Five ways taxpayers waste their money on taxes. Are you one of them?
November 26, 2018
Whether you realize it or not, taxes are the greatest expense you have. Saving 10% of your income on taxes can have a significant impact on your personal life as well as your business growth. Let’s discuss five ways people waste their money on taxes:
1. Not contributing money to your retirement accounts. Whether you are employed or self-employed, you should always strive to maximize your retirement contributions either via your employer’s sponsored 401K, your IRA (Individual Retirement Account), and/or your business established retirement account such as Simple IRA or SEP IRA. Contributions to retirement accounts not only help you to build your wealth in the long run, but they also save you money on taxes in the short run as the majority of retirement plans are tax deductible. Let’s say you are in 20% Federal and 5% State tax brackets. Contributing $10,000 into 401K or Simple IRA can save you $2,500 or even more in taxes!
2. Not paying your kids for working in your family business. If you have children under 18 years of age who help you in your business, it might be a good idea to pay them up to $12,000 (provided they earned that amount) as it will be tax free income to them. By doing this you can save several thousands of dollars! For example let’s say you operate your business as self-employed, thus, your income is not only subject to income tax (let’s say 20%) but also self-employment tax of 15.3%. That’s 35.3%! If you pay your kids $12,000 *35.3%, you can save up to $4,236! In addition to that, your kids are able contribute to Roth IRA since they will now have earned income after taxes. So the earnings will be tax free as well! Please keep in mind that this is highly audited area. Therefore, additional documentation to proof that your children work for you is required.
3. Not maximizing your HSA accounts! If you have high deductible health insurance plan, we recommend you maximize your HSA account by 04/15/19. The maximum you can contribute to HSA for 2019 is $3,500 for self-only individual plan and $7,000 for the family. If you are 55 years or older, there is additional $1,000 catch up contribution available. You do not have to open a new HSA account if you have a new health insurance plan. If your medical expenses are not significant, consider self-directed HSA account investments.
4. Renting your house to your business. If you own a business and use your house for your business meetings or rental purposes not exceeding 14 days, your rental income will be tax free. Therefore, consider renting your house to your business for up to 14 days. Income earned from the rental activity will be tax free to you personally, and your business will get a tax deduction.
5. Not utilizing your home office deduction. Many business owners work from home using their home offices regularly and exclusive for business. However, some of them are concerned that home office tax deception will trigger IRA audit. Despite the odds, the home office deduction alone will not! It can add to your already high tax audit risk tax return, but it will not trigger IRS Audit. Do not be overly concerned with the audit, but instead utilize all tax deductions available to you when you run your business. In our experience, home office deceptions can save taxpayers on average $1,000 in taxes! Also, if you are overly concerned with IRS Audit risk, consider converting your business into another type of entity, such as S-corporation or partnership. Operating business as S-corporations can also be very beneficial from the tax standpoint.
To summarize all of the above, if you have your business and want to run it successfully utilizing every tax benefit available to you, having a CPA on your team is essential! Please feel free to contact our firm as we uniquely specialize in working with small businesses!