Some Folks Pay A Lot Less Tax Than Others On Very Same Income-Did You Pay Too Much Tax In 2004?
Someone once remarked, "Next to being shot at and missed, nothing is quite so satisfying as an income tax refund." There's no question that saving money in taxes is high on everybody's list of financial priorities, especially small-business owners.
Taxes are an inevitable - and painful - part of every business owner's life. But there are ways to reduce, if not eliminate, your company's tax burden if you know how to use business-expense tax deductions to your advantage.
Most business owners know they owe taxes only on their net business profit - that is, their total profits after they subtract their deductions. As a result, knowing how to take full advantage of your deductible business expenses can dramatically lower your taxable profits.
Here are the 3 mostly overlooked tax deductions:
1. Full home office write-off: The rules allowing a taxpayer to claim the home office deduction have been loosened, beginning January 1, 1999. No longer does the home office need to be the "principal place of business" for the taxpayer. The home office test can now be satisfied if the taxpayer uses the home office for "administration or management activities" and there is no other fixed location in which the taxpayer performs such activities for his business. The home office still must be used exclusively for business purposes to qualify. This will allow more taxpayers who conduct business outside of their office, but use their home to perform administrative tasks, to qualify for the home office deduction.
2. Writing off family medical expenses: This strategy is a little more complicated but is well worth the extra effort. To use this strategy, first you must hire a spouse or other trusted family member to work for your home or small business; either full-time or part-time status will work. Next, you need to set up and sign a medical reimbursement plan. You may need the advice of an accountant to help you with this. This plan allows any sole proprietor to convert all family out-of-pocket medical expenses into legitimate business deductions. Finally, your spouse or family member pays all out-of-pocket medical expenses for the family, keeping receipts and documenting miles driven for medical purposes. At a specified time, your business reimburses your spouse or family member for these expenses and deducts them as a business expense.
3. Writing off your child's college education expenses: If you frown at the high cost of a college education, this tax strategy is for you. You can put your child on the payroll of your business for performing office chores and other business-related tasks.
The most common way to utilize young children in your business is for them to provide cleaning services, or routine copying, filing and typing. These are jobs that even a 10-year-old is clearly capable of performing, and jobs that you'd arguably have to pay someone to do if your child were not available.
In 2005, a child can earn up to $5,000 and pay no federal income taxes on the earnings because of the standard deduction. Your business can deduct wages paid to your child-provided the amount is reasonable and for bona fide work. Bottom line: You'll escape federal income taxes of up to $5,000 of your business income, and if you are a sole proprietorship, you will eliminate self-employment tax on the income as well.
Any income your child earns over and above the $5,000 standard deduction is taxable at your child's rate. Since the 10% tax bracket extends to $6,000 for a single filer, your child could earn an additional $6,000 and owe just $600 of federal income tax on the money. Because your marginal tax rate is likely much higher, the extra money your child earns may result in family tax savings. Even better, if your business is not incorporated, you won't have to withhold or pay FICA (Social Security and Medicare) payroll taxes on the earnings of a child under age 18.