J.T. Chandler

by Terry Watson | July 16th, 2012
James Chandler

James Chandler

You can’t pick up the newspaper or turn on the news without hearing the latest about the economy, ups and downs of the stock market, or the latest unemployment figure. In past days, a burgeoning economy allowed the average person to increase their net income and net worth almost on autopilot. But, doing the same in today’s market requires a different game plan.

Speaking of game plans, let’s look at the lifetime incomes of some professional athletes: Terrell Owens ($80 million), Allen Iverson ($100 million) and Cheryl Swoopes ($50 million). Would you be surprised to know that they are BROKE?
This proves that the money flowing in isn’t the whole story. Gross income is nice, but net income is nicer.
Would you be surprised to know that many people give away tens of thousands of dollars a year? Did you know that you can keep hundreds or thousands (even tens of thousands) more of your money …all with the blessing of the government?

The secret is maximizing your pre-tax dollars vs. after-tax dollars. You lose every time you spend after-tax dollars that could have been spent with pre-tax money. A North Carolina couple with $50,000 in income.Subtracting the personal exemption and standard deduction, they would pay 20.6% in (federal & state taxes)on $31,000 of income, or $6399. Every legitimate dollar that can be spent with pre-tax income reduces that $31,000, thereby reducing their taxes.

Contributing to a 401K or an IRA is something everyone can do immediately. But, far more deductions are available for business ownership, it doesn’t matter if its part time or full time. Additional deductions available to business owners include:
1. Hiring Children. If your children help you in your business, you can pay them up to $5,800 a year. It’s a tax deduction for you, and tax free income for them). Instead of an allowance, pay them a salary.

2. Vehicle Expenses. You may deduct 55.5 cents for every business mile driven. Driving 10,000 miles a year would result in a $5,500 reduction in taxable income. That’s $458 a month that could go toward your car payment and expenses.

3. Meals and Entertainment. You can deduct 50% for meals outside your home and 100% for meals/entertainment from home. Just $100 a month in deductions in this category could provide $1200 in deductions.

4. Home Office Expenses. The IRS allows you to deduct expenses for phone, utilities, home office space depreciation, property taxes and insurance and more based on the percentage of home office space in your home. For instance, if your home office is 18% of your space, you can deduct 18% of those costs against your pre-tax income. Those are fixed expenses you’ll pay anyway; why not pay some of it from pre-tax earnings?

5. Medical Benefits. This is a huge tax saver if you do not have employer provided insurance. Rather than paying for benefits with after-tax funds, make it a business benefit paid with pre-tax funds. Obviously, exact figures are dependent on circumstances and you should always check with your tax professional to set your business up properly.

So…can you legally quit giving your money away? Just by combining items 1-3, our hypothetical couple would reduce their taxable income by $13,000 and lower the amount they were giving away in taxes by almost $2,000!

It’s not too late in the year to make a difference in your 2012 taxes. Everything you do between now and December 31 impacts your after-tax income. If you’re tired giving your hard-earned money away, start making a plan today, if you need help call us for a free tax analysis and newsletter.

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