Tax Time Tips: Maximize Your Tax Deductions
By: Michelle Seiler-Tucker, Best Selling and Award Winning Author
It’s a very pleasant experience to obtain a tax refund around April; however, it may not be the greatest approach. A refund is just receiving your money back on the interest-free loan you presented the government over a year ago. On the other side of the coin, owing a gigantic tax bill around the same time of the year isn’t the wisest strategy either. It is preferable to plan your withholdings and other tax procedures to either receive a marginal refund or owe just a bit more in taxes after filing your return.
Audits are a worry rarely experienced by the majority of the population with the IRS auditing 1.03% of individual returns. High income is one of the biggest factors; only 0.9% of people with income of less than $200,000 encountered an audit in 2011, but 12.1% of those grossing at least $1 million did experience an audit. Specific business types also face heightened IRS inspection, including Subchapter-S corporations and self-employed individuals who file Schedule C face especially high odds, with 4.3% of these returns audited. This is due to several types of deduction attempts that raise red flags to the IRS. These include excessive moving expenses and medical deductions for unneeded cosmetic surgery; a staggering 69% of returns claiming the adoption credit were also audited last year.
Most small business deductions are a bit more complex than can be expounded upon in this brief overview, but this is a good synopsis of the basics. The self-employment tax refers to the employer portion of Medicare and Social Security taxes that business owners must pay. Everyone who works must pay these taxes, which is almost double the percentage of the average worker. Many people view the self-employment tax as a discouragement to entrepreneurship, but the IRS does a few things to lighten the load. First, you get to deduct half of your self-employment taxes from your net income. The IRS considers the self-employment tax as a business expense and permits you to deduct it suitably. Moreover, self-employment tax only incurs on your net business income, or what's left over after you deduct your business expenses.
Meals and entertainment are a joy for all but also necessary in the business arena. To deduct these expenses you must conduct business with the individual or group you are engaging during the event or immediately before or after it has taken place. These expenses are only 50% deductible. Examples of deductible expenses in this category include tickets to a sporting event, the cost of a meal, or the cost of entry to a social affair. Be certain to keep scrupulous records of all business activity you conducted, when, with whom, and how it directly relates to the entertainment expense.
When you use your car for local business trips or just going to work to-and-fro, your vehicle expenses are tax deductible. Transportation costs are considered an audit flag, so be sure to only take what you are permitted and keep excellent records. If people lease their cars for business, the entire lease payment can be deducted from the taxable income in certain instances. In some circumstances the lease payment can be combined with individual deductions, such as operating costs.
The government is willing to subsidize retirement planning through Individual Retirement Accounts, 401(k)-style workplace programs and more, yet many people underutilize these benefits. The rules are intricate, especially for the different types of IRAs but, retirement accounts remain one of the best ways (along with diversification)
As a business owner, I can state that the best way to tax reduction is through owning a business. In fact, the government makes it easier to reduce tax liabilities for the small business owner. But it is your obligation to remain astute and vigilant for every tax-saving opportunity that is offered through deductions, credits, depreciation and payroll-tax reductions. Keep more of your profit in the attempt to pursue the life that you’ve always dreamed for yourself.