As we are in the beginning of tax season, most people will get their tax prepared like they do each year. In fact, more than 90 percent of taxpayers subscribe to this method called tax preparation.
The tax preparation method that most people choose each year results in leaving on the table approximately $2,000 to $3,000 yearly. When you look at the cumulative effect over a 10-year period, as result, it costs you more than $20,000 to $30,000, respectively.
Quite frankly, I have witnessed tax returns that have cost people more than $50,000 every year, which resulted in approximately $500,000 paid to the Internal Revenue Service (IRS) because they only subscribe to tax preparation.
You should ask yourself the following questions:
- Is this you?
- What can you do to get out of this rut?
- Do you want to pay less in taxes?
- Would you like to keep more of your hard-earned money?
- Will you participate in change to get different results?
If you answered, “yes,” to these questions, you can be helped. It’s just like when I was overweight – by 30 pounds, to be exact. I was frustrated to the point that I wanted to change. I talked about lipo surgery, the magic pill and the magic diet, but the bottom line was I had to change my lifestyle.
We all have heard if you want to accomplish your goals, you need to talk with the right advisor (coach/mentor). I did, and now, I’m 30 pounds lighter, healthy, less stressed and very happy.
Choosing the right coach and mentor for taxes works the same way. If you are frustrated with the method of tax preparation, you need to seek tax strategies for your method. Seek a coach or mentor who practices or teaches this type of method.
Allow me to explain the difference between tax preparation and tax strategies.
Tax preparation is when you put together your tax information about your taxes, and you either prepare them or submit them so your taxes can be prepared. Once prepared, you call to pick up and submit them to the IRS.
Tax strategies – personal consist of proactive planning and analysis for you and your tax professional to not only look for tax deductions and write offs, but also systematically prepare your business and personal income to be as tax efficient as possible. Tax efficient means the lowest taxes to be paid by the taxpayer.
We look for hobbies and other things you personally do that could be turned into businesses. And we look at where you spend your time and money.
Tax strategies – business are the same as the aforementioned except that we look at what deductions your business is missing or has not implemented. For example, the following:
- Retirement plans - 401k, SEP, IRA – tax planning
- Payroll – health deductions, HAS
- Executive business allowance and reimbursement
- Equipment purchases
- Building purchases
The bottom line is that most taxpayers are sick and tired of getting taxed to death by the IRS. Everyone wants to pay less in taxes, but many just don’t know how. Understanding tax strategies will get you moving toward paying less to the IRS and keeping more of your money. That’s right; keeping more of your money to invest and pay yourself is our strategy concept.
As CPAs, our first strategy is to ask our clients about the tax rate in which they want to participate. Honestly, thinking about what rate you want to pay is not usually a choice for most taxpayers.
Most taxpayers believe they have no choice regarding what tax rate they want to pay until the end of the year or when their taxes are prepared. Most of them have not taken time to implement tax strategies to make changes that result in lower taxes.
When I attended my son’s swim meet, I saw another dad with a high-tech telephoto camera. I asked him for the name of his business. He answered, “What business?”
He went on to tell me how he enjoyed taking photos of his kid’s team, and how the action photos were his reason for purchasing the high-dollar camera. He also said his kid played sports year round.
I asked if he was selling pictures via the Internet so we could view the shots he had of my kid. He stared at me with a glazed look. I then proceeded to tell him about how he could open a small business photographing kids’ sports, and he would be able to partially deduct his related business and activity expenses associated with his high-end camera and his kid’s sports.
See, the bottom line is he was going to spend the money and the time, but he failed to do the business. So my wife and I now are in the business of photography (swimming).
This is one of those tax strategies that is missed all the time because the activity is thought of as only being a personal rather than a business expense. Consequently, the opportunity to turn what was once a personal expense into a proactive tax strategy is missed and causes the taxpayer to pay more tax dollars to the IRS.
Some examples of other home-based business tax strategies that can be implemented are as follows:
- Photography R You (photo business)
- Talk Fusion (video business)
- WorldVentures (travel business)
- Homemade Gourmet (food business)
- Rodan + Fields, Mary Kay, Avon, etc. (beauty business)
- Melaleuca (FHTM – consumer products)
- CAbi (women’s clothing)
- Creative Memories (scrapbooking, family photos and albums)
The intent to make a profit and materially participate is the only requirement to creating the business. So what does this mean to you? Participate in the business, and do it often enough to try to make a profit. If you do that, it qualifies as a legitimate business.
Take the first step by setting up your business and keeping track of reasonable related business expenses.
If you have any questions about this idea or would like to learn more, please do not hesitate to call 210-490-7100 or email ed@guerrerocpa.com.You may also visit www.guerrerocpa.com or attend our tax strategies workshops at Pericos at Sonterra every third Friday from 11:30 to 1.
