Posted by Keith Hall (NASE National Tax Advisor) - For most of us tax time is not the most rewarding time of the year and is typically ranked right up there with visiting the dentist. Statistics would indicate that our commitment to flossing is only evident in the few weeks right before that dentist appointment. And likewise our commitment to tax planning is most likely limited to the few weeks right before the return is due. Unfortunately, in both cases, by that time it is already too late to make any real difference.
Most tax planning strategies end with the New Year’s Eve party. Once the year is over, so are most of your options for truly reducing your total tax liability. The best time to start thinking about taxes, about reducing taxes, is right now. You are completing and filing last year’s income tax return, so now is the best time to make next year’s tax return most more pleasing. If you did not take advantage of the Home Office Deduction for last year, try and find some place in your home that you can use regularly and exclusively for your business. The Home Office Deduction can save, on average, about $1,000 in taxes. If you have children that you are giving money to anyway, consider creating a job for them within your sole proprietorship. They can earn up to $5,700 in wages tax free, but those wages would be fully deductible for your business. So create a job and you could save over $2,000 in taxes per child.
If you have unreimbursed medical expenses or self employed health insurance premiums consider adopting a Health Reimbursement Arrangement or and HRA 105 Plan. If your spouse helps in your small business, these plans can provide a full deduction for all of your family’s medical expenses. Many small businesses with average family medical costs can save over $3,000 in taxes by adopting an HRA 105 Plan. Think about your business’ equipment needs, computers, accessories, furniture, etc. If you know you will need these items soon, consider buying them prior to the end of the year and therefore utilize available accelerated depreciation options. Certainly don’t spend money just to get a deduction, but if you are needing those items anyway, accelerating those purchases can reduce your taxes.
And finally, if you weren’t able to make a qualified retirement contribution this year simply because you didn’t have the cash flow, start putting a little bit aside every month so that next year you will be able to make that retirement contribution. Retirement contributions can be the last real way to save money on last year’s taxes since those contributions will still be deductible, even if you made them today. However, you must have the money to contribute in order to take advantage of the tax savings, so don’t wait until next April 15th to start setting that money aside.
The bottom line for all of these tax savings ideas is that you need to start now. No one is going to remind you to reduce your own tax liability. Don’t wait until the next tax return is due before you start saving more of your own money. Check out the Tax Resource Center at NASE.org and start taking charge of your own taxes. The best time to start saving money on taxes is Right Now!