We’ve all got to pay taxes, but why pay more when you can pay less?
Surprised? As an accountant and tax specialist, I’ve helped my clients save hundreds if not thousands of dollars – through prudent tax planning!
By strategically evaluating your business finances and applying tax-saving tactics like taking advantage of all the deductions, tax breaks, and credits available to you, you could be saving money on your tax bill too.
So if you’re a small business owner looking to reduce the amount you pay in taxes, keep reading – I have five easy ways for you to reduce your tax bill and pay less tax!
Disclaimer: This material has been prepared for general informational purposes only. It is not intended to provide, and should not be relied on for, tax, financial, or accounting advice. Please consult your own tax, financial, and accounting advisors before engaging in any transaction.
When Should You Start Tax Planning?
Well, honestly – about six months ago, but now’s a perfect time too!
I hear you saying: Isn’t the tax season from January to April next year? Why do I have to start tax planning now?
Tax filing season generally runs from January to April annually. This is the time for you to report all the financial transactions from the previous year to the IRS and calculate your final tax bill for the year. Unfortunately, once we’re in the tax filing season, your opportunities to minimize your tax bill are quite limited.
That’s why we recommend that you start tax planning as early as possible. This gives you the chance to work with an accountant or tax specialist to understand your tax liabilities and implement relevant tax planning strategies during the tax year – so you can reap the rewards when it’s time to file your taxes.
There are still a few more months left in this tax year, which makes it the ideal time to dig into tax planning if you haven’t already. And I have just the tips to help you save on taxes!
Tip 1: Evaluate in Advance
Before you begin tax planning, we recommend doing a thorough evaluation of your business and getting a quarterly tax projection (if available through your Accountant). When you do a tax projection, it allows you to see how profitable your business is and if you are making sufficient income for you to need to do tax planning.
For example, if your business is your sole source of income and it is not profitable yet (your expenses are higher than the revenue or income you generate), then you may not owe as much taxes depending on your personal situation. This can vary among individuals, so you may still need to implement some tax-saving strategies that can help you reduce the taxes you have to pay.
Tip 2: Assess Opportunities to Maximize Deductions & Reduce Your Tax Bill
There are many ways you can reduce your taxes depending on your unique situation. A common tax planning strategy for self-employed people is to set up a retirement account and make a contribution towards it. Solo 401k, SEP IRA, and SIMPLE IRA are some examples of retirement contributions you can make that are tax deductible and reduce your taxes. These contributions need to be set up during the tax year for you to be able to use them as leverage when filing your taxes.
You may also consider making a contribution to a Health Savings Account to reduce your taxable income while simultaneously acting as a tax-free investment. Withdrawals from these accounts are also tax-free when you use them for qualifying medical expenses. If you are eligible to itemize, you may also be able to increase the amount you put towards charitable contributions and take a tax write-off on these contributions.
Tax planning can help to reduce or even avoid capital gains taxes you may have to pay. Some options for this include holding on to assets for more than one year before selling to qualify for more favorable long-term capital gain tax rates, including reinvested dividends in the cost basis, or donating the appreciated stocks (which you can also claim as a charitable contribution write-off).
Apart from these, the IRS offers many other deductions that you can potentially claim on your taxes to reduce your final tax bill. It can be tricky and time-consuming to evaluate which of these apply to your specific circumstances, so consulting with a qualified professional can help you find the most savings!
Tip 3: Leverage Relevant Tax Credits
Unlike deductions that reduce your taxable income, tax credits are offset against your final tax bill. Leveraging the relevant tax credits can help you reduce the total amount you have to pay in taxes.
If you have children under the age of 17, you would be eligible for the child tax credit designed to support parents providing for children in their care. Additionally, you may be able to claim the child and dependent care credit for childcare or daycare services you have for children under the age of 13. This credit also applies to anyone who needs to pay for the care of a qualifying dependent of any age to be able to work. Certain states also give out tax credits to complement federal tax credits, so be sure to leverage any state tax credits if you qualify for them.
Tip 4: Plan (and Pay) for Your Taxes
Once you have taken advantage of all available tax deductions and credits to reduce your bill as much as you can, the next best thing you can do is to plan to pay the taxes that you owe. The IRS takes making tax payments seriously and you may incur a penalty if you underpay or are late in paying your taxes. The IRS also collects interest on penalties, so you may quickly end up with a much larger bill than you anticipated!
Avoid such situations by making quarterly estimated tax payments on time. If you are earning income that is not subject to withholding such as self-employment income, interest and dividends, or rental income, you are liable to make estimated tax payments every quarter.
Alternatively, if your income is subject to withholding but you were hit with a large tax bill last year, you may want to adjust your withholding. This will allow you to funnel sufficient funds towards your taxes during the year so that you aren’t caught off-guard in tax season.
Tip 5: Work on Your Money Mindset
Now, this isn’t strictly a tax planning tip to reduce your taxes but it is essential for any small business owner who wants to start making millions. My most important tip for you is to start working on your money mindset around paying taxes.
Nobody wants to pay more taxes than is necessary, but if you are dedicating all of your free time to shaving $500 off your tax bill, then you may be missing out on valuable opportunities. Taxes are an essential part of running a successful business in the US – they cannot be avoided and it is a sign that your business is successful.
Moving away from the mindset of “How can I reduce my taxes?” to “How can I make more money so the tax bill is not a worry?” is the real tax planning tip I offer all my clients.
Whether it’s tax planning, tax preparation, or working on your money mindset to shift some of those limiting beliefs – I can help. In the ETS VIP Week, you’ll get personalized tax planning advice, money mindset coaching, and more. Walk away feeling empowered about your business finances and confident that your business is set to thrive. Book your FREE Consultation Call now!