How To Simplify Your Living Expenses
Here’s the thing: I’m a New Yorker. And in New York, it is amazingly difficult NOT to spend a lot of money, just on the basics! As a student of Harv Eker, I am trying to limit my expenses to 50% of my after-tax income, and I have to tell you, that is really hard to do. Harv isn’t the only one to suggest this either: almost every money-management guru gives the same advice. Simplify your expenses.
The fact is, if you want to become financially free, you must do two things: increase your passive income and decrease your expenses. Once your passive income is equal to or greater than your expenses, you are financially free. The concept is simple enough — and in other articles I address creating passive income (the easiest and fastest way to do this would be by renting your rooms). But how do you simplify your expenses? Especially when you look around and you don’t see a way HOW? Here are a variety of ways you can still live a decent life and be a bit more frugal at the same time.
Food & Toiletries
- By far, making lunch at home was one of my biggest savings! I made lunch and snacks and bought them to work.
- Instead of buying shower gel, go back to soap bars. They last longer and are much cheaper.
- Don’t wash your hair every day, and when you do wash your hair, only wash it once. That saves lots of shampoo.
- I made my own coffee at home — or cut it out altogether and put that money aside in your financial freedom jar. One guru calls that the “latte factor.”
- As a nation, we eat out a whole lot more and buy convenience foods to just heat in the microwave — but these can be expensive. Cooking may take time, but it does save you lots of money.
- Buy generic! I was so opposed to this, and one day I ate some potato chips that my boyfriend bought. Seriously? They didn’t taste different from the name brand. Try it. Ok, some things may be non-negotiable, but you’d be surprised what is. Your grocery bill will go way down.
- Take the effort to cut coupons, take advantage of sales, and go to discount warehouses, like Sam’s Club or Costco.
Heat & Electricity
- If you don’t already have one, get an electric thermostat with a timer, so you can change the temperature automatically during specific times of the day. Lower the temperature when the family is out of the house.
- Use space heaters and lower the heat in the rooms you use. Use an electric blanket at night.
- There is plastic covering you can get at the hardware store and cover your windows. That keeps the heat in the house.
- Make sure your boiler and hot water heater are maintained properly.
- Wear layers of clothing and keep the heat lower.
- Use kitchen and bathroom vents sparingly in the winter
- Replace regular light bulbs with compact fluorescents
- Wash laundry in cold or warm instead of hot
- Use a clothesline instead of using the dryer
- Use a ceiling fan instead of an air conditioner.
Cell Phones, Internet, and Communication Utilities
- Avoid pre-paid cell phones, even if you just want the phone for emergencies, unless you are careful to use a plan with minutes that don’t expire. You pay exorbitant rates per minute.
- Never underestimate the minutes your teen may use. Be careful not to get the lowest plan. Constant overages are very expensive overall.
- You don’t necessarily need a home phone if you have a cell phone. With free nights, weekends and long distance, you may save considerably. Be careful with phone plans that have low rates, because the taxes add significantly to the bill.
- For your Internet connection, you don’t have to get the highest rate of connection speed. For the average user, you won’t be able to tell the difference and that can save you $20 a month.
- If you switch to broadband, don’t keep your dialup (unless you travel often outside the country or in rural areas). Also, drop paying for AOL. All AOL features are free if you have broadband.
Entertainment
If you really wanted to be extreme about it, you could cut entertainment out altogether. But that’s not really practical, so here are some ideas.
- First, if you think FREE, you may not get free, but you do end up with “cheap.” Cheap doesn’t mean less fun, either. Sometimes you can have MORE fun.
- If you live in a city, just try walking around. In New York, I have found impromptu concerts by street musicians or just sat in the park and people watched. You’d be amazed how much fun you can have!
- Instead of eating out or going to bars with friends, host a potluck at home or just have friends over for drinks. It’s much cheaper to buy liquor than to buy drinks at the bar.
- For movies, go to matinees or the $2 movie (some communities have them). Yes, those movies are second-run, but hey, it’s worth financial freedom to me. You can also always rent movies.
- Cable. When times are tough, the cable needs to get going. It can get so expensive! If you do need it for the reception, get basic and then rent movies. Buying a great DVD player and renting movies is cheaper than cable in the long run. If you rent rooms in your home like I do, keep the cable — it’s a perk for your tenants that are worth paying for.
- Take your kids to the bookstore and hang out.
- Find free community shows, like Shakespeare in the park or fireworks.
- Take the kids on the subway trip — as far as you can and go explore. In New York, take the train to Coney Island.
- In the summer, there is always a local food festival or street fair.
- Get your kids involved in a community group, like a theatre. They develop skills, make friends and have fun.
Clothing
- For kids, don’t go over the top with the brand names, especially since the kids will grow out of them quickly.
- For adults and older teens, don’t buy really trendy clothes that will only last one season. Buy classical fashionable clothing that will last, and get trendy with accessories.
- Buy shirts and ties or blouses and just one suit — accessorizing is cheaper.
- Buy a few pieces of quality clothing as opposed to lots of cheap clothing. They will last a lot longer.
- This goes without saying, but buy clothing in the off-season and on sale. You will save a tone of money.
Transportation
- A gas saving tip I just learned: put your car in cruise control whenever you can. It has cut my gas bill in HALF.
- If you live in a metropolitan area, try walking around the city as opposed to taking a bus or a train. In New York, you can even get there faster sometimes!
- Maintain your car — tire pressure, oil changes, everything. Preventative maintenance is way cheaper than repairs.
- Never use cheap gas – use quality gas and the correct octane for your car. It may seem more expensive, but it’s cheaper in car repairs in the long run.
- Don’t be afraid to walk, even in the winter. It’s great exercise and it saves a ton of money. Bring a backpack with you for grocery shopping if you need only a couple of things.
The Change Jar
I have a change jar. Every time I pay for something, I always use bills and get the change. I put the change in the jar. You wouldn’t believe how much money you can save! This money could be entertainment money, allowance for the kids, put it in a savings account or saved for emergencies. This change jar has saved my butt many times over the years, and is a great way to have “found” money at the end of the month.
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Inheritance tax, a concise guide
With ever-increasing property prices, more and more peoples assets are
now worth more than the inheritance tax threshold of 285,000,
which has never been increased in proportion to the recent property
boom. With a rate of 40% inheritance tax on any assets above the
285,000 threshold in the estate, this can really put a dent in
what your heirs receive from your estate.
Inheritance tax is levied upon a persons death. Once all of their
assets have been totaled up, anything over the threshold will have to
be paid by the executors of their will.
Its becoming increasingly difficult to avoid inheritance tax, but
there are some strategies that you can put in place to help minimize
its impact. Inheritance tax is an extremely complicated subject,
though, so you should never attempt to make any plans yourself without
good professional advice, otherwise you may end up making your tax
situation worse.
Make a will
First, make a will. This in itself wont help you to avoid inheritance
tax, but it will make your intentions clear so that any inheritance tax
planning you have put in place will come into effect.
Transfers between spouses
If youre married or in a civil partnership, both of you should attempt
to use your full threshold separately.
Husbands and wives or civil partners can transfer assets (such as
property) to each other without incurring inheritance tax. However,
this will increase the value of the surviving partners estate, which
will be subject to tax when they die. If this brings it above the
threshold, inheritance tax will then be due. Another possibility is to
bequeath your estate to someone other than your spouse, for example
your children. However, this has its own complications and is not
always appropriate.
Gifts
If you want to give something away during your lifetime but still keep
using it, the Inland Revenue may still consider it part of your estate
for tax purposes when you die. Such gifts are regulated under the
inheritance gift with reservation rules. For example, if you sold
your house to your children you may have to pay full market rent. Also,
they could be liable to pay capital gains tax on it if it is a second
property for them.
However, within certain guidelines you can give away some assets and
gifts to friends and relatives, known as potentially exempt
transfers. These will not be subject to inheritance tax as long as
they are given at least seven years before you die. If you die within
seven years of giving a gift, tax will have to be paid on a sliding
scale.
Some gifts are completely exempt from the inheritance tax rules. You
can gift up to 3,000 in any tax year, plus up to 3,000 in
unused allowance from the previous year. Unused allowance can only be
carried forward from one previous year. Theres also an allowance for
wedding gifts to children (up to 5,000 for each child) and
grandchildren (up to 2,500 per grandchild) and other friends and
relatives (up to 1,000). A small gift allowance of 250
per recipient per year is also permitted.
Some gifts, however, may be subject to capital gains tax if any income
is made from them, e.g. if they are invested in stocks and shares.
Gifts to charities
Gifts to registered charities and political parties are always exempt
from inheritance tax.
Trust funds
In some circumstances, its possible to set up a trust fund. However,
the rules regarding trust funds were changed in the 2006 budget to
restrict inheritance tax avoidance in this way so its not always a
feasible option. Most money held in trust for children will be subject to inheritance tax after
they reach 18 unless they are disabled.
Life policies
Certain types of life policy are exempt from your estate under
inheritance tax rules. So, it may be possible to pay regular sums into
such a policy, either towards a trust or towards your children, in the
hope that it will make enough money to pay some or all
of the inheritance tax bill at the same time as reducing the size of
your taxable estate.
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Misunderstanding Will Double Your Tax
If you have been overwhelmed by articles, advertising and friendly advice about the various schemes to legally avoid California Sales and Use Tax, let me set you straight about how to protect yourself. Aero Marine Tax Professionals handles this type of situation routinely.
First, you must know that your purchase of an aircraft or vessel is not exempt from tax until the California State Board of Equalization (Board) sends you a letter which affirms in writing your transaction is exempt. This may seem a little simplistic, but every month I encounter another taxpayer (the Board’s term for you) who has never filed a tax return, yet firmly believes he/she does not owe tax.
In this case NO NEWS IS BAD NEWS.
The key to this warning is the fact that the burden of proof in supporting a claim for an exemption rests squarely on your shoulders. The Board does not have to prove anything. The taxpayer has to support the claim for an exemption and must file a tax return. Just because you know that your property was used in an exempt manner does not mean that it is exempt. You must have in your possession a document from the Board which affirms they agree you have supported your claim.
In California, when you purchase an aircraft or vessel from someone other than a retailer who collects sales tax from you at the time of the transaction, it is the legal obligation of the purchaser (you) to timely file (self report) a tax return. In general the return is due within twelve months from the date of the transaction.
If you received an inquiry letter from the Board, the due date is located in the top right hand section of the cover letter. The due date on the letter becomes the date the return must be filed and many times is less than twelve months from the date of the transaction.
If you took possession outside the state using an offshore delivery for a vessel, or an out-of-state delivery for an aircraft, it is your legal obligation to timely file a tax return. If you believe your aircraft is exempt because it has been used in a manner that you were told made it non-taxable, your purchase is NOT EXEMPT FROM TAX until you have filed a tax return and received written notification from the Board that you have supported a claim for exemption.
Even if you made your purchase 5-6 years ago, your transaction is not exempt if you do not possess a letter from the Board which affirms you have supported your claim for exemption. Do not be lulled to sleep by the fact that you have not been contacted by the Board. They know they have approximately 9 years after your transaction to legally notify you that you have been assessed tax.
The Board will find you through property tax assessments or during a routine audit of a California retailer who sells you fuel. They do not have to be in a hurry to notify you they are aware of your property. As long as they notify you before the statute runs out they can collect the tax. Imagine getting a notice seven years and eleven months after the tax return due date. You will not only be assessed tax but penalties and interest as well. This will easily double the amount you originally owed.
The Board is in control if you fail to file a tax return. The following example is intended to point out the danger:
John Smith purchases an aircraft for $1,000,000.00 on March 12, 1995. The tax rate in his county is 8%. Therefore, the potential tax is $80,000.00. Mr. Smith registers his aircraft in the name of an out-of-state corporation called Smith Investing, Inc. The corporation was advised that if the aircraft was used in charter operations more than fifty percent of the time it would be exempt from tax. Because the aircraft is registered to an out-of-state address, Mr. Smith believes he has no obligation to file a tax return. During the period of March 1995 through March 1996 the aircraft is in fact used in an exempt manner by being flown on bonafide charter flights more that 50% of the time.
In June 1997 the aircraft is picked up by the county property tax personnel on a random unannounced visit to an airport. The Board runs the tail number through the FAA registration database and discovers the name of Smith Investing, Inc. A further check of the public records reveals a link to John Smith of California. Mr. Smith is now on the radar screen of the Board auditors.
It is the opinion of the Board auditor that a tax return was due by the end of February 1996. He operates from the viewpoint that the statute of limitations will expire in March 2004. (During the late 90’s there was little pressure to assess tax in this type of case. There was no budget crisis. Therefore, Mr. Smith is not contacted.) A reminder flag is set in his file to make sure a notification form is sent to Smith Investing, Inc. before the statute runs out in 2004.
In early 2000, Smith Investing, Inc. sells the aircraft and purchases another.
In December 2002, because of the budget crisis, an inquiry letter is sent to Smith Investing, Inc. at John Smith’s address in California. Mr. Smith ignores the inquiry because he still operates from the belief the out-of-state registration, plus the charter use exempts the aircraft from tax in California.
On November 7, 2003, the Board issues a Notice of Determination for the original $80,000.00 in tax, an $8,000.00 penalty for failure to file plus $65,600.00 in interest. Mr. Smith does not respond. Therefore, on December 8, 2003, the bill goes final.
The collections section at the Board make several attempts to contact Mr. Smith and he continues to ignore them. The Board subsequently files a lien against Smith Investing, Inc. Finally, Mr. Smith hires an attorney to deal with the Board. The attorney discovers that once the bill has gone final, the only way Mr. Smith can get the opportunity to support his claim for an exemption is to pay the $153,000.00 and file a claim for refund.
During the research process to gather the documents which support the exemption, Mr. Smith discovers that the documents were destroyed or lost because no one in the organization thought there was any exposure. Therefore, the assessment will stand. Mr. Smith’s misunderstanding of the laws and regulations have converted a tax exempt purchase into a taxable transaction and doubled the price!
This story is a compilation of several stories I come across every day.
DON’T LET IT HAPPEN TO YOU. If you have the slightest discomfort about your tax status for purchases you have made any time in the last ten years, I will offer a free analysis of your situation.
Don’t hesitate to protect yourself.
Learn to Audit-Proof Your Tax Records
Begin by building your documentation system. There are more than 300 tax deductions available to small business owners. By converting many of your personal expenses into legitimate business deductions, you can have a HUGE impact on you financial well being.
For example, lowering your expenses makes it easier to become financially free (or as Robert Kiyosaki says it “Get out of the Rat Race”).
For those of you who are in debt, the money you save by paying the correct amount instead of over-paying your taxes can be used to accelerate down your debt. For those who are looking for ways to put more into a retirement plan so that their financial future is secure, you can use the tax savings to fund your retirement.
Yet, learning additional deductions is only part of the process. You have to maintain the proper documentation in order to substantiate these deductions. If you don’t properly document your deductions, you risk losing them in the event of an audit.
The Burden Of Proof
With all the court TV shows that are on, most people are familiar with the concept of Burden of Proof. Simply put, in a criminal case, we are innocent until proven guilty. In other words, the burden of proof is on the state to prove our guilty.
However, when it comes to justifying your tax deductions, the burden of proof is on YOU, the taxpayer. IRS examiners are not required to help you keep your records. It is your responsibility to prove and properly document them. The consequences of not following the tax laws are huge penalties. For example:
a) One-half of one percent a month delinquency penalty during the period that you fail to pay the proper amount of taxes
b) 20% of underpayment attributable to negligence or disregard of the rules or did not have a reasonable basis for the tax deduction;
c) 75% of any underpayment attributable to fraud
d) You may not deduct some of the interests paid to the IRS, if they were due to a business tax deduction on your Schedule C.
Tax Deduction Log
Yet an amazing thin happens when you keep a tax log or tax diary. The burden of proof shifts from you, back to the IRS. I have heard story after story of IRS auditors cutting an audit short once the taxpayer has presented them with a complete tax log and documentation system.
Here are some Strategies to Master the Records Requirements (and have fun in the process of maximizing your tax deductions). Keep in mind that you easily delegate this work by teaching it to your assistant (C.A.) or book keeper.
1. Build a documentation system.
No matter what form of business entity you have (‘S’ corporation, ‘C’ corporation, LLC, or, God-forbid, a sole proprietorship, you need three separate and distinct tax records. Permanent Files, Regular Files, and A daily diary.
Permanent Files: These include your prior year’s tax returns, stock purchases and sales, equipment purchases, and sales and similar entries. Generally, you want to keep any record that relates to more than one tax year in your permanent file. If you purchase property, your permanent files should include the purchase documents, closing statements, deeds, and other expenses related to the purchase.
Regular Files: These include time sheets, invoices for part-time help, receipts, invoices, canceled checks and other corroborative evidence.
Daily Diary: Your daily diary, which can be your appointment book, is the focal point of your documentation system. This is especially true if you operate a personal service business. The smaller the business is the more important this information becomes. Your daily diary should include: All of your appointments, Where and when you travel, Where you go by automobile, and Where and when you entertain business contacts.
2. Use Three-Part Checks
Keep a separate business checkbook and use three-part checks. Regardless of your business form, whether a corporation or sole-proprietorship (Ugh), the three-part check is necessary to build good, easy to use records in your regular files.
a) Send part one, the original of the check to the vendor.
b) Staple supporting evidence (receipts or invoices) to part two and file it alphabetically in the vendor file.
c) Put part three in a numerical file for later viewing by the IRS (did somebody say audit??) and reference by you.
3. Keep form 1099 Information Separate
If you have both W-2 and 1099 income, keep your 1099 information separate. This includes the source(s) and amount of 1099 income and all of your business expenses.
4. Keep a separate Tax log or Diary
To complete your documentation system, you must keep a separate tax log. This consists of a permanent record that is separate from the receipts you keep for each item. I’ll list the major business expenses below and give examples of the documentation you should keep.
Home Office Deduction – You should take several pictures of your office (showing that it is separate from your living area) and keep them in a permanent file. You should also keep the printout from your realtor showing comparable cost of office space in your area.
Meals Out – You should answer the following five questions. Who? What? When? Where? Why? You can go high tech (an excel spreadsheet), low tech (a yellow pad) or medium tech (a word processing document). At the restaurant, I make a quick note on the credit card receipt. Three of the questions are already answered, so the note often looks like this “Fred regarding his LLC”. After returning from the restaurant, I give the receipt to my bookkeeper or assistant. She transfers the information from the receipt to the tax log. (You may choose to do this yourself) Now my meal records are audit-proof.
Auto Mileage – The log should contain the following information: Date, starting mileage, ending mileage. Once again, you can use any level of technology you prefer.
Travel – Keep your plane tickets, parking and cab receipts (esp. if over $75), and the workbook or literature provided to you by the seminar promoter. I also use the 5 question log above to document my travel expenses.
Supper Money – If the cost of the meal is less than $75, you don’t need to keep a receipt. Because I often use the supper money deduction on my teleclass nights, I always put the teleclass info in my calendar. I usually pay cash for the meal and reimburse the money after the fact.
I enter my cash outlays regularly and every month or so, I have my book keeper cut me a reimbursement check. Keeping a good documentation system is a worthwhile investment. It makes you conscious of the deductions you would otherwise miss, it keeps you organized and it keeps you audit-proof. That’s a great combination.
Ten Golden Tax Deduction Secrets
One of the key secrets to tilting the tax laws in your favor is to own your own business and shift the taxing structure to your advantage. In this article, we are going to cover just a small fraction of the 300 deductions that are available to you as a business owner.
But first, Id like to start with a question: At any point in your life, did your accountant make it a point to do a comprehensive review of the tax deductions that you can put to work for you? If you are like most people, the answer is probably not. I don’t mean that as a slam against accountants. It’s simply a wake up call to the fact that most accountants and C.P.A.s are simply income tax preparers, not income tax planners. They may do a fine job of preparing tax returns but the information that you are now learning is simply outside the scope of their services.
With that as a background, lets take some time to highlight a few of the more powerful, yet lesser-known deductions that are available. When I speak at seminars, I often teach people about my Top-Ten favorites or what I sometimes call The Golden Tax Secrets. In no particular order, they are:
1. Achievement Awards: Each year, your company can give away to its employees three separate awards. Each of these awards is worth up to $1,600 per year in kind. That means that you cant write the employee a check for $1,600, but rather, you can present him or her a tax deductible gift (in kind). Examples include ski equipment, a plasma TV, golf clubs, cookware, etc. You get the idea. The gift can really be anything other than cash.
The first gift is for longevity. This is reserved to companies in existence for five years or more. You can present the gift to your longest standing employee and if you are the ONLY employee of the company, then this would definitely be YOU.
The second is gift is for safety. This gift is typically reserved for companies in a risky business like construction or a factory. I suppose rehabbing real estate would qualify.
The third gift is for sales excellence. You can award your best salesperson this award based on their outstanding performance during the previous year.
2. Your Annual Corporate meeting: The law requires you to update your formal corporate documents each year. This includes keeping accurate financial records, corporate resolutions and minutes, etc. So, as the owner of your business, you can combine your annual meeting with a vacation, kill two birds with one stone and make the entire trip tax deductible! And you can bring your family, too.
3. Your Corporate Gym: Unfortunately, the IRS wont let you directly deduct the cost of your gym membership. However, under section 132 (h) of the tax code, you can deduct the cost of the Gym equipment. So that Nautilus set, your Bow Flex machine, even the Gazelle Trainer that youve seen on television not to mention free weights, a work out bench, etc are all tax deductible through your company.
4. Business Gifts: Your company can give gifts to individuals of up to $25.00 per year. Often, these gifts are given as year end or holiday bonuses. But a little known nuance is that your companys gifts to other companies are unlimited. So I suppose your company could give a corporate gym membership away to your friends company. I I cant see any reason for your friends company to provide a corporate gym membership to your company in return.
5. Meals and Lodging: Under section 119, your company can cover the costs of meals and hotel expenses required for overnight stays. These trips might involve researching new products, better sources of supplies, new real estate deals, etc.
6. Put Your Kids on the Payroll: Instead of paying your kids an allowance, hire your kids and put them to work. Theyll learn first hand, the importance of having their own business, and their salary is fully tax deductible.
7. Seminars: Your company can pay for the cost of educational seminars- even if they have nothing to do with your current business. So, for example, if you want to learn how to invest in foreclosures, your comapy can pay the freight. What about things like golf lessons, ski lessons, dance lessons or scuba diving? These can all be included!
8. Dependant Care Plan: The tax code allows you to deduct up to $5,250 for the costs associated with caring for dependants This includes young children and our adult parents who, nowadays often have to turn to us for help.
9. Moving Expenses: Your company can pay the cost of an executive move whether it is across town or across the country.
10. Your Retirement Plan. Your company can establish its own retirement plan. It can include you, your spouse and even your kids. There are MANY different types of retirement plans to choose from, and a retirement specialist can help you choose the best types of plans for you and your family. Imagine hiring your child, grandchild, or niece/nephew to work for your business and paying them a tax deductible salary which they place into a tax deductible retirement fund from the time they are age 7. You might also want to self-direct that plan into your favorite investments. Just imagine the financial head start that would give them.
And those are just ten of my favorites. There are many more available to help you save on taxes. By applying these tax deductions, along with the other 300 deductions available to business owners, you can save yourself thousands of dollars each year on your tax bill. Take some time to see what deductions are available to you, and be sure you aren’t overpaying your taxes like millions of other Americans!
Accounting outsourcing can shed your workload
Accounting means handling of accounting tasks and its related stuff with utmost care. It is such department that every business or firms have to make a careful look on this. Accounting is one such department which every company has to maintain. The methods and techniques keeps changing in the accounts to make it work well for an organization. Accounting outsourcing is one such business method that can help you to make your business flourish well. For this, you need to manage your book records till you finish up paying taxes for a financial year. Not only this, you have to keep the records safely for future reference as well because at any point of time you can be in need of such information. By adopting outsourcing for your business, you can relief from a tedious task of accounting.
Every company dreams to prosper well in its business specialization and for this they have to struggle hard to make some unique techniques that makes them different from others in the crowd. Proper and regular maintenance of accounting task will surely help them in survive longer in their business. To survive in such a world where there is extreme competition in the business world is a tough task. To make big money businesses or firms do cost cut plans and endow the saved money in the growth plans of their company. If the firm in-house employees for maintaining its accounting task, then it can prove costly for them. They will have to pay big money to the accounts professional along with having tensions for careful handling of accounting task. A slight mistake in accounting can lead to shut down of their business. Accounting outsourcing can really prove magic wand to keep your business away from such intricacies.
So to keep the business safe, accounting outsourcing can be the most successful strategy to make your business outstanding. You can outsource the complete accounting task from a reputed vendor. It will save a big portion of your revenue and you will get best quality work in your defined time. The increasing amount of work pressure on accounting tasks has given a special place for its work to get it executed through outsourcing. Be it accounting or any kind of business specialization, outsourcing is popular as an effective tool and being successful in solving various kinds of problems and giving you customized business solutions. You just have to hand over your entire work to a known company that can efficiently handle your work on your behalf. Before transferring your work, do some homework to know about the records of the firm whom you are going to hire. Accounting outsourcing process is intended to transfer your entire accounting task to an offshore destination.
By adopting accounting outsourcing for your business, you will not have to hire accounts professionals at your own and to establish a separate department. Thus, you can save some money for your business. The accounting task deals with treasury back-office services, bookkeeping, general ledger, tax computation and filing, data entry, spreadsheet and many others. The vendor does your work with utmost professionalism and you can relieve of keeping your data at safe hands.
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How Can Hiring Your Kids Help You Save on Income Taxes?
Hiring your children in your business can be a great tax savings strategy, as well as a way to teach your children about business and money.
Wages paid to your children (between the ages 7 and 17) are a valid business deduction, as long as they do bona fide work, and they are compensated fairly.
Your children can earn up to $5,350 (the standard deduction amount for 2007) before they will owe any income tax. Because you are getting a business deduction for the wages paid to your child, this is income that you also will not pay taxes on.
In addition, if your children are under age 18, you don’t have to pay Social Security or Medicare taxes on them. You do not have to pay unemployment taxes on them as long as they are under age 21. This is a huge tax savings since you would have to pay these taxes on any other employee you hired.
Even if you pay your children more than the standard deduction amount, you will still come out ahead. In most cases, your children will be in a lower tax bracket than you, so by paying them a wage, you are shifting income from your higher tax bracket to their lower tax bracket.
Strategy: If you are paying your children more than the standard deduction, they can shelter even more income from taxes by opening an IRA account.
Hiring your children does not raise a red flag with the IRS, but you should document your children’s salary and services provided to audit-proof your tax return. To do this, keep a time sheet showing the date, hours and services provided by your children, and write them a check for their wages.
Note: You may have heard of the “kiddie tax”. Earned income, including wages that you pay your children, are not subject to the “kiddie tax” rules, regardless of their age.
Example: In 2007, you can pay your child up to $5,350 (the standard deduction amount in 2007) before either one of you would incur any taxes. Suppose you are in the 28% tax bracket and you pay your 15-year old son $5,000 over the course of the year to perform office related tasks.
You get a business deduction for the wages paid to your son, saving you $1,400 (28% of $5,000). In addition, this reduces the amount of profit that is subject to self employment taxes (15.3% of $5,000 = an additional tax savings of $765). Your total tax savings in this example is $2,165.
Since your son’s earnings are less than the standard deduction amount, he does not owe income taxes on his earnings. In addition, because your son is under age 18, you do not have to pay Social Security, Medicare or unemployment taxes on him like you would with a regular employee.
Action: If you have children between the age of 7-17, consider putting them on the payroll. You will need to keep time sheets showing the dates, hours and services performed. You should also write them a check to substantiate the wages.
Filing Guide: You will need to file quarterly payroll tax reports (Federal Form 941, state payroll tax forms) for your children (even though no taxes are due). In addition, you will need to file a Form W-2 for your children at the end of the year.
Sources: IRS Publication 15, Chapter 3, Family Employees
Tax Savings Tips For Parents
Ask any new parent, and they will tell you that the costs associated with a new baby are many, everything from bottles to diapers to cribs, strollers, and high chairs, and all of this before the child even learns to walk and talk and beg you for a pair of $500 designer jeans. Parenting is one of the most rewarding, and important jobs that a person can have, in addition to being one of the most expensive. The good news is that there are two tax breaks offered by the federal government that the majority of parents can qualify for, which are the dependent exemption and the child tax credit.
The dependent exemption is a tax break that allows you to receive an additional tax deduction of as much as $3,000 each year until your child turns 19. This is addition to the standard tax exemption that the IRS allows per person to cover basic living expenses. Single people are allowed one exemption, while married couples have the option of taking two of these exemptions per year.
The amount that you will save with this exemption depends on your current tax bracket, and generally, the higher the tax bracket, the more money you will receive, unless your income is too high to claim an exemption, but again, most people will qualify. This dependent exemption is only phased out for married couples filing jointly with an adjusted gross income of more than $300,000. Limits for single parents exist as well, and it is important to research these limits, both for married and single parents, to be sure that your income does not exceed them. If you qualify for this exemption, you can simply fill out the required lines on your tax form, including an adoption taxpayer identification or social security number for each child.
The child tax credit is available for married couples filing jointly with a reported gross income of below $13,000, although again, it should be noted that income limits for both single and married parents are revised frequently. With this credit, it is possible to receive up to $1,000 per child.
Determining the amount of credit that an individual can claim requires the completion of the child tax credit worksheet, which can be downloaded from the IRS website. You will need to provide a social security or adoption taxpayer identification number for each child in order to qualify. As with all tax information you should always check with a professional because tax laws can change every year.
Tax Benefits of a Home Based Business
If you have a home business then you need to make sure you take advantage of all the tax breaks that are available to you. Many home businesses are unaware of all the tax breaks that are available to them and do not claim them on their yearly tax return. This is unfortunate because small home businesses more than anyone need all the tax help they can get. The following tax benefits are just a few suggestions every home business owner should consider claiming this tax season.
Tip #1 Business Space
You can claim a portion of your utilities, insurance, mortgage, and more, for your business space. As long as there is a percentage of your home that is used solely for business purposes then this consists of your “office.” To find out how much you can claim of the above expenses you need to do a little math. Determine the square footage of your home and then the square footage of your “office.” Once you know the percentage then take that amount from your yearly mortgage payments, insurance payments, utilities, repair, and the like. An example would be that if you used 15% of your home as office space then 15% of the bills associated with the home could be claimed as an exemption on your tax return. This can result in some major savings when tax time rolls around so be sure you investigate what expenses relate to your business and can be exempted.
Tip#2 Transportation Expenses
You have a car, you buy gas, and you pay for car expenses. This can add up over a year’s time so you want to make sure you claim all uses of the vehicle for home business purposes. This could include trips to the post office or to buy home business supplies. It might be to pick up lunch for clients or driving to meet potential clients. As long as you keep a record of where you drive, how many miles it is, and who you are meeting with then you can claim the transportation expenses and be covered in case you are audited.
Tip #3 Furniture
Believe it or not but you can deduct furniture as long as it is used for business purposes. That means your desk, tables, chairs, even a sofa used in the office space may qualify for a deduction. Keep records of how the furniture is used and be sure to always keep receipts for the price of the furniture. When you claim deductions, even if they are legal ones, you want to make sure you can cover yourself if you are ever audited in the future.
There are actually many other tax benefits a home business can take as long as they qualify for them. Some of these include telephone charges, social security, computer equipment, restaurants and hotels, and even child labor! There are ways to reduce your tax liability each year as long as you are savvy enough to figure them out. Sure, you can always hire an accountant, but then you would have to pay him. So, figure out where you stand and how you can help your home business save money on taxes each year.
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Tax Planning for Business Losses in 2008
As we come to the conclusion of 2008, many businesses have lost money in this year. The economy for 2009 looks very volatile and some industries may start to recover in 2009, while others may take a little longer. One positive area to bring to the table is that the price of oil has decreased significantly and regular gas prices have come down to $2.00 or so per gallon depending upon your location.
The question through this difficult year where losses have mounted up, why do you have to tax plan? If you were profitable in year 2006 and/or 2007 and paid business taxes in those years, you may be entitled due a tax refund in 2008 to recover part or all of these monies paid in previous years. This tax recovery is called a net operating loss carryback claim…This situation applies to proprietorships, corporations, limited liability corporations, and so forth.
The first part of this discovery phase is to identify whether you are a qualified individual and/or company to recapture monies paid in from prior years…It would be a good idea to obtain from your accountant, bookkeeper, CPA, or your own in house books an updated balance sheet and profit and loss statement for 2008. Additionally, you may want to locate your 2006 and 2007 either personal and or corporate tax returns and review the past years information. If you have paid business taxes in those past years and are in loss situation for 2008, there is a good chance you will be able to recover either partial or all monies paid to the government for 2006 and/or 2007.
If you are a farmer and have losses in 2008, you should locate your 2003, 2004, 2005, 2006, and 2007 prior years tax returns because your eligible carryback years extend back for five years. Everybody else, for the most part, can carry back their business losses two years…
Once you have located your prior years tax returns and reviewed the business taxes paid into those years, compare this to the 2008 Profit and Loss Statement. It is good idea that your 2008 information should be current and accurate because it could have a major effect on your decision making. Assuming you are in a loss situation for 2008, you may want to plan you year end cash flow accordingly. For this illustration, we will assume everyone is on a cash not accrual basis accounting system. Because of your tax situation and the possibility of recovering a tax refund back in early 2009, you may, if cash flow permits, pay more bills in December 2008 than the normal January 2009 payment cycle. The bottom line here is that a qualified professional should be assisting you at this stage because of the cash flow and tax effect though the period ending December 31, 2008. The professional cost vs tax recovery benefit could be a big plus to you.
This carryback claim process is important because it can generate needed working capital if the economy hasn’t recovered in your niche for 2009. Additionally, with all the available acquisition and financing deals available for commercial vehicles, construction trucks, office equipment, computer systems etc, these monies could be used as a down payment or a combination of working capital and acquisition funds.
These carryback claims can be carried back two years, except for farmers, five for them, and if needed carry forward for twenty years. It doesn’t matter what your business structure is…There are exemptions to these rules and you should consult your tax professional for advise on these carry back and carry forward rules.
For illustration the types of industries that would qualify for these carryback losses include construction, trucking, farming, restaurants, all retail shops, mail centers, franchise operations, consulting firms, manufacturers, wholesalers, service providers, This is obvious a partial list of qualified businesses. In addition, the type of entity doesn’t play a role in these carryback claims. There are a few exceptions to the rules, therefore consult a good tax adviser.
In addition to the carry back rules, there are numerous business and individual tax changes for 2008. It would be a good idea to get a head start at the end of this year to understand them and see if there are any you want to take advantage of before December 31, 2008.In conclusion, 2008 was a trying year for many, but this recapture of tax monies shouldn’t be ignored. If done properly, you can get a head start on 2009 and have a profitable and less stressful year… … Who says Tax Planning is boring
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