Steps To Legally Reduce Your Taxes

2. Work to earn, spend, THEN pay taxes

"Employees pay the highest percentage of taxes. Big business and investors pay the least." ~Robert Kiyosaki

What does THAT mean you ask?  Well think about how most people get paid, through a paycheck from their employer.  Before it even hits your bank account federal, state, and FICA taxes are already deducted.  THEN you can spend what is left over.  But what if you could reverse that order?

We went over this in (link) When Are You Taxed? but let’s give another simplified example.  I think all of us have a space that they live in, a car and a cell phone.

Let’s assume your employer pays you $40,000 and you live in an income tax free state, say South Dakota.  You will net about 82% of your total salary after federal taxes and FICA taxes.  So then you get to spend the remainder of your check AFTER taxes are taken out. (the below was factored using Smart Asset’s calculator)

Now, let’s say you run a part time business out of your home and make $40,000 from there.  Now we have a home office deduction we can utilize.  This can get very complicated based on your housing bills and the square footage of your home office but let’s say we go off the maximum deduction of $1,500.  The average annual cost of a cell phone bill is about $1,400 and we will assume we just use the mileage deduction which is 57.5 cents per mile at the time of this writing.  For simplicity, I will use my mileage as a real estate agent which is about $1,300.  So just with those 3 deductions, our taxable income is lowered to $35,800.  Here we earn money, THEN spend it and are taxed on what is left over!  Did you have professional fees to pay for?  Those are deductible as well.  Meals out with clients?  Yep, tax deductible.  There could be dozens more but like I said, everyone’s tax situation is different.

Now you have to be careful with business deductions.  While there is lot of leeway with tax deductions for business, generally speaking the expense has to be ordinary and necessary.  And ordinary can be different from one industry to another.  It would arguably be ordinary for a carpenter to buy tools for their trade.  If you are a beautician it would probably be difficult to write off a power drill and say it is “ordinary” nor “necessary” for your business.  Necessary also doesn’t have to be indispensable.  Do you absolutely NEED a cell phone for your business?  You could probably argue no; business moved along for years before cell phones but definitely would be an ordinary and necessary expense.

One final note:  travel.  This gets to be questioned quite a bit as some think they can take a weeklong trip to Disneyland but if they have 1 business meeting then they can write off the whole trip.  Not quite true.  Generally speaking you have to spend at least 4 hours and 1 minute on documented business activity per day.  Now if you have business meetings from 8-1 and then go to Disney in the afternoon until close, that’s fine.  But the IRS is very picky on activities AND you have to document.  Receipts, invoices, documentation, brochures even cell phone logs and mileage logs can help.  Document, document, document is the name of the game for having your expenses getting the blessing from the IRS.

Now the IRS does allow you one day for travel to the destination and one day back that you don’t need to have any business activity documented, regardless of how long it takes you to get there.  AND if you happen to leave on a Friday, you get a pass on the weekend in between.  So you COULD say fly out to Disney on a Friday morning, spend the remainder of Friday, Saturday and Sunday at Disney, spend 4 hours and 1 minute checking out rental properties on Monday morning say with Realty Doctors or Southern Impression Homes and then enjoy Disney Monday and fly back Tuesday, you could probably write the whole trip off as a business expense.  Well, the airfare, meals, rental car and hotel stays.  Good luck deducting your Disney Park Hopper tickets!


Read Next: Shift to lower taxed or NEVER taxed brackets and buckets

*Full disclosure I am NOT a CPA nor a certified financial advisor (or any other alphabet soup designation) and all of the information in this section is provided solely for educational purposes and does NOT constitute legal or tax advice. EVERYONE should consult their own financial advisors, CPAs and tax strategists to compile their own individualized plans.*

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