“People ask me ‘Is this tax deductible?’ That’s the wrong question. The question should be ‘HOW can I make this tax deductible?’” ~Tom Wheelwright
Now on to the last part: spending. I don’t care if you are Frugal Freddy or Spendthrift Sally. We ALL must spend money on something, even the basics of food, water, shelter and clothing.
We all need to eat. Now if you go out to eat at the local steakhouse that will normally be a personal expense and not tax deductible. But if you bring a client? Then it could be tax deductible. Is your business partner your spouse, your brother or a friend? If you discuss business during that meeting, it could become tax deductible. Do you use your personal internet for some business use? Well, part of that could be tax deductible.
Even WHERE you spend your money can make a big difference. I live in Minnesota and currently clothing for general use is exempt from the 6.875% sales tax, whereas in South Dakota it would be taxed at 4.5%. So if a family that lives near the border needs to do back to school shopping might travel to MN to save on sales taxes. Likewise, I know several people that live in Big Stone City or Milbank, SD yet work in Ortonville, MN and save on income taxes.
Do you live on the border of Illinois and Missouri? Illinois is ranked number #3 for the highest gas taxes and Missouri is ranked #49. As one that used to drive over 20,000 miles a year for a previous job, the savings on gas can add up!
Now what about WHERE you live? An old coworker of mine decided to move from Illinois to Texas. The result? He figured out he would save about $300,000 in property and state income taxes until retirement. How would an extra $300,000 in retirement benefit you? What if you could invest that $300,000? How much more would your life change if you had over a QUARTER of a MILLION dollars in your pocket, versus the government’s?
Many times, a purchase can be structured to minimize your up-front costs yet maximize your tax deductions. Here’s a common example through real estate. If you buy a property say for $100,000 usually $80,000 of it can be depreciated over 27.5 years which comes to just over $2,900 a year of depreciation. But did you buy the property outright? Probably not; you probably had 75-80% of the property covered by a low, fixed-rate mortgage from a bank. Even though you only put up 20-25% of the purchase price, YOU get the FULL depreciation and tax benefits, NOT the bank!
Here’s a more creative example. Are you in need of a new car? Well if the gross weight of the vehicle is over 6,000 lbs (think of pickups and SUVs) then you could qualify for a section 179 deduction. Again, did you take out a loan for the vehicle? Well, hypothetically if you used the vehicle 100% of the time for business, you could get 100% of the tax benefits without putting any money down. AND the interest would be deductible.
There are literally thousands of ways to spend money and structure it to get even a partial deduction. Always ask yourself if you can make a purchase tax deductible, in part or in full.
Read Next: WHEN are you taxed?
*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.*