Have you ever wanted to be the life of the party? It’s simple, just talk about how to save money on taxes.
Seriously, people love talking about taxes!
Okay, maybe not, but they should!
When you understand how to use the tax code to your advantage, it can save you thousands, if not tens of thousands of dollars. I say “save” because I acknowledge that paying taxes is not fun, but you have two options.
Option 1: You can complain about how “taxation is theft” and mope around about it.
Option 2: You can understand that the tax code is written in such a way that it incentivizes certain industries and investments.
I hope you’re smart enough to see that option 2 is the better mindset to have about taxes.
Since I learned this truth and began to work more and more tax-saving strategies into my business and investing life, I have saved tens of thousands of dollars in taxes…in just a few years!
This is by no means an all-inclusive list, but here are a few great ways you can begin to save money on taxes today!
1. Investing Pre-Tax dollars in Tax-Advantaged Accounts
The first way for you to save money on taxes is to invest pre-tax dollars in tax-advantaged accounts like a traditional 401k. For service members, this would most likely be in your traditional Thrift Savings Plan. When you invest pre-tax dollars into a 401k, you are deferring taxes on that income until a later date. This doesn’t mean you’ll never pay taxes on it, but it means you won’t pay any at the moment.
This is most beneficial if you believe that you’ll be in a lower tax bracket at retirement age than you are now. Let’s say you max out your (at the time of this writing) $19,000 annual contribution limit for the TSP. That $19,000 means you avoided owing an additional $4,750 in ordinary earned income tax that year, assuming a 25% tax bracket.
Again, you will pay this tax later, but if you are in a higher tax bracket now than you will be later, this will still save you money. This is especially true when you consider that your pre-tax dollars will be earning compound interest for decades before you need to pay those taxes!
Do you own a vehicle? Do you use that vehicle for business? If you answered “yes” to both of these questions, you could probably save money on taxes through a mileage deduction. In 2020, the IRS mileage deduction is 57.5 cents per mile.
One gallon of diesel: $3.00
VW Jetta TDI mileage: 30mpg (city)
My car has a 15-gallon fuel tank, so assuming I fill up that means I’ll be able to travel (at least) 450 miles for $45 worth of fuel.
($3/gallon X 15 gallons) = $45
(15 gallons X 30mpg) = 450 miles
At 57.5 cents per mile, if you drive one full tank of fuel (450 miles) for business, you can write off $258.75 in mileage expenses.
At first glance, this appears to be a no brainer, but you have to recognize that the mileage write-off assumes maintenance and other expenses are accounted for in these costs as well. Nonetheless, if you are driving your car for business and not tracking it for mileage expenses, you are paying unnecessary taxes.
My favorite way to keep tabs on mileage expenses is through the app MileIQ. This app automatically begins tracking when I’m in a car, and at the end of the drive, I can swipe right or left to annotate whether it was a personal or business trip. If you make the same drive frequently, it will automatically recognize those trips and you won’t even need to categorize them anymore! You can download a report from MileIQ at any time in order to send it to your CPA and take advantage of this write-off.
Long story short, MileIQ makes mileage deductions extremely simple to track!
It might seem obvious that you can write off education expenses, but most people only thought of college when they saw the word “education” above. If that was your thought, you are probably missing out on other tax deductions!
Yes, you can still write off college tuition expenses, but you can also receive a tax deduction for other business-related education such as learning a new skill, attending a conference, paying for an online course, audiobooks, etc.
*Shameless plug warning* That means you can get a tax write off while learning more about building wealth with real estate, and specific tax strategies, by taking my real estate investing course!
4. Home Office
This is not necessarily a simple tax deduction, but it can be quite lucrative. Essentially, the cost of any workspace that you use regularly and exclusively for business can be deducted as a home office, regardless of whether you own or rent the space. You should prepare a diagram of your workspace and dimensions to present to the IRS if they audit, but otherwise, you’re sort of on the honor system.
Once you figure out what percentage of your home is used for office space, you can then deduct that percentage of your mortgage interest, home depreciation, property taxes, and several other expenses too! For example, if your home office occupies 10% of your residence, then you could write off 10% of the above expenses.
You can either calculate your home office deduction using the standard method or the simplified method. Although the standard method requires you to keep a better record of all your expenses and requires more time, I absolutely recommend you use it. The simplified version has a cap on the amount you can write off, and it is peanuts compared to what you could probably write off with the standard method.
Don’t be lazy: use the standard method to deduct your home office expenses!
A meal is a tax-deductible business expense when you are entertaining a client (or potential client) or traveling for business. In these circumstances, you can deduct 50% of the meal’s cost if you keep your receipts. If you don’t keep your receipts, you can deduct 50% of the standard meal allowance, provided you at least have a record of the time, place, and business purpose.
No, you can’t deduct food eaten alone at your desk—sorry!
In order for your travel to qualify as a tax deduction, it must last longer than an ordinary workday, take place away from the general area of your tax home, and require you to get sleep or rest. You also need to have a specific business purpose planned and must actually engage in this business activity. These business activities can include, but are not limited to, finding new customers, meeting with clients, learning new skills (see the education section above), etc.
Make sure you keep complete receipts and records for all of these business travel expenses because the IRS seems to enjoy scrutinizing travel expenses.
You can deduct the cost of transportation while driving around your destination city, to and from your destination, lodging, and meals for these business trips. You don’t have to be the most frugal human being on these trips, but don’t go overboard trying to write off a Ferrari as your rental car either.
The best part about travel deductions is that you can write off 100% of your expenses, except for meals which are limited to 50% as discussed above.
Solar technology is a fairly new write-off that may not stick around forever. For the time being, you can deduct 26% of the purchase price of solar through the federal solar tax credit. If you own real estate and are responsible for the utilities on your asset, solar might be a great way to mitigate these expenses, especially with this large tax deduction!
8. Hire Your Children
You can hire your own children for $12,400/year!
The amount that you pay your children is pre-tax, which makes this even more powerful. I think the coolest parts of this strategy are getting your kids involved in the business, teaching them how to handle income and the fact that you can have them contribute a portion of this income to their own 401k plan. Talk about helping provide for your children’s future!
There are a lot of ins and outs to this strategy, so definitely consult a professional to make sure you’re utilizing it correctly, but I love this idea and am looking to begin implementing it next year!
As if you needed another reason to donate to good causes (you don’t), you may deduct these contributions if you itemize them. You can deduct the amount of your contribution up to a certain percentage of your adjusted gross income.
This is just another reason why you should remember to give back as your business grows. Ultimately, you should always be charitable anyway!
10. Get Creative
This is just the tip of the iceberg. There are many other tax deductions you can claim when self-employed. For example, there are tax deductions for health insurance premiums, interest on business loans, startup costs, advertising, rent, business insurance, etc.
11. Talk with your Tax Professional to Save Money on Taxes
I feel the need to throw out there that I am not a tax professional by any means. These are just some tips and tricks that I have begun using over the last few years. It is without a doubt worth meeting with a tax professional to discuss your tax strategy and how to improve it.
Also, a good tax professional will more than pay for themselves each year, and I absolutely recommend you find one like mine. If you would like an introduction, don’t hesitate to ask!
The more money you can save from spending on taxes, the more money you can reinvest into the business for growth!
Also, if you want an introduction to my tax professional, let me know!
Here is another popular article about getting rich in the military!