Midridge’s Smart Tips: Explore How To Trim Your Taxes

Midridge’s Smart Tips: Explore How To Trim Your Taxes

Explore ways to reduce income taxes to the legal minimum while keeping you on good terms with the tax authorities.

Whenever you generate profits, you’ll have to answer to the Tax Man. The challenge is to use every legal means of reducing your tax liability to the lowest possible amount. Here are some ways to meet this goal.

Record-Keeping

The first step in cutting your taxes to the legal minimum is to create and maintain reliable financial records. Your record-keeping system should give you a clear understanding of your financial affairs—income, loans, purchases, losses, investments, interest paid and earned, etc.—and enable you to quickly access your financial data at tax time.

An enterprise with a complex business model will require a fairly detailed financial record-keeping system. A wage earner who is maintaining a household and supporting a family can make do with much simpler record-keeping. A small to medium-size business has needs that fall in the middle. Ask yourself, what works best for me? Then implement that system.

An entrepreneur operating a small to medium-size business will need a formal “double-entry” bookkeeping system (your accountant can explain this, but generally it means that fiscal records are maintained in two places so errors are easier to detect) that’s supported by hard-copy or electronic documents such as receipts.

Working With a Competent Tax Adviser

Although tax laws aren’t intended to punish income-earning citizens, their complexity may make you think so. You should have a basic understanding of tax laws that apply to you and your company, whether you personally complete your returns or hire professional help. Your tax adviser can explain things you don’t understand, or if you’re going it alone, you should routinely seek and read timely, relevant articles about income tax. If you delegate to an expert, cultivate a lasting relationship based on mutual trust. Trust is essential for effective communication, collaboration and the best possible tax result.

Tax Planning

Many people think of taxes—and ways to reduce them—either in late December, when they toss up a Hail Mary in hopes of reducing their taxes for the past year, or in June, when they’re scurrying to file a return by the 30th. But effective tax planning is a year-round process. As significant financial events occur, ask questions and find informed answers regarding potential tax consequences.

Of course, your opportunities to reduce the taxes triggered by a major financial event may be limited. When that’s the case, the most effective tactic is to predict, as precisely as possible, how much money you’ll need to cover the tax liability.

Financial Planning

When you develop a financial plan for your business, start with an inventory of financial resources (cash on hand, money owed to your accounts receivable, etc.) and then list future expected earnings, existing debts and future financial commitments like a capital expenditure for new equipment. Each financial resource has the potential to grow, shrink or remain constant; future ups and downs affect your taxes. So as you consider strategies to make the most of your financial resources, you also should consider the related tax implications.

As the Benjamin Franklin saying goes, “A penny saved is a penny earned.” Paraphrasing Franklin (sort of), “A tax deferred is a tax saved.”

In executing financial strategies such as when to buy, borrow and sell, tax rates are always a factor to consider but should never be the most important factor. Consider these ideas, presented in no particular order, for trimming your taxes:

Claim deductible expenses as soon as you can. Tax laws change, and some items that are allowable deductions now may not be in the future.

Consider incorporating an unincorporated business. Sometimes employee benefit and other programs sponsored by a corporate employer are more tax-efficient (meaning they reduce the owner’s tax liability) than those available to owners of unincorporated businesses. Generally, there are minimal adverse tax consequences of incorporating an unincorporated business. 

Optimize retirement savings and/or deferred compensation arrangements for you as the business owner and the employees. Put as much as you possibly can into your retirement savings plan without sacrificing the liquidity you need for emergencies. And whenever possible, try to qualify for the maximum amount of employer matching funds. That’s optimizing at its best: free money!

The financial advantages can be significant because, No. 1, money you save for retirement will earn compound interest and, No. 2, you can defer the payment on your earnings until you are retired, when most people earn less and thus pay a lower percentage of their income to the tax authorities. The tax aspects of retirement savings and deferred compensation arrangements are very technical, so seek recommendations from experts (tax and financial advisers, actuaries, plan administrators, etc.) to maximize your legal tax avoidance.

Your Bottom Line

Planning well and having access to the right information about your finances as well as tax rules are keys to holding onto your profits when you go up against the Tax Man. Plan your work and work your plan. And remember: It’s not how much you make; it’s how much you keep

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