Reduce your taxes

If you are like most of us, paying your taxes just emptied your wallet and you are just now getting over the pain from April 15th. Now is the time to start planning for next year and to resolve making the hit a little less painful.

The plan is to be mindful of your taxes everyday. You need to prepare all year long so that when April 15th comes again next year, and it will, you are ready and you are in the driver’s seat.

What you need to know is there are two tax systems in the USA, one for the informed and one for the uninformed. 

Here are some ideas to help you become “informed.” 

There is something called “above the line” and “below the line” deductions. “The Line” is the last line on page 1 of your form 1040. It reports your adjusted gross income (AGI). Anything included above the line will either add or subtract from your AGI.

The AGI is such a critical part of your tax filing because so many things are based upon it. For example, medical expenses are deductible only up to the amount that exceeds 10% of your AGI. If your AGI is $60,000, you would need to exceed $6,000 in medical expenses before you could start deducting them. This deduction would be considered “below the line” and would not affect your AGI.

As a W2 employee there is not much that can be done to affect your AGI. You might contribute to a traditional IRA, and that will help, but as a small business owner, or real estate investor, there is a whole other world of deductions available to you. Many of these are “above the line” deductions. They are your personal tax shelters! Your small business and Real Estate deductions enter your tax return “above the line” and may have a dramatic impact upon your tax liability. This is one of the reasons that small business owners appear to be richer than W2 employees. They can control their taxes in a strategic way by making purchases and investments that may greatly reduce their AGI.

What can you do about it? Start by being continually mindful of getting your deductions “above the line” instead of “below the line.” Track your vehicle mileage; purchase a computer for business use, not personal use. Don’t go out to lunch or dinner, but go to business meetings where meals are served. Make sure to use business retirement plans and benefit plans to their full advantage. Learn the rules and understand how they apply to you. This may sound like a lot of extra work, but it really is not. If you create a simple system and keep accurate records, you may be surprised by how much your deductions can add up.

Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csub.edu/sbdc.