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Four Tax Savings Tips

[ 0 ] Feb. 28, 2014 | SBO Editor

Tax savings

“INC. YOURSELF: How to Profit by Setting Up Your Own Corporation” by Judith McQuown has sold more than 700,000 copies to date and the “entrepreneurial classic” (CNBC) is now completely revised and updated.

Tax Savings Tips

Providing information on the latest tax laws and legislation that affect individuals and small businesses, INC YOURSELF, can save entrepreneur thousands — start with the FOUR tips below:

One way to save thousands of dollars in federal income taxes is to set up a C (general business) corporation to split your income between the salary your corporation pays you and the money your corporation keeps.

For example, take Maria, a real estate broker whose earnings are $48,000 a year, with dividend income of $6,000 and medical expenses of $2,000, excluding insurance.  Maria prefers to retain as much corporate income as possible, so her corporation pays her a salary of $20,000 a year.  By accepting the low salary, Maria saves more than 29 percent in taxes: $8,968 as a sole proprietor versus a total of $6,349; $3,713 in corporate income taxes and $2,619 (including real cost of Social Security tax) in employee income taxes.

​Another tax-saving strategy works best when entrepreneurs have losses in their start-up ventures and same-year income from other sources.  Setting up an S corporation will let them deduct these losses from their other income.

For example, with income from other sources of $40,000 and S corporation losses of $20,000, their Adjusted Gross Income drops to $20,000 instead of $40,000.

By setting up a Medical Care Reimbursement Plan, one- and two-person corporations can arrange to pay directly for 100 percent of their medical insurance, drugs, dental expenses, eyeglasses, contact lenses, mental-health expenses, physical therapy or gym membership (with doctor’s note), and many other expenses.  These can easily total over $10,000 a year–all paid for by your corporation.

Dividends paid by a corporation to your corporation are 70 percent tax-free, as long as your corporation holds the stock for at least 45 days.  The remaining 30 percent is taxed as low as 15 percent, for a net effective tax rate of 4.5 percent. The remaining 95.5 percent is tax-free.  Over time these dividends can add up to savings of thousands of dollars a year when compared to individual income-tax rates on dividends.

To learn more about your individual tax savings potential, visit www.irs.gov for specifics on tax savings and the law.

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Category: Features