Blog | Personal Finance

Five Ways to Legally Reduce Your Taxes

What if you could have more money in your pocket today?

The fastest and easiest way to put money in your pocket is to reduce your taxes.

I love taxes, not just because I think they are fascinating, but because they really are powerful. As I wrote in Tax Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes, they're either going to be your worst enemy or your best friend.

Deductions

The first thing that comes out of your paycheck, before you get a dime, are taxes and you get what's left over. What if we could actually take the expenses out first and then pay the government with what's left over?

In fact, the government wants you to do it. Anybody can own a business out of your house as an Amazon reseller, any kind of internet marketer or multi-level marketer.

Every one of these gives you the same benefits as if you were Walmart. What if when you went out to dinner with your spouse, that meal was deductible? All of a sudden, the government's paying for 20 to 30% of your bill.

You have to meet three tests:

1. It has to have a business purpose. That's pretty easy. The business purpose is you're talking about business.
2. It has to be typical that you talk about business with that person -- your business partner, your spouse or somebody who can give some critical feedback.
3. It has to be necessary, meaning that it's actually going to give me a benefit in my business. This applies to your car, your house, your meals, your travel, even your vacations.

The minute you start your business, you sit down with your tax advisor. He or she is going to be able to tell you approximately how much you're going to save in taxes for the next year.

Immediately, go to your employer and change your withholding. That affects your very next paycheck.

Conversion

Any time we can convert or change our income from a high-taxed income to a lower tax income, we've just put money in our pocket.

This latest tax bill has this new thing called a 20% pass-through deduction.

It applies to any business owner up to a certain amount of income. Let's say that you make $150,000 a year as an employee. By being a self-employed consultant to your company, you get 20% off.

In other words, instead of paying tax on $150,000 you'd be taxed on $120,000. Let's say you're in a 30% bracket. That's $9,000.

Make sure you sit down with your tax advisor on this because you don't want to lose your benefits like your health care, etc.

Tax brackets for your kids

Let's say you started your home-based business and you pay your son or your daughter to do bookkeeping or to help marketing in your business and you pay them $12,000 a year. That $12,000 is not taxable to your kids.

If you're in a 30% bracket and you pay them $12,000, you just put 30% of $12,000 -- $3,600 -- into your pocket today.

You don't have to wait until April 15th of next year. That's money that again, reduces your withholding

Sit down with your tax advisor. Figure out what could your kids do in your business.

If you pay your kids from your own company, you don't even have to pay social security taxes on that salary.

You're going to spend that $12,000 on the family vacation, a college fund or an afterschool programs. Don't use it for their food and essentials because obviously you have to pay for that. Be responsible.

Eliminate taxes

Being generous is pretty much the best way to make money. The government is saying if you do generous things, we're going to give you this huge tax benefit – one from the state and one at the federal level.

This is a way to double dip that the government wants us to do it.

There are hundreds of tax credits or non-taxable income. Then there's things that aren't taxable at all, like municipal bonds, insurance or life insurance proceeds.

In Arizona, you'll get a credit for taxes for charitable contributions. For example, private school tuition is one of those charities.

Rather than a deduction, you get a credit. You donate a dollar, you get a dollar back; you pay a dollar less in state taxes.

Deferral

If you go to a financial planner or most tax preparers, they're going to tell you that the way to save taxes is to defer them to a later year.

Once you've done everything else, do this.

Typically, the only way you're going to be a lower tax bracket is if you retire poor.

Think about it. You're not going to have your business deductions or tax brackets because you sold your business. You're not going to have a lot of regular tax benefits since you've paid off your house and your kids have finished college.

If you had the same amount of money when you retire as you did when you were working, you're going to be in a higher tax bracket.

Most people say they’re not going to need as much when they retire. Really? You're not going to have medical bills? That's great because you are different from everybody else.

Who wants to make less money when they retire? You want to retire with more money, not less money, while paying fewer taxes.

The way to do this is to reduce our taxes permanently by taking the steps I’ve laid out for you above.