Death and Taxes

He said it

Benjamin Franklin said, “… nothing is certain except death and taxes.” The good news is that death visits us exactly once. The bad news is that we are not so fortunate with the Taxman. Every year, he throws a monkey wrench -- maybe, in the end, you realize you can’t afford that vacation you were itching for after all.

Keep Most of Your Money

You work hard for each dollar. You want to keep as much as possible of the money you make. Of course, you want to reduce the money you give Uncle Sam. Is that even legal, you ask? As long as you remain within the legal confines of the tax code, it is legal and your responsibility. Here is the rub: you need to know enough about the rules to run circles around it.

In this issue, we will focus on some tax rules regarding business ownership. Generally, the idea is that business owners get much better tax treatment than employees and can claim more deductions. 

Simplified Scenario

Let us look at a simplified scenario. Suppose that you are a W-2 employee making $160,000 a year. You are married with three dependent children who are full-time college students. You are renting a house for $4,000. You have very few deductions, so you claim the $29,200 Standard Deduction for Married Filing Jointly. That gives you a net income of $130,800 (160,000 - 29,200) and a 22% tax bracket. Your tax is $18,882 before tax credits. See https://www.forbes.com/advisor/taxes/taxes-federal-income-tax-bracket/ for the 2024 tax brackets and calculation.

Pay Your Children

You start a small business, form an LLC, hire your three children in the business, and pay each $14,600 -- the 2024 Standard Deduction for Single. That is $43,800 in brand-new deductions you did not have before. Even better, you keep all the money within the family, and your children do not have to pay taxes on their income. Why? Because their income is not greater than the 2024 Standard Deduction for Single.

Home Office Deduction

Say you use 8% of the floor area of your house as a home office. You can claim a $3,840 Home Office Deduction, 8% of your $48,000 yearly rent. In addition, you can claim an 8% deduction off of your utilities such as electricity, water, gas, lawn maintenance, phone, internet, etc. If your monthly utilities are $800, that is another $768 deduction.

Save Big on Taxes

Your LLC total deduction is $48,408 (43,800 + 3,840 + 768), plus $29,200 of Standard Deduction equals a $77,608 deduction. You just lowered your net income from $130,800 to only $82,392 (160,000 - 77,608). That takes you to the 12% lower tax bracket. You save $9,458.96 in taxes, down from $18,882 to only $9,423.

This simple example illustrates the many benefits of business ownership. We discussed only some of the many tax benefits, but the takeaway is that, for taxation purposes, it is better to be a business owner than an employee.

Please let me know if you have questions, comments, or suggestions. See you in the next issue!