What New Women Business Owners Need to Know about Tax Planning
Fri, 11/09/2012 - 4:26pm | by Dominique Molina
"The hardest thing in the world to understand is the income tax."
- Albert Einstein
The bad news is, the tax code is so complicated Albert Einstein can’t understand it. The good news is you don’t have to be Einstein to cut your taxes. You just have to know how the system works for you – your business, your investments, and your family. As a woman entrepreneur, you have many strategies available to do just that. Before you get started, it helps to have a common understanding of how the tax system works:
- Add taxable income from all sources to figure total income.
- Subtract “adjustments to income” to determine “adjusted gross income” (AGI).
- Subtract standard or itemized deductions and personal exemptions to determine taxable income.
- Consult table of tax brackets to figure your tax.
- Subtract any available credits to figure your final bill.
That's really most of what you need to know. The real issue isn't the numbers. It's what you have to include in your income, what you get to deduct from that income, and where you invest to avoid reporting income at all. Having said that, there are three main strategies for cutting your tax:
1. Earn as much nontaxable income as possible. You have more control over business and investment income than any other income you earn. That is why owning a business provides you with so many opportunities to pay less. You can draw income from your business in the form of tax-deferred and tax-free benefits. And you can grow and draw income from your portfolio in all sorts of tax-advantaged ways. Good tax planning concentrates on these choices.
2. Make the most of adjustments to income, deductions, and credits. Adjustments to income and deductions save by cutting your taxable income. Tax credits save by cutting your actual tax. There's no magic to using them, other than knowing what you can deduct. A good tax plan helps you exploit more of these opportunities.
3. Shift income to other taxpayers and other tax years. Shifting income from today to tomorrow cuts today’s tax—plus it squeezes another day’s use out of today’s tax dollar. And shifting income from you to a lower-bracket taxpayer, such as a retired parent or child, saves even more. Many strategies involve these sorts of moves.
And being a female entrepreneur provides one other HUGE benefit. Owning your own business—a bona fide business with legitimate profit intent—is the best tax shelter left in America. Future blog posts will outline strategies for organizing your business, deducting day-to- day expenses, buying and owning real estate and equipment, and choosing retirement and employee benefit plans.
Stay tuned next month . . . my future blog posts will be your guide to tax discounts throughout your tax return. Enjoy your savings, and don’t spend it all in one place!
Dominique Molina is President of the American Institute of Certified Tax Coaches an organization of tax professionals who are trained to help their clients rescue thousands of dollars in wasted tax. In addition to her blogging and speaking engagements, Dominique provides CPA continuing education as a registered educator with the National Association of State Boards of Accountancy (NASBA).