As the end of the year races toward us, the opportunities to find and take advantage of tax deductions and loopholes to save money on income taxes are growing scarce. Fortunately, there are still plenty of tax saving strategies that you can implement even with just a few weeks to go until the end of the tax year.
One of the most effective ways for typical households to lower their tax bill is by donating items to charities. Unlike cash donations, donating used goods to charity is a free way to reduce the income taxes you pay. A quick trip to the basement or storage closet could turn up several trash bags worth of used clothing that no longer fits your children, or you. Other items like shirts, pants, suits, jackets, shoes and more may just be out of style, or no longer fit your current dressing manner.
For example, workers who used to have to wear a suit and tie to the office may now work in a business casual environment. Unless you live on the East Coast, suit and tie occasions don’t come up all that often. Hold onto one dark suite for funerals and formal weddings, and one less formal suit for other semi-formal events. Even clinging onto one fun suit, or stylish suit that you "might" wear to "something" someday can still leave you with a dozen suits that can be donated to local charities. Keep track of everything you donate with "contemporaneous records." Take the receipt from the charity and fill it out right away, but also keep a log in a notebook or a note card of everything you donate.
If you haven’t cleaned out your basement or storage unit in the last few years, there might be TONS of used clothing in there that you can donate. Don’t be afraid to donate it all and claim every last penny on your income taxes. Again, just keep very good records of exactly what you donated and when. Back up the charity’s receipt with your own logs, and, for extra measure, take some digital photos of the clothing. There is no need to capture itemized pictures, a few pics of a giant clothing pile and maybe one or two of the twenty bags being dropped off at Goodwill should be more than enough proof to head off any challenge regarding how much you donated. (How much you valued each item at, is a different story, which will cover next year when we talk about how to prepare your 2009 Federal Income Taxes.)
Don’t stop at clothing. Small appliances (think anything that could be used in a dorm room or small apartment), electronics, sporting goods, and more can all be donated to charities that would gladly accept them.
As an added tip, break up your donations by dropping them off over several days, or donating a portion of your used goods to various different charities. The IRS requires additional documentation for single donations that exceed $400. Keep each donation under that amount, and relive the extra burden of documenting larger charitable donations.
With many charities having one of their worst year ever raising money for good causes, now is the time to pitch in and help out. By donating unwanted items that are laying around your house, you not only help good causes that you believe in, you can also make some money and save on your taxes next year at the same time. Plus, you house will be cleaner, and you might actually be able to find some of those important things that are lost in your storage areas.
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Black Friday has come and gone. Cyber Monday is history. Yet, online shopping continues in full force. Various reports suggest that online shopping has increased dramatically this year, likely due to the increasing usage of broadband connections in the home, and the draw of huge savings secretly located on the Internet if you can just find the right combination of coupon codes, discount websites, and wholesalers online. However, as always, when it comes to personal finance what you don’t know can hurt you. Make sure you understand all of the details regarding online shopping for bargains. Otherwise, you may get burned.
Amazon Makes Online Shopping OK
Not long ago, online shopping was the exclusive providence of very specific people, typically techies, and ultra-bargain shoppers who linked together in electronic discount finding groups reminiscent of the old coupon clubs. A few appearances on Oprah by folks like "Coupon Mom" helped drive online shopping and deal finding to the forefront of the American consciousness. But, what finally pushed online shopping over the edge from the wary, angst filled, activity it used to be to a common shopping method used by teenagers, little old ladies, and the technological inept alike was the legitimizing factor of Amazon.com.
When Amazon burst onto the scene a decade ago, it was a revolutionary idea. Selling books online meant that not only could Amazon offer deep discounts on books, but it could also stock many more titles than local booksellers could on their shelves. Even the big national chains like Barnes & Noble and Borders couldn’t compete with how many books Amazon sold. The offer to order a book for you began to pale by comparison. Instead of waiting for the bookstore’s regular shipment of books to include the book title you were looking for, you could order the same book from Amazon and have it delivered directly to your house right away.
For a while, books, were one of the things that was OK to purchase online. There were many things that made them safe. First, any book Amazon.com sells is exactly the same as the books on the shelves at Barnes and Noble. In other words, there is no concern about quality or some sort of bait and switch scam. Secondly, shipping costs were relatively low. The savings offered on the price of the book was larger than the cost of sending it in the mail, which meant a good deal, was still a good deal even with shipping. This was no small factor as online pet supply websites found out when it turned out no one was interested in buy 50 lb. bags of dog food online due to the ridiculous shipping costs. Finally, Amazon had good customer service. Products could be returned, and exchanged, and over time, the company became a household name, erasing the fear of giving out your credit card number online.
Once Amazon started selling products beyond books, the barriers were officially broken, and online shopping was a common thing among all groups of people.
Not All Shopping Websites Are Like Amazon
Unfortunately, this familiarization with online shopping via a retailer like Amazon has made many Americans let their guard down when it comes to buying online. It is important to remember that not all merchants are Amazon.com. In fact, precious few are. That means that you need to find out all the facts about who you are buying from FIRST before placing an order, no matter how great of deal it is.
Top Things To Know About Online Shopping Websites
- Return Policy – Not just that they accept returns, but the details as well. Who pays for shipping? How long is the return period? If it is also a brick and mortar store, can you return items to the store? Is there a restocking fee? Most importantly, under what conditions can something be returned? Many sites allow returns, but only for defective items. That means if you don’t like it, or it isn’t what you thought it would be, then that is just too bad.
- Shipping and Handling Charges – Even on Amazon.com you have to be careful of this one. Amazon lets anyone sell on their website. Unfortunately, it sorts prices based on the cost without shipping. That means that the vendor who sells for $9.99 plus $8.95 shipping is listed as cheaper than the vendor who sells for $12.99 plus $2.99 shipping.
- Is It Really Amazon – Speaking of Amazon. The website doesn’t always make it easy to tell if you are buying a product from Amazon, or from some third-party using Amazon as a store front. It matters because they have very different return policies and shipping time frames.
- Who Is It? – Amazon isn’t the only website that makes it harder to see who you are actually doing business with. Don’t check out the main website to see if they are legitimate, check out the actual seller. There is a big difference between how legitimate eBay.com is and how legitimate one of its storefront sellers is.
- Privacy Policy – Will your name and address be sold on lists as a sucker who buys stuff online from unknown websites? You can never know for sure, but make sure you check the privacy policy to ensure that the vendor at least cares enough about their customers to make it look like they care.
Lastly, never forget that identity theft and credit card numbers are tasty targets for scammers. Protect them as much as you can by not signing up or registering for websites with your real name and address until you are actually ready to make a purchase. Whenever possible, use a temporary credit card number for all online transactions to avoid nasty surprises later.
Business tax deductions are important in order to offset high business taxes levied against small business owners and entrepreneurs. Business owners, particularly, single proprietors are often hit with high tax bills because of the Self Employment Taxes.
Self-employment taxes, or SE Tax, is so high because it includes taxes that would usually be paid by the employer. As an entrepreneur, the small business owner gets a double taxation whammy on things like Social Security taxes. The standard worker with a wage paying job at an employer pays 7.5% in Social Security Taxes. The employer withholds this amount from the employee’s paycheck. The employer also pays 7.5% in SS taxes.
The total Social Security Taxes adds up to a whopping 15%. A small business owner that files as a sole-proprietor is on the hook for the whole thing! That means that an entrepreneur pays 15% in taxes for Social Security on top of the regular Federal Income Taxes that they owe. For a successful small business owner with a high-income that puts him in the 30% tax bracket, that adds up to an astounding 45% Income Tax rate. And, that is before things like Medicare taxes, state taxes, and local taxes.
In other words, a small business owner can pay 50% or more very easily in taxes!
The only defense against such barbaric tax-rates is to take as many business tax deductions as possible. By doing so, the business lowers its profit for tax purposes, and therefore passes along less income to the taxpaying business owner on his Schedule C – Profit and Loss From Business Operations.
As an aside, this financial dance with the IRS is what causes legitimate, successful business owners to have trouble qualifying for mortgages or other loans. By the time these deductions are all taken, the income the business appears to earn can be substantially lower than its actual profits as they apply to the business owner’s bank account. This is why stated-income mortgages are so important for the self-employed. Unfortunately, scumbag mortgage brokers uses these mortgages to get unqualified borrowers into mortgages for houses that they couldn’t afford. These days, stated-income mortgages are all but dead thanks to these crooks.
Unfortunately, racking up sizable tax deductions by buying office supplies like paper, toner, and ink cartridges is difficult, even when paying the criminally overpriced rate for brand name printer ink and toner.
2009 Section 179 Limits Business Tax Deduction
The savior for many small business owners is IRS Section 179. Section 179 allows for a certain amount of business expenses to be deducted immediately, instead of depreciated over several years. This is particularly useful for out of date tax depreciation limits like those on computers. Imagine how laughable it is to deduct a netbook purchase over five years. Odds are a netbook will not last 5-years. Even better odds are that it won’t be “useful” in 5-years regardless of the what the IRS says.
With a Section 179 deduction, the small business owner deducts $200 in the year the netbook was purchased, instead of deducting $40 per year for five years.
Maximizing Section 179 Tax Deductions is a critical personal finance skill for any entrepreneur. Keep an eye here for more information on income tax deductions and paying Federal Income Taxes in the near future.
A great tax saving strategy, particularly for higher-income taxpayers is to start a small business. Many expenses that are not deductible for regular Federal Income Taxes are deductible to a business. For example, the mileage deduction is not deductible for personal driving purposes, and mileage driving to work is also not deductible. However, mileage driven for business purposes is tax deductible.
While starting a phony small business is not a good idea, no matter how big of tax savings can be achieved, there are many legitimate businesses that people can start. The key aspect of being legally considered a business for tax purposes is that there must be a profit motive to the activity. That profit motive must outweigh other reasons for engaging in the activity, otherwise, the enterprise could be considered a hobby instead of a business.
Formally incorporate the business with the Secretary of State in your state. Set up a LLC, it makes a great business structure for single-owner small businesses and is typically cheap and easy to setup. Filling out an online form and paying a registration fee is usually all that is required.
Then, get an Employee Identification Number, or EIN from the IRS. Unofficially known as FEIN by some people, an EIN is free and can be applied for and issued instantly online.
These steps go a long way toward legitimizing your business. Make sure you report a little bit of income along the way (verifiable income that comes with a 1099 is best) and your business can save you lots of money on taxes over the years.
(Finance Gourmet has no affiliation with MortageCalculatorium – They are stealing our RSS Feed – Come to the real personal finance advice site)
Small Business Tax Deductions That Regular Filers Can’t Get
With a small business, that trip to Office Depot is tax deductible. A business also makes it so you can deduct buying new computer equipment like monitors, printers, desks, chairs, and other office furniture. You can also deduct office supplies. All you have to do to save hundreds of dollars on your taxes is keep a mileage log for business purposes, and save those receipts for everything you purchase for the business.
When you file taxes for a LLC make sure to distinguish between office supplies like paper, toner, ink cartridges, coffee, notebooks, calculators, and so on, from capital expenditures. The difference lies in the usable life of the office equipment or office supply. Most consumables are considered office supplies, while items with a usable lifespan of years are considered equipment or capital.
The importance of this difference is that office supplies are straight tax deductible, while equipment or other capital expenditures may need to be depreciated. The definition of depreciation is that the amount deducted is equal to the amount of usable life that has been used up during the tax year. Since there is a lot of room for interpretation there, the IRS has formal depreciation tables and rules that state how long certain classifications of equipment must be deducted over. For example, if an item must be depreciated over 5 years, then the business can deduct one-fifth (1/5th) of the purchase price of the item in the first year, and then 1/5th, or 20% of the price in each of the four following years.
It is typically in the business’ best interest to deduct items as quickly as possible. Fortunately, small businesses can take advantage of a special tax provision for entrepreneurs and other small business owners.
2009 Section 179 Limit
Businesses may deduct the full cost of some items regardless of the usual taxable deprecation schedule as Section 179 Expenses. The Section 179 limits for 2009 is $250,000. That means that a business can deduct up to $250,000 worth of anything without having to depreciate it over the normal lifespan of the item. For high-income taxpayers, this offers a big tax deduction if used properly.
Section 179 Limits 2009 Vehicles
Deducting the cost of an automobile has been a favorite tax deduction for tax payers with high incomes. However, the total depreciation deduction for a passenger automobile placed in service during 2009 is $2,960, or $10,960 for automobiles that qualify for the special depreciation allowance.
The maximum deduction for a truck or van is $3,060 or $11,060 for those that qualify for the special depreciation allowance.
The old tax loophole for buying a Hummer, Suburban, or other heavy vehicle to get a bigger Federal Income Tax deduction has been largely closed.
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