Are You Needlessly Over-paying Your Income Taxes?
The “Ten Minute Income Tax Tune-Up”
Income Taxes (hereafter IT) generally are the largest single bill in your life. They are a BIG annual and non-amortizing expense. Income taxes comprise 30%-40% of your daily labor, ’till the day you die. Income taxes are thus The Forever Bill.
But IT are also, by definition, a variable expense. IT can, and must, be proactively monitored and managed throughout the entire course of the year. A tax plan is always a part of your business plan. Makes sense, right?
The following IT Savings Worksheet illustrates a gross income of $1 million. But the entire $1 million is taxable ordinary income. Ouch. The Tax Man cometh. It’s not what you earn. It’s what you keep. The 8 simple steps below will save you big money:
Tax Tune-Up / Tax Savings Worksheet
1. Gross Income: $1,000,000.00
2. Gross Business Expenses: $400,000.00
3. Net Business Income Before Taxes: $600,000.00
4 Tax Bracket – 40%
5. Lifestyle Costs $200,000.00 – Your personal expenses.
This $200,000 is after-tax consumption, and is NOT tax-deductible.
6. Reportable Gross Income: $333,000
Lifestyle Costs divided by the inverse of your tax bracket. In Florida, your Income Tax Bracket is a maximum of 40%. The Inverse of your bracket is.60. Divide.60 into your Lifestyle Costs, which is #5 above. This is the Gross Income that you must report on your Personal 1040 Tax Return to live the $200,000 lifestyle that you have chosen in # 5. So, the correct Gross Income on your Personal 1040 is: $333,000.00
Please note that Step 6 is The Key: Only bring home the pre-tax $333,000 that is needed to pay for your after-tax lifestyle costs of $200,000.
7. Amount available for Pre-Tax Savings (#3 minus #6): $267,000
8. IT saved in this example: $106,800.00
Number 7 above x 40% (combined state and federal tax bracket).
In this hypothetical example, you paid $133,200 in IT (40% x Reportable Income of $333,000). Before this Tax Tune-Up, you were going to pay $240,000 in IT (40% x $600,000). But, instead of reportable Income of $600,000, you reported $333,000, and left $267,000 in the corporation as pre-tax income. By keeping $267,000 in your Corporation pre-tax, you have saved $106,800 of otherwise-lost IT dollars. (40% x $267,000).
You then add this 106,800 of “soft” tax dollars saved… to your “hard”, after-tax dollars of $160,200 (60% of $267,000). This equals a 66% rate of return, tax free ($106,800 / $160,200). Recapturing 40% In “dead” tax dollars on your net, after-tax 60% is a 66% rate of return, tax-free. All because you reported $333,000 of income, just enough to pay for your $200,000 lifestyle costs, while keeping the remaining $267,000 in your Corporation.
The instant that you utilize IT Reduction as part of your Business Plan… You earn a 66% tax free rate of return. This 66% rate of return is “instant” the moment that you deploy the $267,000 into a legal tax deduction inside your Corporation.
The happy ending for you is that you continue to lead the lifestyle that you want ($200,000). We simply did NOT bring $267,000 out of your corporation as taxable income. You reported income of $333,000, not $600,000. That saved you forty percent on $267,000 of Income = $106,800. The non-reportable $267,000 was put to work inside your Corporation in a legitimate tax-deduction that became an Asset. Converting otherwise-lost “dead” tax dollars into Assets. Simple, Legal, Smart.
Think about it: You just made 66%, instantly, and tax-free. There is no reporting of income. You simply “recaptured” otherwise-lost IT dollars. That’s not a taxable event. That’s just smart business. By recapturing “dead” IT dollars, you add forty cents of new-found “soft” money to your “hard,” after-tax sixty cents; and that earns you sixty-six percent, tax-free. In the end, your Corporation has an Asset, instead of a cancelled check from the IRS.