Avoid Taxes (Save 20-40% on taxes)

The promise in the title of this post is to save you 20 to 40% on your income tax by using a single tax reducing strategy, unless you are already using the method now. And, even if you are already using this strategy, this post might expand your view on its uses.

Most Canadians neither know nor understand this method of tax reduction, which is the main method used by the wealthy to reduce their income taxes, sometimes to zero!

A few years ago, major Canadian newspapers carried an article about how many millionaires in Canada paid absolutely no taxes. The average Canadian must have found it upsetting to say the least. But, put yourself in their position for a moment. You can afford an expert tax accountant, so you have one. He calls you and tells you that if you move this money over here, and put this in the name of your company instead of your personal name, and make a few other adjustments in how you “own” things, you can reduce your taxes to zero. What do you say, “No thanks, I like paying taxes”? Trust me, what the wealthy do to reduce taxes is seldom illegal. They simply either understand the tax regulations or hire someone who does. The purpose of this post is to give you an understanding of some of these strategies.

The main thing you are going to learn here is how to use “deductions” to reduce your “taxable income” and therefore pay less taxes, maybe a lot less. Is it easy? Well, it’s not at all difficult to understand, but it does require some. You will have to read this post and grasp the principles herein. You may have to devout a little regular time to this endeavour, but the dividends can be substantial.

Taxes: Life’s Biggest Expense

Most likely the biggest lifetime expense you will encounter is TAXES. The amount of tax you will pay has little to do with your total income and a lot to do with your knowledge of tax reducing strategies. A large percentage of the money you will accumulate in your lifetime is dependent on your tax reducing plan and not on your income. A good tax plan uses the tax laws to decrease your taxes.

Your tax objective must be to increase disposable income by reducing taxes legally. You have every right to learn and understand the tax system, so you can take advantage of every legal means available to reduce the taxes you pay. We all live under the same tax and legal system and are all entitled to the benefits the system provides.

We would strongly discourage you from engaging in tax evasion (such as hiding income) or such activities as claiming false deductions (claiming for something you don’t have). Such things are illegal and could lead to fines or even jail.

We would encourage you, however, to learn some things about the system that can help you save taxes. When we talk about making many things deductible, we are sometimes asked, “What if I claim too much, or the tax department writes to me and tells me I can’t have that particular deduction? Am I going to get in trouble”?

The answer is, if you’ve made a mistake they will simply correct it and let you know. You could end up paying a little more tax than you had originally calculated on your return when you filed it, but this is tax that you would have paid anyway if you hadn’t used the deduction. The most you can lose in such a case would be a little interest on overdue tax if you are disallowed a particular deduction – nothing ventured, nothing gained. As long as you are not directly hiding income or claiming for things that don’t exist, you’re not doing anything illegal. You’re just learning about and testing the system. We did not invent the things that you will learn here. They are used by thousands of Canadians every year to reduce the taxes they pay. They are now available to you if you choose to learn and apply them.

Let’s assume you earned $50,000 and the only deduction you had was your “Basic Personal Amount” of $9,600. This would mean your taxable income is $50,000 minus $9,600, which is $40,400.

Here is what you would pay:

26% of the first $37,178 = $9,666

32% of the balance of $3,222 = $1,031

( You have no taxable income that falls into the higher brackets)

TOTA L TAXES DUE = $10,697

For more detailed info on taxes visit previous article (tax, tax, tax).

The Most Rewarding Tax Strategy

Now, try to suppress any negative thoughts about this until you read it entirely. It’s a lot easier than you may think and the potential rewards are huge. Remember, thousands of very intelligent “middle-income” Canadians use this strategy year after year, and for most of the wealthy, it is their main tax reduction strategy.

Owning Your Own Business

There is no better way to create tax deductions, than owning your own small business, and in most cases, running it from your home. let’s talk about creating deductions in your business.

Personal Property

Many of the things that you consider personal property are claimed as deductions by those who have a small business. The easiest way to illustrate how this is done is to use an example. The business could stem from a hobby or interest that you now enjoy, from some special training you have or some special talent, or from joining one of the many Home Based Business opportunities available today. There is one that we are very impressed with and a long track record, for more info regarding that please contact me.

Let’s have a look at how it has affected a fictitious couple we will call John and Jane Johnson.

John and Jane have a small business. They are Independent Associates for Wealth & Health (W&H). John also has a full time job as manager at Wal-Mart. Jane works part time at a doctor’s office. They have put their Home Based Business in both of their names to give them more flexibility at tax time. The main functions of a W&H Associate is to share information on a $26.00 a month Plan with their friends and family and to introduce the concept of the company to others who may be interested in starting their own business. In the process of carrying out these activities, we should observe the following things.

A car is no longer a luxury for John and Jane, it is a necessity for them to carry out the duties of their business. John figures that about 50% of the time he uses his car, it is for the business. He adds up all his automobile expenses at the end of the year (of course he now gets receipts for everything). These expenses include such things as depreciation (or lease costs), interest on his car loan, gas, oil, repairs & maintenance, etc. He deducts 50% of these expenses from his income.

The Johnson’s own their own home although it does have a $190,000 mortgage on it. The basement of their home was not being used, so they turned it into an office and a large room for holding business meetings in. (It does resemble a rec room and the kids do use it when it’s not being used for business. After all, there is a TV and DVD Player in it that is used for watching training videos). The office and meeting room pretty well take up the whole basement, except for the laundry room, so together, they make up about 45% of the space in the house. At the end of the year, John adds up many of his home expenses. They include the interest on his mortgage, (which is actually, at this time, about 90% of his mortgage payment), property taxes, electricity, and furnace oil. John deducts 45% of these expenses from his “new business” income. He also deducts his long-distance and cell phone bills.

The Johnson’s do quite a bit of traveling. Wherever they go they make sure that they take along their W&H materials – a sales kit, a few videos and some literature. Last year they went to California.

While there, they talked to some people about their business. They gave out some business cards and picked up a few from other people. (They put the business cards they received in a file with their receipts just to prove they were doing business.) They visited with some other W&H associates and attended a W&H Business Briefing in L.A. Of course, they deducted most of the expenses they incurred (except for the costs at Disneyland where they took the kids). They do use a Visa card when they travel (which is a great way to record expenses), so they deduct the interest and fees as well. Their deductions came to over $ 4,300.

Some of the other things that John deducted last year were that TV and DVD Player that he needed for his business. He also bought a Video Camera so he could record the meetings at his place and make some of his own tapes just to add a personal touch to his business. John subscribes to a number of magazines so he can keep in touch with what’s going on in the industry. Any stationary that he buys, their computer, the filing cabinet, the shelving and Jane’s new desk all help with the deductions.

The Johnson’s are thinking of buying a Motor Home to make their traveling more convenient and flexible. They will deduct an appropriate portion of the depreciation on that when the time comes.

The Murray children get involved in the business as well. One of their older children does

some telemarketing for them and other needs are filled by them throughout the year. Instead of an allowance, the children are paid as sub-contractors. It is a little higher than most allowances, but with it the children are required to buy some of their own clothes as well as contribute to their education expenses. (Jane actually looks after most of their money for them.) John has set things up so that the money that goes to the children is a deductible expense. John and Jane know that their children can earn around $10,000 a year before they have to pay any taxes. The fact that the children earn money and file a tax return each year has other important tax advantages as well, such as creating RRSP room.

In the first year in their new business the Johnson’s only earned $ 3,200. But, their business deductions came to $ 18,500. The income was attributed to the one who did the work in proper proportion. In this case it was mostly John. The Johnson’s know that you are allowed to lose money in a business and you can, in most cases, charge that loss against earned income. They know the tax rule says that a business must have “a reasonable expectation of profit”, and they do expect to make a profit in the next few years. However, they didn’t make a “profit” last year, but John did get $ 4,629 back from his income tax (the tax he had paid through his job at Wal-Mart). He then put that into an RRSP and created another big deduction for next year.

Now, let’s look at what DEDUCTIONS the Johnson’s created (or will create) by owning their own business. They deducted, (or will deduct) all or part of the expenses relating to their:

Car Gas, Oil, and Maintenance

Other Auto Expenses

Mortgage Interest and Taxes

Utilities and Telephone

Vacation Expenses

Credit Card Fees and Interest

TV

DVD Player

Cameras

Magazine Subscriptions Stationary

Computer and Printer Office Furniture

Recreation Vehicle Children’s Allowances

IMPORTANT NOTE: All of the above deductions can be used to reduce taxable income payable against other earned income except expenses relating to an office in your home. In other words, in the case of the Johnson’s, where the actual income they received from their small business was $3,200, the most that they could claim for mortgage interest & taxes, and direct home expenses like electricity and fuel oil, would be $3,200. They could, however, carry forward to future years, any loss not used, to be used then in accordance with the same rule. All the other expenses, if valid deductions, could be used to reduce the taxes payable even from John’s salary from his regular job. Also take note that some expenses such as computers, leased automobiles, and entertainment require a little more work to establish the amount you can deduct than just adding up the receipts.

Now, let’s go back to the example used earlier where a person with a $50,000 a year income

was paying $ 10,697 in taxes.

Now let’s suppose you had that $3,200 extra income that John received from his home based business and the $18,500 deduction. It would then look like this:

You earned $50,000 at your regular job plus the $3,200 from your business. Now your

deductions are your Basic Personal Amount of $9,600 plus the $18,500 business expenses. This would mean your taxable income is $53,200 minus $28,100. How much tax do you pay now?

Taxable Income is $53,200 minus $28,100 = $25,100 (Compared to $40,400 in the first example.)

26% of $25,100 = $6,526 (Total Taxes Due)

TAXES SAVED = $4,171

The final result is an income increase of $3,200 and a tax savings of $4,171 for a total income/savings of $ 7,371.

For a different perspective, this makes the monthly financial benefit of this part time business $614 a month ($3,200 earned and $4,171 saved, divided by 12). Not a bad little part time business. That’s a 41% reduction in tax payable. And really, this is a very conservative example. If you take your Home Based Business seriously, not just using it as a way to reduce taxes, the results can be so much more rewarding.

People don’t plan to fail……..they fail to plan!

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