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Take Control of Your Financial Future
By Diane Kennedy, CPA

The average 50-year-old American has no net worth. This means that the average 50-year-old has worked for 25 to 30 years and, despite that hard work, has accumulated nothing. Throughout those years of work during which the average 50-year-old has accumulated nothing, he or she has paid some $500,000 in taxes to federal and state governments. Here’s something to consider – one small change in how much tax this average American paid – a reduction as small as 10 percent could mean a net worth of $200,000.

Taxes are the single biggest expense of Americans today. A minor change in this expense can make a tremendous difference to your personal bottom line. And here’s the good news: It is possible to reduce the amount of tax you pay right now.

Control Your Income
The sad truth is that there isn’t a lot of tax planning available for employees. The best tax plan comes when you own your own business and/or invest in real estate. This is true when it comes to controlling when you receive income. Whether you own a business or not, it has never been more important to “push off” income into the next year. That is because the tax rates will reduce in 2002.

How to do it:

  1. Delay your income until the next year – Wherever possible, wait until the following year to take extra income such as bonuses. If you have a business, and can legitimately do so, wait until the beginning of January to invoice clients.
  2. Consider a pension plan – If a pension plan such as a 401(k) works into your overall financial plan, you will receive more tax benefit for a deduction in the current year than the following year. Try to maximize the deductions you can take.
  3. Invest in real estate – Everyone, but especially employees, should consider investing in real estate. Nowhere else can you create a cash flow stream without paying tax. That is because real estate investing allows you to take advantage of the “phantom expense” – depreciation. Depreciation is an expense that you get to take on your tax return and for which you haven’t paid any money. The IRS provides tables that will tell you the “depreciable life” on your real estate. That calculation then tells you how much you can deduct.

Control Your Deductions
If you work for someone else, they are getting the advantage of the best of deductions. If you have a business, even a part-time one, you are already well on the way to a tax plan that will save you money.

How to do it:

Have a home office – This must be the all-time most misunderstood deduction! But the rules are actually very simple: If you have a room set aside in your house for the exclusive use of your business, then it becomes a tax deduction. That means that you can then deduct a pro-rata portion of the household expenses (mortgage interest, property tax, utilities, janitorial and the like) against the income from your business.

Consider your auto expense – There are many options to writing off your vehicle – it could be through mileage reimbursement, a company leased vehicle or a vehicle that the business has purchased. Go over your own unique circumstances with your tax advisor and stay tuned to www.legaltaxloopholes.com for more tax tips regarding autos.

Deduct for business travel – Business travel is a deduction. So, if you have a business purpose, and can prove it through good record keeping, you have a legitimate deduction.

Control Your Tax Rate
Controlling your tax rate is a great way to save money.

How to do it:

Employ your dependents – Don’t pay your children an allowance. Pay them a legitimate and reasonable salary instead for work performed in your business. In 2001, you could pay your child up to $4,550 tax free to them and take a legitimate deduction. But, remember, it doesn’t have to stop with your children. If you have other dependents, they can also be included as paid employees. They must perform real work; keep records of hours worked and have a job description.

Get a ROTH IRA – A normal pension plan defers tax to a future date. But, make no mistake; there is a day of tax reckoning. In the case of a ROTH IRA, you don’t get a deduction up front, but your investment can grow TAX FREE until you draw it out. In other words, by putting investments into a ROTH IRA plan, you reduce your tax rate to zero. It doesn’t get much better than that!

Understand the C-Corporate structure – The C-Corporate tax structure isn’t right for everyone. But, where it fits the rest of your requirements, the C-Corporation works to move income from your higher personal tax rate to its lower tax rate. The first $50,000 of income in a C-Corporation, for example, is taxed at a low 50 percent.

How Do You Get Started?
The first step is to take assessment of where you are. That includes looking at your current circle of friends, mentors and advisors. Are they in the financial position you want? Do you currently have the human resources (advisors) available to take you where you want to go? One resource to put your team together is the Advisor Checklist, available free at www.dkacpa.com. Use this checklist to assess your current advisors as well as plan for the type of advisors you want to add to your team.

But, the most important thing is to start now. Every step you can take away from the “status quo” of being average will bring you closer to your ultimate financial goals.


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About the Author: Diane Kennedy, CPA, is the author of “Loopholes of the Rich: How The Rich Legally Make More Money & Pay Less Tax.” She also is the founder of TaxCents™, a tax education company that encourages individuals to make informed tax-advantaged financial decisions from a position of power and knowledge. She owns tax strategy and accounting firm in Phoenix, Ariz.