The IRS has set many tax deductions and benefits in place for taxpayers. Unfortunately, some taxpayers who earn a high level of income can see these benefits phased out as their income climbs.
For example, if you earn under $100,000 annually, up to $25,000 of rental income losses qualify as deductible, and you can save thousands of dollars on other income origins through this deduction. However, if you earn over $100,000 a year, this deduction begins to phase out, until it is completely gone for taxpayers earning $150,000 and above annually.
Here are some suggestions for those whose income is toohigh.
Have your business hire your children. Your children can earn up to $5700 without paying any income tax. If you hire your kids to work for you, part of your income is shifted from its current tax rate to a tax rate of zero. Even if your business is structured in such a way that you will have to pay payroll tax on the children’s earnings, that tax is 15.3% and that is probably less than your current tax rate.
If you add a C-Corporation to your business structure you can reduce your taxable income and therefore be qualified for some of those deductions for which your current income is too high. Remember, a C-Corporation is its own individual taxpayer.
With a C-Corporation in place, you can use its lower tax rates. A C-Corporation starts out at a 15% tax rate. If your tax bracket is higher than 15%, you will be saving on the difference. Plus, your C-Corporation can be used for specific employee benefits that work best in this structure.
With this strategy, you can save in excess of $15,000 in annual taxes.
Bunch your expenses and your income so it varies year to year. Some years the bear will eat you and other years, you will eat the bear. This is especially good strategy if your income just exceeds the maximum for tax benefits.
Discuss this tax strategy with your tax expert and financial planner. The key element is to lower your taxable income so that you can take advantage of tax benefits otherwise denied you because your income is too high. Be certain that your strategy is legitimate. There are plenty of means and methods to lower your taxable income within the rules, so you don’t have to stray into unlawful methods to protect your income from the taxman.
When your income crosses normal limits, you enter into the high income area. That means you need to pay more taxes. But don’t worry; there are some legal worries to reduce your tax burden. Read this useful discussion from Chintamani Abhyankar.