Reduce Your Income Taxes by Owning a Home Business

The taxes you have to pay each year have nothing to do with how much you earn. How much you income taxes you pay is directly impacted by how much you know about legal and acceptable income tax deductions. Doing your income taxes yourself or handing all your income statements and receipts to the tax preparer at the mall each spring is a sure-fire way to pay way more income taxes than you should RTO office.

The tax system is complicated but with the help of a tax specialist or a qualified accountant you should be able to recover a large amount of the income taxes that are taken from your pay check each week. There are many legal way to reduce or completely eliminate the amount of taxes you have to pay each year, and this article will focus on one of them. How to save money on your income taxes by starting your own home based business.

The current tax system is progressive in the sense that the more money you earn the higher the percentage of taxes you have to pay. A person earning $30 000 a year might pay close to 30% in income taxes while someone making $100 000 would be in the 40% tax bracket.

You are not taxed on your total income but on what's called your "Net income". This is calculated by removing personal and basic deductions from your total income. Most companies will take income taxes from your pay check each week based on your estimated net income for the current year so that you don't have to pay income tax at the end of the year, but you will not receive a refund either.

So if you earned $40 000 for the year and your basic deductions came to $8 000 your net taxable income would be $ 32 000. This amount taxed at 30% would mean that you would have had to fork $9 600 over to your governments tax department throughout the year.

Now that you understand that you are taxed on net income after deductions doesn't it make sense to find ways to legally increase the number and total amounts of these deductions? If you earned $40 000 a year and had $40 000 in income tax deductions, your taxable income would be zero and you would recover 100% of the income taxes you paid for that year. That is how the wealthy manage not to pay income taxes each year; by having enough deductions to offset their total income.

One of the best ways to create substantial tax deductions is by owning and running a small business from your home. By having a home based business you can start claiming deductions on things and activities that are considered of a personal nature by others.

Here's my example

I have a full time job but I also run a small business from my home as an Independent Travel Consultant. As a travel consultant I write reviews of hotels and resorts and recommend an alternative to time share condos to people looking for a great deal on hotel stays.

Now since I own a small business I am able to claim the use of my car as an income tax deduction. I can claim most of my automobile expenses because I use my car mostly for business. Every day I make a list of where I am going to drop off or post advertising for my business. That list could include the dentist, where I have an appointment after I post a flyer. It could include the super market, after I post a flyer on their bulletin board I might get some groceries done. It could be golf course club house, where I... You get the point. Every place I go during the day I go to advertise my business. If there is something around that place I need to or want to do, that's just a coincidence and it makes 90% of my automobile expenses tax deductible.

Since I have an office in my house I can also claim a portion of my mortgage, taxes, heat, lighting, maintenance, etc. My office is in the basement and that constitute a large percentage of my house. The percentage of house expenses I can claim as deductions is close to 30%. This means 30% from the mortgage, taxes, water bill, heat and house maintenance. This can add up to a few thousand dollars in income tax deductions each year.

The use of a telephone, the internet, professional membership, website hosting and any other fees are required for me to conduct business they too can be claimed as business deductions.

I am a travel consultant, so most of the expenses incurred during my vacations are tax deductions. That's airfare, hotel stays, car rentals, meals and other expenses. Every day while I'm on vacation I produce a small video about the resort or the locations I visit using my camcorder. These videos are then used as internet commercials for my business and this makes my vacations completely tax deductible. That is 3 or 4 trips a year that are a legal tax deduction for my business.

Computers, DVD players, cameras, camcorders, cell phones are all essential tools of my trade and are therefore tax deductible.

As you can see, these are things I owned and activities I did before having a business. But now that I am a travel consultant I can deduct them and lower the amount of income taxes I have to pay each year. These practices in particular allowed me to save more than $4 000 in income taxes last year.