Save On Taxes Through Income Splitting
Apr 13th, 2007 by Wealth Builder [This post is written and copyrighted by Wealth Building Lessons (http://www.wealthbuildinglessons.com).]
One of ways people save on their taxes is by splitting their income. You set up a separate legal entity for tax purposes and it pays its own taxes.
If you’re a regular w-2 wage earner (an employee working for someone else) you won’t have this option available to you.
But if you’re doing some consulting work on the side, if you’re self-employed or if you’re a small business owner, setting up a separate corporation can save you a lot of money.
Corporate tax rates are usually lower than individual tax rates on the first $75,000 of income. Plus you get the added benefit of being able to deduct business related expenses like car lease payments and driving expenses, business meals and business-related entertainment, business equipment like computers, and you can also set up a pension and profit sharing plan to fund your retirement.
After all these expenses are deducted, you may opt to pay out a salary to yourself for living expenses and you can retain any extra money in the corporation. If its under $75,000 it will be taxed at a lower rate than your personal taxes (so long as do don’t qualify as a professional corporation).
However, if you accumulate more than $250,000 in retained earnings, you might be subject to additional tax.
A lot of these deductions mentioned are available to self-employed individuals. However, the rest of the money flows into your personal tax return and your main aim is divert the income into a separate entity. At a time when Alternative Minimum Tax (AMT) is hitting a lot of middle class families, it might make a lot of difference to self-employed individuals to set up a corporation so that they can tweak their income to obtain the maximum benefit of tax planning.
NOTE: I’m not a tax adviser, so please consultant your CPA. But I hope you get the gist of this post. By diverting income away from your personal tax return, it is possible to pay less taxes.
Related Books
1. Loopholes of the Rich: How the Rich Legally Make More Money and Pay Less Tax
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