I am regularly asked how someone can reduce their taxes – legally, of course.
My answer: Change your facts
One of the most powerful ways to make the tax rules work for you is to change your facts. This concept applies in most developed countries because the tax law is written to favor specific facts.
Do you know someone who is always sharing the write-off of their most recent meal (trip, vehicle, cell phone, gadget, etc.)? Do you wonder if what they are doing is cheating or legal?
With the right set of facts, any of those items can be legal tax deductions.
That’s why when I meet with a new client, I want to know their facts first. Then, I can determine how to change their facts to reduce their tax.
What are these facts?
The facts I’m referring to here are usually surrounding where your money comes from and where it goes.
Do you own a business?
Do you own investment real estate?
Are you an employee?
Are you self-employed?
How much time do you spend in your business?
How much time do you spend in your investing?
What is your role in your business?
What is your role in your investing?
What investments do you have?
What expenses do you pay personally?
What expenses are paid by your business or investing activity?
What is deductible for one person may not be deductible for another person. This is because one person’s facts can support a particular deduction whereas another person’s may not.
If you don’t like your tax, change your facts
A few years ago, a client asked me if he could deduct his travel to a particular state. He and his family enjoyed spending time and traveling there frequently. At that time, he didn’t have a business reason to travel to that state and his business was not set up to conduct business in that particular area.
I went over the specific rules with my client that covered what he needed to do in order to meet the requirements to deduct the travel in his business. I also shared with him how he could deduct the travel expenses for his spouse and children.
A few months later, my client tells me about a very profitable deal he now has in the state and he provided me with all of the documentation we discussed to support his deductions.
My client jumped in and changed his facts. It led to increasing his deductions, reducing his taxes and making more money! In order to meet the rules, he had to conduct legitimate business in the state. He did and he was very successful at it.
How can you change your facts?
Any time you have cash come in or go out, there’s an opportunity to change your facts.
Should you receive the income personally or should your business receive the income?
Are your investments helping your tax situation or should you explore new investment strategies?
Are your expenses personal or do they meet the rules specific to your situation that make them deductible?
Are you willing to change your facts?
Discuss your facts with your tax advisor and ask how changing your facts could change your tax. Then, be ready to take action.