Posted on: 10 January, 2003
Author: Wayne M. Davies
This article is based on the following 2 assumptions:1) You are a small business owner or self-employed person(including home-based businesses and part-timeentrepreneurial activities).2) You don't lik... This article is based on the following 2 assumptions:1) You are a small business owner or self-employed person(including home-based businesses and part-timeentrepreneurial activities).2) You don't like to pay taxes. In fact, whenever you thinkabout paying taxes, you get so mad you end up "all latheredup and nowhere to go."Now, if paying taxes makes you so upset, what have you doneabout it lately?Why was your tax bill so high last year? You paid too much tax last year (and the year before that,and the year before that . . .) because you have probablybeen an innocent victim of many popular myths about taxes.Here they are. Get rid of them or you'll be stuck payingtoo much tax forever!Tax Myth #1: "I don't make enough money to worry aboutreducing my taxes."Nothing could be further from the truth. People at alllevels of income can pay less tax.Tax reduction strategies are not just for the rich andfamous. No matter how much money you make, you can pay lesstax than you currently pay. In fact, even if your business (or part-time entrepreneurialventure) has a loss, you can use that loss to offset othersources of income, such as wages from a "regular" job, yourspouse's wages, investment income, rental income, otherbusiness income.And if your business loss is so great that it more thanoffsets all your other income, you can take advantage of aspecial rule that lets you: a) Carry back that excess lossto the 2 prior years, thereby entitling you to a refund oftaxes you already paid for either (or both) of those 2 prioryears; and/or b) Carry forward that excess loss to the next20 future years, so that any income you earn in the futurewill be reduced by that excess loss.Tax Myth #2: "Tax reduction strategies are too complicatedfor me to use."Again, total and complete hogwash. There are plenty of waysfor you, the average American, to lower your taxes. Tax reduction is not just for the wealthy who pay high-priced attorneys to finagle their way out of paying taxeswith sophisticated tax-avoidance schemes, like off-shoretrusts and foreign bank accounts.The average Small Business Owner has plenty of tax reductionstrategies at his/her disposal. You just have to know whatthey are and how to use them.Tax Myth #3: "I had my return prepared by an Accountant, soI know I paid the right amount of taxes."There are thousands of excellent, hard-working accountantsdoing a great job. And if you use a tax professional, maybehe/she has done everything possible to reduce your taxes tothe legal minimum.Based on my own experience, however, I'm convinced that manytaxpayers who use professional tax preparers are overpayingtheir taxes, sometimes by thousands of dollars each year!Why is that? Well, there are many reasons. The mostobvious one is this: Many professional tax preparers arejust that: tax preparers and tax preparers only.A good tax accountant may know how to prepare a tax returnin his/her sleep. He knows the forms backwards andforwards. He knows what numbers go on which form perfectly.But that's it. That's all he/she knows.A good tax preparer is not necessarily knowledgeable in taxreduction strategies. There's a big difference between agood tax preparer and a savvy tax reduction specialist.When you look for a good accountant, make sure you find onewho doesn't just "do the returns", send out a bill and say"Next, please." Tax Myth #4: "My tax situation is OK because my BLANK (fillin the blank with a family member or other "good friend")takes care of my taxes."There are various versions of this myth. Do any of thesesound familiar?"My brother-in-law takes care of my taxes." "My uncle takes care of my taxes.""My college buddy takes care of my taxes."And of course, the same problem exists with Myth #4 as Myth#3. Even when someone you know and trust does your returns,how do you know that this person is a good tax reductionspecialist?And often, many of these family members or "buddies" are noteven professional tax preparers. This person just happensto be "The Family Accountant. Just like every family hasone person who knows a lot about cars (or mutual funds, orcarpet cleaning, or whatever), many families have someonewho "knows enough to be dangerous" with regard to taxes. And even if your "Family Accountant" is a professional taxpreparer, he's probably not charging you for the return.He's doing you a favor. He prepares your return; you changehis oil.My first reaction to this kind of situation (when someone isgetting his/her return prepared for free) is this: You getwhat you pay for! When a family member does your return"for free", how much attention can he give to your need fortax reduction strategies? Probably very little.Tax Myth #5: "My tax situation is OK because I prepare myown returns."If this statement applies to you, then perhaps you are a"do-it-yourself-er". Money is tight and you are used todoing things yourself anyway, so why not save a few buckseach year and do your own returns?So you've spend countless hours over the years pouring overthe forms and instructions, trying to figure out how to dothe returns. And you've done OK. No letters from the IRS,no audits. Hey, pat yourself on the back! And now that tax preparation software is so readilyavailable and affordable, doing your own return is a breeze!Just key in a few numbers here and there, push the printbutton, and presto, you've got your return done in recordtime! And now you can even e-file your return with your owncomputer. Have you ever heard of the book, "The Millionaire Next Door"(by Thomas J. Stanley and William D. Danko)? This book describes the common characteristics ofmillionaires in our country. My favorite millionairecharacteristic is this:Millionaires become millionaires by minimizing their taxesand getting their tax & other financial affairs in order.Now comes the "Million Dollar Question": How do you thinkmillionaires get their tax affairs in order? By doing theirown tax returns? Of course not! Millionaires NEVER dotheir own tax returns! They have more productive things todo with their time.Instead, what millionaires do is spend time and money eachyear on tax planning and tax reduction strategies, notfiguring out what number goes on which line of Form XYZ.So my challenge to you is this: What are you going to dothis year to reduce your taxable income?Are you a believer in any of these 5 myths? Now's the timeto get rid of them, once and for all.Your financial well-being depends on it. 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