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View Full Version : ways to save $$ on taxes...stratagies



huggytree
12-18-2010, 02:04 PM
I had an awesome year...sales up 35 percent, profit over 50 percent....its unbelievable where im at....(ok im done bragging)

now the next problem is my taxes/SS/etc almost doubled this year....i had big plans for all my money at the end of the year...now those plans had to be dramatically changed...(i pay my taxes in 1 big chunk at the end of the year)

one thing i did was to put $20,000 extra in a SEP IRA...that $20k lowered my tax bill by $9k...thats a 45percent savings....i didnt want to do it, but i couldnt see giving the Gov. $9k more......its getting frustrating how much im paying....i had $10k in a Roth ira, but have to take it out because i now make too much to contribute to a Roth ira...so i have to go through alot of paper work to transfer it to a SEP ira....its still ongoing with my Edward Jones friend.....we are being treated like rich people, but we sure dont live rich...

any other idea's how to save on taxes? there isnt any more equipment to purchase...i barely have any deductions in my personal life...

im working alot harder, making alot more money, but in the end it doesnt seem like im taking home that much more at the end of the year.....the gov. seems to be the main benifitiary to my hard work with me in 2nd place....my wife was considering going back to work in a few years...now i told her to volunteer somewhere instead...im also thinking about stopping my advertising and staying small instead of growing...

this tax thing is just shocking...i thought id owe $10k more, but it was $31k more than last year.

i made 50 percent more profit, but taxes went up 95 percent.....how does that encourage me to grow and expand...it doesnt..

Evan
12-18-2010, 04:55 PM
now the next problem is my taxes/SS/etc almost doubled this year....i had big plans for all my money at the end of the year...now those plans had to be dramatically changed...(i pay my taxes in 1 big chunk at the end of the year)

You may be in a different tax bracket, but social security and medicare didn't change. Depending on the numbers, you could have maxed this out, providing up to a 6.7% "cut" in tax. You also *cannot* pay your taxes in one big chunk at the end of the year when you're owing approximately $10K and not incur an underpayment penalty and interest for the late payment. This can often be significant, so if you're trying to avoid non-deductible penalties and interest, you may wish to spread your tax liability over all four quarters as required. Of course if your income is sharply higher in certain quarters, it can be adjusted to be a higher payment for just those quarters.


i had $10k in a Roth ira, but have to take it out because i now make too much to contribute to a Roth ira...so i have to go through alot of paper work to transfer it to a SEP ira....its still ongoing with my Edward Jones friend.....we are being treated like rich people, but we sure dont live rich...
The modified AGI limit is $167,000 (if married filing jointly) before you have to make a reduced contribution, but $177,000 is the maximum. If you have a traditional IRA, you could do a conversion of those funds to a Roth IRA without there being an income limit, and it could be quite advantageous.


any other idea's how to save on taxes? there isnt any more equipment to purchase...i barely have any deductions in my personal life...
Do you have health insurance? Beef up your charitable donations. Make your state estimated tax payment before December 31st in order to claim it on your 2010 tax return.

As I do not know your personal tax situation, I cannot provide any real assessment as to why your taxes increased, but there are probably many things left out.

Oh, and of course if you want to decrease your taxes, you could always earn less by charging less. :) [Most people usually don't like that suggestion.]

Steve B
12-18-2010, 08:11 PM
Man, you really need to either get a new accountant, or you need to start paying attention to the one you have. How can you possibly be surprised by something that hasn't changed any.

I think you should not only stay small - you should figure out ways to shrink. That way you can pay even fewer taxes than in previous years.

Evan
12-18-2010, 10:05 PM
I also am curious how your taxes can increase 90% from the prior year. Certainly percentage-wise, of your income it cannot go up that much. Tax bracket's don't work that way. There are a lot of missing variables, and I'm tending to believe that this was not from the advice of your accountant that your taxes went up 90%.

Also, while not trying to get political, anyone making over $100,000 is generally viewed as being "comfortable" and in many cases "rich". You don't view it that way, but if a family of four lives on $35,000 -- they would view it that way. Like everything, it depends on the perspective.

Steve B
12-19-2010, 02:38 AM
Evan - I'm guessing some non-traditional math is involved in a conclusion that taxes went up 90% when profit went up 50%. I've been amazed at how some people look at numbers and come up with their percentages for things. I could be wrong, but I'm guessing this is one of those cases.

Evan
12-19-2010, 11:16 AM
Well "profit went up 50%" doesn't mean much. Is it net income that went up 50%? Big difference.

If profit (net sales, LESS cost of goods sold) is $100,000, a 50% increase is $150,000. Sales being up 35% is irrelevent, as it goes into profit, so perhaps there was more efficiency.

Tax on the $100,000 may be $25,000. Tax on the $150,000 may be $40,000. Sure, taxes went up. But you're paying the same (approximately) 25% on the same base $100,000, and maybe 30% on the excess $50,000 (in this example), assuming it throws you into a higher tax bracket. Your taxes owed certainly increased, but that's due to increased revenues, and it putting you in a different tax bracket. $25,000 tax/$100,000 net income = 25% tax bracket. $40,000 tax / $150,000 = 26.67% effective tax rate, or an increase of 1.67% in tax liability. Sure, your tax liability may have went up significantly, but it is proportional (relatively) to your income.

Of course there are a lot of other variables here. If a spouse works, and income changes, that affects things. Interest, dividends, distributions from IRAs, capital gains, etc., all will have an influence on that bottom line number.

huggytree
12-19-2010, 06:55 PM
i pay some taxes quarterly...typically $3-4k...some state some federal...then in dec. i pay the bulk...typically its been $35k...this year it was $63k....by putting $30k into a sep it lowered it to $54k owed.....i trust my accountant knows what he's doing...he's a very smart guy and has never lost when battling the IRS......

i dont know yet exactly how much my income went up in actual numbers....i just see a 50percent on my quick books...i know my total business sales went from $320k to $450k this year.....i also know im over the max for a Roth IRA....when i get my W-2 ill know....

my quartly payments havent changed....only the final year end payment...i had planned on saving $10k in retirement, but i had plans for that additional $20k that im now putting in a SEP.....to keep my taxes down i felt like i had no choice...the return was just that great...now i will be taking out a loan for my year end plan because im $20k short...

when i finalize my taxed in Jan. Im going to sit down with him and go over this year and last years taxes...so i understand where the major increase came from....he typically does 50 percent wages vs 50 percent profit....maybe he raised that percent and im paying more SS/Medicare because of it...

im just lucky i had a cash stockpile at the end of the year....i was expecting to go up $10k in taxes/SS, but not $33k

ive been discussing this issue with my Edwards Jones girl and she tells me how great it is that im having a problem that has to do with making too much money...im a glass 1/2 empty guy......making more $ seems to have made that mental problem worse instead of better....

Evan
12-19-2010, 08:55 PM
$3-4K is probably not sufficient per quarter on approximately $400K in sales. Of course what matters is the bottom line net income figure, not sales. $320K to $450K sales is a 41% increase in sales. If your cost of goods sold (all your parts/tools) was 50%, your net income is approximately $225K. If the prior year, COGS was higher because of some inefficiency, say it was 60%, your gross profit would be 40% and you'd have net income of approximately $128K. A net income of $128K to $225K is approximately 76% higher than the prior year.

Based on the information you provided, this seems to be reasonable, and proportional. A 76% increase in net income leads to approximately a 76% higher tax liability. Your effective tax rate hasn't changed considerably.

With that kind of income, you're best maxing out your social security (cap $106,800), and the respective medicare tax. Take a nice distribution to pay for your taxes, and have the company make a SEP make a sizeable SEP contribution. What about health insurance? Does your company provide this to you?

Discuss with your accountant other fringe benefits you can get from your corporation as an employee. Maybe hire your wife to do some work for you, and consider providing money for schooling (approximately $5K a year) if she wants to get another degree. Consider a flexible spending account for medical expenses. Consider various types of insurance to protect yourself, as you are in a business where you can be susceptible to injury and a loss of income. If you want to be generous, consider giving a de minimis gift to your contractors as a "thank you" for their service, and it shows you care. Perhaps send something to your existing clients for the year a calendar or magnet for the refrigerator that has your information on it. In general, just look at what you can do with yourself to improve your image and reputation to existing clients and vendors, and also what you can get in benefits as an employee of your company.

Evan
12-19-2010, 08:57 PM
Oh, and consider beefing up your payroll federal/state withholdings. The more you can do through payroll, the less you need to do with estimated tax payments... to some extent. It won't replace everything.

Steve B
12-20-2010, 03:52 AM
So where did the 50% and 95% come from?

I can't come up with those percentages from the stuff you posted? Even the increase in your year end tax liability was only 80% not 95% (it went up 28k and it used to be a total of 35k right?). And, that's before you took advantage of the SEP.

huggytree
12-21-2010, 04:40 PM
your correct steve...it was probably more like 80 percent increase. i was doing angry math at the time

i think i was around $150k last year and this year should be $225k range....my wages vs profit is 50/50, so no SS tax on 1/2 my income...$30k in a SEP for 2010 to bring my taxes down $9k more vs $10k in a Roth IRA in 2009(dont think i did a sep last year)

im almost maxed out on SS, but i think im $2-3k short..

final numbers arent in yet, so these things are just a rough estimate....

i ordered a new car to celebrate a awesome year and thought i could just pay for it...now ill have to take a loan for at least 1/2 of it...its still awesome that i can even do that, but its a last minute change and im scrambling to come up with the down payment $$..i may wait until March to put the extra $20k in the SEP...the car will be here in 2 weeks and my bank accounts are empty right now waiting for $50k in invoices. i was rich 3 weeks ago, then i paid $40k in materials + $53k to for taxes....the scary thing for most small businesses is they dont bank tens of thousands...most of the guys who pay me have $2k in their accounts...they cant pay me until they are paid

huggytree
12-21-2010, 04:43 PM
i use the union insurance and they have a forced medical savings plan...i get $1,500 back at the end of the year

its already paid for by my company

Evan
12-21-2010, 05:06 PM
This is why I also advise clients to make estimated payments throughout the year representing their actual tax liability. You are subject to penalties for underestimating your tax liability and not paying these taxes on a timely basis.

It is much easier to swallow $5K payments 4 times a year than one single $20K payment. It's a mental thing, really.

In any event, if your income is this high and you would ordinarily have nondeductible contributions to a Traditional IRA (if you have one), you could convert those funds to a Roth IRA and pay minimal taxes. Say over many years you contributed $30K to a Traditional IRA but they were non-deductible contributions. You've accumulated $10K of gains, and wish to convert to a Roth IRA. Well, as you funded it with non-deductible contributions, the $30K won't be taxable on withdrawal, but the $10K will be. Not too shabby of a tax bill compared to most folks. The Roth IRA conversion tax bill tends to hit people who have made deductible IRA contributions and are somewhere near the $100K range (+/- $25K or so), and it probably throws them into a higher bracket on top of it.

Trust me, the situation you are in is so much better than the "average American." Most can't afford a new car, let alone paying 50% of it up front with cash just sitting in the bank. Trust me, most people would be playing the smallest violin to your problems. What you had stated makes perfect sense using the analysis I provided. While I don't have everything in front of me, it will hopefully make sense to you.

Evan
12-21-2010, 05:07 PM
i get $1,500 back at the end of the year

My invoice is in the mail :)

Steve B
12-21-2010, 06:04 PM
BTW - Congratulations on your success. It's been fun "watching" your company grow from a distance. You should be very proud - especially that you were able to do this in this economy. But, I have a feeling this economy helped you out a bit by forcing you to be more careful about decisions and it also seemed to drive out several of your competitors.

huggytree
12-22-2010, 09:42 PM
im not saying im poor..or even average...but im not rich...rich is $1,000,000+ or maybe $5,000,000

im making more than double what my original goal was when i went into business

Steve B, you probably were one of the many reasons for my sucess...thank you very much.....

Thanks Evan for discussing this issue with me....im going to sit down with my accountant and go step by step with where the taxes are coming and going...i need to understand it instead of just trusting him

the biggest reason for my sucess was just time...you need to build the customer base up....homeowner sales went up 110 percent....just crazy numbers
new homes was down 30 percent and remodeling was up 20 percent....i dont think i lost 1 builder in 2010.....i typically lost 1 for every 1 or 2 i gained in the past....ive just built up a great base of customers..ive become friends with them all.....my philosiphy of having 100 small customers instead of 1 or 2 big customers paid off....i have soooo many small guys who bring me a project or 2 a year and never question my prices...

biggest thing was that phone # i bought from the guy who went under....$50k just from that line..(paid $750 for it)...thats almost 1/2 my increase right there and im still getting new jobs from that line every month and repeat business.\

i just bid on a $48k job today, so 2012 may be even better...not a bad way to start

while most plumbers have focused solely on price i decided to switch from service to higher quality...there arent many high quality plumbers left...maybe 10-20 out of the 200 in the area are 'quality'..probably 150+ are price only....the main benefit to going after 'quality' minded customers is they are great at giving referrals and they are loyal..