As a tax accountant, I look at taxes has a necessary evil, however, most people, including the majority of my clients don’t feel the same way. But with the alternative (not paying, not being in compliance with the law) being illegal and down right scary, most soon come to realize planning for the enviable is wiser.
With adequate tax planning, employed tax payers as well as business owners can take advantage of the differences on tax codes. Here are two things you can do today.
1. Structure your wages and / or income into dividends and lower the regular salary that you allocate yourself on a year basis. For example, if you originally made $100,000 in salary with a 30% tax rate, you will be left with $70,000 at year end. However, if you have a $30,000 salary with a 10% tax and $70,000 of dividends, paid quarterly with a 20% tax, you are left with $83,000 at the end of the year, saving you $13,000.
2. Debt can also be a way to take advantage of the tax code. This is where things could get tricky if done by a unprofessional, be sure to schedule an appointment to get help. Interest on certain debts are not taxed, so rather than investing for equity, you can invest in a company with a convertible debt contract. For example, you can structure the investment so that you receive 5% annually from your debt investment. If the company does well, you can convert the debt into a share of the firm that is worth more than the present value of the 5% debt payments plus the taxes you will have to pay on the capital gains. That calculation is a little complex based on the assumed discount rate of future payments. However, it should be fairly clear based on the trajectory of the company’s performance. Either way, you will win with a beneficial tax rate or a large capital gain.
LaQuitta Jones is a tax accountant, with TT&P Accounting, her expertise is tax preparation and planning. She also assist for small to medium size corporations with financial statements, cost management, revenue generation and business consulting.
For more information, please visit TT&P Accounting.