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The Trap Most People Fall Into With Income Tax Planning

Let’s face it, most income tax planning comes down to timing. There are few ways to permanently get rid of income taxes, unless you simply don’t make any money. I love lowering my taxes as much as possible just like everyone else, but if my strategy is to make less money just to pay less taxes, then I’m playing a fools game.

But here’s a mistake I see a lot of people make – they often think income tax planning is either showing less income or showing more deductions. But sometimes you have to flip that thinking – maybe sometimes it makes sense to show more income or less deductions.

This can be the case in many situations. Here are a few examples:

  1. Most businesses take the Section 179 deduction to write off assets all in one year, and, yes, this can be beneficial. But what if your income is low this year and is expected to be much higher next year. Well, maybe it make sense to NOT take the Section 179 deduction this year, and delay the deduction until next year with depreciation. With low income this year, and high income next year, you’ll save more in taxes overall by delaying the deduction.
  2. In the race to lower income and taxes, many pass-through businesses (S corps, LLC’s) will lower their income as much as possible before year-end. But before doing so, you have to see what effect this has on the business owner’s personal taxes. It could be that on your personal return you already have lots of deductions. If this is the case, and you lower your business income too much, all of those personal deductions will go to waste. It may make sense to actually show income on the business to use those personal deductions.

 

You see, income tax planning cannot be done in a vacuum, you have to look at the big picture. It’s like a puzzle – you have to see how all the pieces fit to see what makes the most sense. Sometimes it could make sense to show more income and less deductions to save more in taxes!

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