Financial Articles

Many American Voters do not understand the taxation debate around election time. They hear stories of businesses and rich folks getting big tax breaks and yet do not fully understand, although at first glance they feel that is somewhat unfair. What is very unfortunate is that many politicians will claim that only the rich get the tax breaks. But in reality what is happening is that government is rewarding people who have wealth to spend their money in a certain way to receive a tax break.

For instance if they buy a vehicle for business or an airplane they get a tax break. Why is this good for everyone? Because if a rich person who owns a business buys an airplane or an automobile then someone gets to have a job in Wichita, Kansas or Detroit or Ohio or Alabama. The people who work in those factories need that job to feed their families and maintain their standard of living and quality-of-life.

It’s unfortunate that more people don’t understand the taxation debate and even more unfortunate that people who do understand the taxation debate who are running for office misrepresent its intentions. Many times Democrats will complain that the tax cuts are too deep and government does not have enough money to give away money to the poor. But in reality the government wastes most of the money that it gets and very little ever gets to the poor people.

It would be better to have a tax cut for the poor people so they could have more money in their pockets to spend for themselves and keep the tax incentives for the rich too. When to poor or middle class people spend the money they would buy things and that too would provide more jobs for Americans. If the government gets all of the money they just waste it on ridiculous social programs and pet projects.

Often the social programs make people weak and this should be well understood by the Christian quote; Don’t Give a Man a Fish Teach Them to Fish. It is just too bad that people do not understand the taxation debate. If they raise our taxes how does that help us? The Democrats want to raise taxes and that would be a disaster for our economy. That just means we all have to pay more money to a government that is going to waste it. And so I ask the question why would anyone want to do that? Please consider all this in 2006.

Running a one-person business? Tired of the huge hit you take at tax time? Want to save money on your accounting and taxes? Consider these simple tips and tricks…

Tip 1: Use an accounting system

Oh sure. This sounds obvious. But unless you have a decent way to track both your income and your deductions, you not only won’t know how much money you’re making until tax time, you’ll also miss or forget about tax deductions.

Something like Quicken or Microsoft Money will work just fine. If you need more bookkeeping horsepower than these checkbook programs provide, look at stepping up to QuickBooks or Microsoft Small Business Accounting.

Tip 2: Don’t Incorporate

New business owners often rush to incorporate. But incorporation rarely makes sense for small businesses. And incorporation totally complicates your taxes and accounting.

What’s a new business owner to do? Form a limited liability company instead. A limited liability company, or LLC, gives you all the same liability protection. But without the tax complexity of a corporation.

An LLC with just one owner, for example, gets treated for income tax purposes as a sole proprietorship. Which means to report your business activity to the IRS or state revenue folks, all you do is file a simple, one- or two-page schedule with your regular individual tax return.

Tip: Consider hiring your kids

If you have minor children and they help you out in your business—doing real work—consider hiring them. As long as they earn less than $5,000, they won’t pay any income taxes on their wages nor any payroll taxes. Yet, you’ll still get to write-off the amounts you pay them as business expenses. (This might be a neat way to save for a kid’s college expenses.)

Tip 4: Consider hiring your spouse

While medical insurance is a deduction for income-tax purposes for sole proprietors, you can save far more in taxes by hiring your spouse and then setting up what’s called a Section 105(b) plan. Such a plan lets you treat all of your family’s medical expenses (insurance, out of pocket, deductibles and so on) deductions for both income tax purposes and self-employment tax purposes.

If you are interested in this, confer with a local tax practitioner. Section 105(b) plans can be a little tricky to understand if you haven’t used them before.

Tip 5: Take the home office deduction

Hey, if you regularly and exclusively use some portion of your home for your business, go ahead and take the home office deduction.

Don’t worry about this deduction being an audit flag. Or a hassle. The deduction is meant for people like you.

Tip 6: Set up a pension plan

If you want to save more than a regular IRA allows, set up a pension plan for your business. You can easily set up something like a SEP-IRA which will allow you to contribute up to twenty of your profit to a tax deferred account.

Example: If you make $50,000, you could use a SEP-IRA to contribute $10,000 to your pension account. And there are other good low-cost options available, too, such as SIMPLE-IRAs and one-person 401(k) plans.

To get more information on small business pension plans, contact the Vanguard Group at www.vanguard.com or Charles Schwab at www.schwab.com.

Tip 7: Learn and then use TurboTax or TaxCut

A final tip: In most cases, the taxes of sole proprietorship are pretty simple. So, rather than come to someone like me (a CPA) or an enrolled agent or one of those nationwide tax preparation firms, try doing your return yourself using tax software.

Programs like TurboTax and TaxCut work great for simple-situation sole proprietors.

A new study of state tax burdens ound that low-tax states outperform the higher tax states in employment, personal income and population.

The report, entitled “High Taxes Lower Economic Performance,” was conducted by the Maine Heritage Policy Center. It looked at all 50 states and their fiscal years of 1994 to 2004.

The study found that the ten lowest tax states have an average tax burdern of 9.5%. The top ten highest tax states had an average tax burden of 13%.

The low tax states were found to have population growth that was 172.1% higher than the high tax states. Personal income growth was 31.9% higher, while employment growth was 78.6% higher.

The report then compared the lowest 25 tax states with the 25 highest. The lowest tax states had an average tax burden of 9.9%. The highest tax states had an average tax burden of 11.5%.

The lowest tax states showed a population growth that was 74.4% higher than that of the higher tax states. Personal income growth was 15% higher, while employment growth was 32.6% higher.

The author of the study, J. Scott Moody, said that the “states with low taxes have greater job creation and wage growth than states, like Maine, with high taxes.”

“The data reveals that high tax states are missing out on the level job creation and wage growth that low tax states are experiencing,” he explained.