Let?S Talk Taxes

Let?S Talk Taxes

With tax time here, now is the time to consider how you want to claim — the standard deduction or file an itemized income tax return.  Why should you do this? It’s simple.  Often overlooked deductions can make a HUGE difference in lowering your tax bill if you decide to itemize.

The standard deductions are fine for those who have an uncomplicated tax situation.  But the amount of your mortgage interest payments, state taxes, property taxes, charitable contributions and hurricane losses, if any, could be more than the standard deduction that is given.  What does this mean? If you do not itemize, you may not save as much as you are entitled to. With this in mind, you should take a look over the following list of often missed credits and reductions before you start the process of completing your 2009 tax return:

1. Education Expenses: There are many education related deductions and credits available to you if you are making tuition payments, paying off your college degree or student loan interest or just saving for your child’s education.  You then owe it to yourself to check out the explanation of education tax benefits available on the IRS website.  http://www.irs.gov

2. Deductions for Home Office: Are you self employed? Is your home office your principal place of work?  Is your gross income more than your related deductions? You should then be able to claim this deduction.  Are you employed by a company? If so you can deduct the home office ONLY if it is for your employer’s convenience.  You MUST also pass the “exclusive use” rule to qualify for deducting a portion of your home’s expenses, including mortgage interest, real estate taxes or rent, utilities, property maintenance (mowing, snow removal) or even repairs.  Caution, this is a RED HOT issue for the IRS so be certain you pass the “exclusive use rule”.  If you don’t have an office in your home, you may still deduct your mortgage interest and real estate taxes on both your main residence and any second home.

3. Deductions for Charity: You can deduct all that you have given to charity, especially if you have given cash gifts, or in-kind donations of clothing, toiletries, food or appliances that you can then deduct at fair market value.  You should go through your receipts and your credit card statements to make sure you don’t forget all that you have given.  Only donations to 501 (c)3 organizations qualify.  If you donate items other than cash and the amount is over 0, you must have a receipt from the organization who received your donation.  Also remember that the IRS will want to see proof of cash donations, such as checks, stubs or statements from the charity.

4. Miscellaneous Expenses: Did you know that gambling losses, job search expenses, safe deposit fees, subscription to investment publications and even tax return preparation expenses could be claimed as tax deductions?  Also, unreimbursed business expenses may be eligible to be claimed as a deduction.  Your total miscellaneous expenses, however, must exceed 2% of your adjusted gross income to qualify.

5. Don’t pay in cash: Cash may be convenient but it’s also practically guaranteed to be forgotten come tax time, unless you’re one of those folks who’s great at writing down every single purchase. In some cases,  if you do not  get a receipt when you pay in cash, you will be unable to make a deduction.  When you can, write out a check or use your debit card so you can prove the purchases for the doctor visit, charitable donations and business expenses; the IRS considers a canceled check or credit card/debit card receipt to be appropriate for purposes of record-keeping.

6. Other itemized deductions: Florida doesn’t have an income tax, so for the year 2009 Form 1040, you may deduct sales taxes you pay.  You can either use your actual sales taxes paid or use the IRS table.  If you don’t itemize, and use the IRS table, then you can also deduct the sales tax you paid on big ticket items such as Cars, Furniture household items like a new kitchen.  Also, if you are a teacher, you may deduct up 0 for any school supplies you purchase.  This year the energy tax credit has been extended, so if you purchased  a new water heater, air conditioner, solar device,  or impact windows, you might be entitled to a 00 tax credit

7. Capital Losses: With the market downturn in 2009, you can deduct up to 00 in NET losses on investments.  Any losses in excess of that may be carried over to 2010.

8. Earned Income Credit:  Those taxpayers whose income is below a certain level and who have dependents may also qualify for additional tax credits. If the credit results in a refund, the IRS will mail it to you.

9. Education and Child Care Credits: Depending on your circumstances, you may be eligible for tuition payments for your dependents’ college expenses.  For those of you who have children in daycare, there is also a credit for the amount you pay to your daycare provider.  You MUST have a receipt from the provider listing their name, address, amount you paid and their Tax Identification Number.

10. Medical deductions: Be sure to include your payments for medical insurance if you receive Medicare.  You may also be able to deduct medical insurance premiums, co-pays, other out of pocket expenses, hospital, doctor, dentists and any other medical visits.  Remember that there is a 7 ½% take away before you can itemize.

11. LASTLY: Be sure to include ALL your W’2’s, Form 1099’sand any other documents which report income to you, such as bank  or brokerage statements.

Tax Deduction Checklist
The best tax deductions checklists are found in three places:

Your past years’ tax returns 2) With your tax professional 3) Through an online tax website

The IRS website provides plenty of useful information on tax filing which could end up saving you a lot of money on this year’s tax return.  Take a few minutes to go over all the information you have on taxes so you can save yourself the most in the end.

CHOOSE YOUR TAX FILING METHOD! You may wish to hire a tax professional if you have had any major changes to your income such as an inheritance, lottery winnings, an investment windfall, or the like, or simply feel overwhelmed at the thought of the task.  On the other hand, if your goal is to prepare your own tax return, there are great software programs for help with tax preparation, such as TurboTax, Quicken, or TaxAct. These programs are inexpensive and will walk you through your tax return with a series of questions that make it a relatively painless process.
INFORMATION PROVIDED ABOVE MAY NOT BE OF USE TO YOU AND THEREFORE YOU SHOULD CONSULT A TAX PROFESSIONAL CONCERNING YOUR ELIGIBILTY TO USE A DEDUCTION.  EVERY PERSON’S SITUATION IS UNIQUE.

Prior Year Tax Preparation Online

Related Past Year Tax Articles

Let?S Talk Taxes

Let?S Talk Taxes

With tax time here, now is the time to consider how you want to claim — the standard deduction or file an itemized income tax return.  Why should you do this? It’s simple.  Often overlooked deductions can make a HUGE difference in lowering your tax bill if you decide to itemize.

The standard deductions are fine for those who have an uncomplicated tax situation.  But the amount of your mortgage interest payments, state taxes, property taxes, charitable contributions and hurricane losses, if any, could be more than the standard deduction that is given.  What does this mean? If you do not itemize, you may not save as much as you are entitled to. With this in mind, you should take a look over the following list of often missed credits and reductions before you start the process of completing your 2009 tax return:

1. Education Expenses: There are many education related deductions and credits available to you if you are making tuition payments, paying off your college degree or student loan interest or just saving for your child’s education.  You then owe it to yourself to check out the explanation of education tax benefits available on the IRS website.

2. Deductions for Home Office: Are you self employed? Is your home office your principal place of work?  Is your gross income more than your related deductions? You should then be able to claim this deduction.  Are you employed by a company? If so you can deduct the home office ONLY if it is for your employer’s convenience.  You MUST also pass the “exclusive use” rule to qualify for deducting a portion of your home’s expenses, including mortgage interest, real estate taxes or rent, utilities, property maintenance (mowing, snow removal) or even repairs.  Caution, this is a RED HOT issue for the IRS so be certain you pass the “exclusive use rule”.  If you don’t have an office in your home, you may still deduct your mortgage interest and real estate taxes on both your main residence and any second home.

3. Deductions for Charity: You can deduct all that you have given to charity, especially if you have given cash gifts, or in-kind donations of clothing, toiletries, food or appliances that you can then deduct at fair market value.  You should go through your receipts and your credit card statements to make sure you don’t forget all that you have given.  Only donations to 501 (c)3 organizations qualify.  If you donate items other than cash and the amount is over 0, you must have a receipt from the organization who received your donation.  Also remember that the IRS will want to see proof of cash donations, such as checks, stubs or statements from the charity.

4. Miscellaneous Expenses: Did you know that gambling losses, job search expenses, safe deposit fees, subscription to investment publications and even tax return preparation expenses could be claimed as tax deductions?  Also, unreimbursed business expenses may be eligible to be claimed as a deduction.  Your total miscellaneous expenses, however, must exceed 2% of your adjusted gross income to qualify.

5. Don’t pay in cash: Cash may be convenient but it’s also practically guaranteed to be forgotten come tax time, unless you’re one of those folks who’s great at writing down every single purchase. In some cases,  if you do not  get a receipt when you pay in cash, you will be unable to make a deduction.  When you can, write out a check or use your debit card so you can prove the purchases for the doctor visit, charitable donations and business expenses; the IRS considers a canceled check or credit card/debit card receipt to be appropriate for purposes of record-keeping.

6. Other itemized deductions: Florida doesn’t have an income tax, so for the year 2009 Form 1040, you may deduct sales taxes you pay.  You can either use your actual sales taxes paid or use the IRS table.  If you don’t itemize, and use the IRS table, then you can also deduct the sales tax you paid on big ticket items such as Cars, Furniture household items like a new kitchen.  Also, if you are a teacher, you may deduct up 0 for any school supplies you purchase.  This year the energy tax credit has been extended, so if you purchased  a new water heater, air conditioner, solar device,  or impact windows, you might be entitled to a 00 tax credit

7. Capital Losses: With the market downturn in 2009, you can deduct up to 00 in NET losses on investments.  Any losses in excess of that may be carried over to 2010.

8. Earned Income Credit:  Those taxpayers whose income is below a certain level and who have dependents may also qualify for additional tax credits. If the credit results in a refund, the IRS will mail it to you.

9. Education and Child Care Credits: Depending on your circumstances, you may be eligible for tuition payments for your dependents’ college expenses.  For those of you who have children in daycare, there is also a credit for the amount you pay to your daycare provider.  You MUST have a receipt from the provider listing their name, address, amount you paid and their Tax Identification Number.

10. Medical deductions: Be sure to include your payments for medical insurance if you receive Medicare.  You may also be able to deduct medical insurance premiums, co-pays, other out of pocket expenses, hospital, doctor, dentists and any other medical visits.  Remember that there is a 7 ½% take away before you can itemize.

11. LASTLY: Be sure to include ALL your W’2’s, Form 1099’sand any other documents which report income to you, such as bank  or brokerage statements.

Credit Counseling

Tax Deduction Checklist
The best tax deductions checklists are found in three places:

Your past years’ tax returns 2) With your tax professional 3) Through an online tax website

The IRS website provides plenty of useful information on tax filing which could end up saving you a lot of money on this year’s tax return.  Take a few minutes to go over all the information you have on taxes so you can save yourself the most in the end.

CHOOSE YOUR TAX FILING METHOD! You may wish to hire a tax professional if you have had any major changes to your income such as an inheritance, lottery winnings, an investment windfall, or the like, or simply feel overwhelmed at the thought of the task.  On the other hand, if your goal is to prepare your own tax return, there are great software programs for help with tax preparation, such as TurboTax, Quicken, or TaxAct. These programs are inexpensive and will walk you through your tax return with a series of questions that make it a relatively painless process.
INFORMATION PROVIDED ABOVE MAY NOT BE OF USE TO YOU AND THEREFORE YOU SHOULD CONSULT A TAX PROFESSIONAL CONCERNING YOUR ELIGIBILTY TO USE A DEDUCTION.  EVERY PERSON’S SITUATION IS UNIQUE.

Easy Prior Year Taxes

Related Past Year Tax Articles

Dealing With Past Due Taxes ? A Matter Of Perspective

Dealing With Past Due Taxes ? A Matter Of Perspective

Federal, state, county and local governments all run off of the taxes we pay. As you probably have noticed, they get a bit touchy when you don’t pay the amount you owe or do it on time. If you owe past taxes, you are going to have to deal with the problem sooner or later. How you do it is a matter of perspective.

Every single tax agency is a massive government machine that grinds along day after day after day. Practically speaking, this means the agencies are generally very slow to react. Once they do, however, the collection effort can be hard to stop and you can easily get trampled into the ground under the assault of agents and audits.

If you don’t pay your taxes this April, the IRS is not going to be knocking on your door the next day. In fact, the agency probably isn’t going to do much of anything other than send out computer generated correspondence if even that. I will give you a classic example. My accountant filed my personal return for 2005 electronically. The IRS did not get it. It wasn’t until 2007 that I heard about it. Yes, a full two years.

While it took a bit, the agency did track me down and it was not pleased. The first notices were for tens of thousands of dollars and I nearly fainted. After much discussion and copies of tax returns, the agents finally realized I was not trying to play funny with the money as they say. I ended up paying some penalties and interest and that was it. It was an extremely stressful time and the only thing that really saved me was I had paid the original taxes on time.

This example should give you a clue on how important perspective is in these matters. If the IRS starts hunting for you, fending the agency off is going to be difficult, stressful and expensive. If you voluntarily come forward and try to deal with the issue, the agency is much more willing to work out arrangements with you. You don’t have to live with past due taxes hanging over your head.

Prepare Prior Year Taxes Now

Find More Past Year Tax Articles

How to Get Help with Past Due Taxes

How to Get Help with Past Due Taxes

There are times when you will find it hard to pay your income tax.  There are several factors why this problem happens.  One of the primary causes is economic hardship.  Your current finances may not be enough to pay your taxes.  In case you skipped paying your taxes in the previous years, it is very important for you to seek tax help.  There are several ways how you can get help with past due taxes.  You can consult a tax attorney or if you want to get free advice, you can simply sign up with the tax support services of Free Tax Support.   

It is in your best interest to pay taxes on time because the amount of penalties imposed by the IRS can be very staggering.  So before you experience much trouble, you have to seek tax help as early as possible.  Sometimes, the reason why you can not pay your taxes is that you are overpaying the IRS.  There are several items in your tax returns that could be eligible for deductions.  But because you are not aware of it, you will pay higher taxes which should not be.  In cases when you have to pay back taxes, you have to be aware also that the IRS has several tax relief programs.  So it is best to consult a professional tax support service so you can get help with past due taxes.  You never know, you may qualify for the tax relief programs of the IRS so you can resume paying your taxes and avoid legal issues.  

When getting help with past due taxes, you must understand that there are several tax help and relief options available for you.  First, you can take advantage of the Tax Relief Settlement.  This is a negotiated settlement with the IRS.  You will only be required to pay a certain percentage of the taxed owed to the government.  The terms of the settlement will depend on your income level, assets, and expenses.  You will be able to save a lot of money if you take this tax relief option.  Another option that you can take is the so called Offer in Compromise.  This relief program was mandated by Congress to help taxpayers in settling their debt with the government.  The IRS will offer you a settlement agreement where you will pay just a fraction of the original amount that you owe.  

In getting help with past due taxes, it is really important to consult a tax professional.  You can hire a tax attorney which will represent you.  This is a costly option but can be very advantageous for you because you might get favorable settlement deals.  Another route you can take in getting tax help is to get free tax advice from Free Tax Support.  The agents of Free Tax Support are experts in handling tax problems.  Free Tax Support can also provide you with comprehensive documents and free tax kits detailing the process on how to handle tax issues and problems with the IRS.

Prepare Prior Year Taxes Now

Find More Past Year Taxes Articles

Steps to Solve Problems with Past Due Taxes

Steps to Solve Problems with Past Due Taxes

Having past due taxes should be stricken off your to do list.  This is a problem that can cause a lot of headaches for you.  However, no matter how diligent you are on paying your taxes there will be times when paying your taxes on time can be very difficult thus resulting to back taxes owed to the IRS.  You need not worry too much though because there are several solutions to this problem.  For one, you can hire a tax attorney to handle your case. You can also try the following steps before you hire a tax attorney.   

The first thing that you can do is to review IRS regulations and laws and find out if you are eligible for tax discharge.  It is possible for your past due taxes to be discharged completely so you will not pay anything at all.  However, there are certain requirements that you have to meet before you can apply for tax discharge.  First, your past due taxes should be at least three years overdue.  Second, you have to show that the delinquency is not due to fraudulent reasons or tax evasion.  This means you have to show proof that you really can not pay your taxes anymore because of economic troubles and that your prior tax returns are not fraudulent.   Discharge of past due taxes are specifically created for those who really can not pay owed taxes.  

Another way to settle your past due taxes is to negotiate with the IRS and see if you can set up a payment plan.  In most cases, this option is the best route that you can take in settling your issues with the IRS.  The tax service is very much willing to help you in setting up a tax due payment plan.  If you show that you really want to settle your account with the IRS, then you can get favorable payment terms.  If you are going to take this option, it would be best to consult a tax attorney or get free advice from tax support services.  In most cases though, the IRS will be able to provide assistance for you in setting up a payment plan.  

If your tax problems are really serious, then it is probably time to contemplate getting the full service of a tax attorney.   There are cases when simple negotiations will not work anymore.  In cases like these, a competent tax attorney can help you to fix things up pretty quickly.  You will also need legal advice if you are contemplating filing for bankruptcy so you can discharge your past due taxes in one swift stroke.  This should be your last option because filing for bankruptcy can be very complicated sometime.  As mandated by law, once you file for bankruptcy, the IRS will be compelled to withhold collecting past due taxes from you.  

Paying your taxes diligently is the best way to avoid getting into trouble with tax laws.  But if you are still unable to pay your taxes on time resulting to several back taxes owed to the IRS, then you have to take active steps to solve your tax problems by seeking professional tax advice or hiring a tax attorney.

Easy Prior Year Taxes

More Past Year Tax Articles

The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax

The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax

When used correctly, C Corporations are a great way to supercharge a tax strategy. I find that when my clients make the most of their C Corporations, they reduce their taxes by a minimum of ,000 every year.

- The Biggest Mistake With C Corporations -

The key to saving ,000 in taxes every year is knowing how to use a C Corporation correctly. When I meet with prospects and review their prior year tax returns, it’s not unusual that I find a C Corporation that isn’t being used correctly. In these cases, the C Corporation is not saving any taxes and in some cases it is actually creating more taxes! So what makes these C Corporations not work? These C Corporations do not save taxes because the wrong type of business is in the C Corporation.

Only certain types of businesses will generate tax savings by operating as a C Corporation. The type of business that does work is what I refer to as a support business or a secondary business. Now, you may be wondering, what is a support or a secondary business? Sometimes it’s easier to define what it isn’t.

The Types of Businesses That Don’t Save Taxes in a C Corporation:

Primary Operating Business. This is a business that creates the main source of cash flow for the owner. The owner relies on this cash flow for living and other personal expenses. The primary operating business is how the owner makes a living. In this type of business, it is critical that the owner be able to get cash out of the company in a very tax efficient way. While it is possible to get cash out of a C Corporation, it becomes inefficient from a tax standpoint to do so with large amounts of cash. Bottom line: if you rely on the cash from your business to pay for your living expenses, that business is not ideal for a C Corporation.

Investment or Rental Real Estate Business. There are several reasons why this type of business doesn’t work in a C Corporation. I’ll share the top two reasons.

First, this type of business involves assets that appreciate. C Corporations do not have a “special” lower tax rate for capital gains (which are generated from appreciated assets). Individuals do have a special capital gains rate so that benefit is completely lost in a C Corporation.

Second, the income generated from these investments is often subject to a special (additional) tax in C Corporations called a personal holding company tax. This tax only applies to this type of income and only in a C Corporation. The tax effectively eliminates the lower tax rates that a C Corporation normally has. This tax was specifically put in place to keep taxpayers from putting investment assets in a C Corporation as a way to pay less tax on their investment income.

The Type of Business That DOES Save Taxes in a C Corporation:

Now that we have eliminated primary operating businesses and investment businesses from the types of businesses that do not save taxes in a C Corporation, what is left? What is left is secondary or support businesses. These are best defined as businesses that generate a modest amount of profit (no more than ,000 annually) and the cash flow that is generated is not needed by the owner to pay for living or personal expenses.

By far the biggest objection I hear anytime I bring up a C Corporation is…

But What About the Double Tax? Sometimes just the mere thought of paying a double tax sends people running in fear. Fortunately, I’m not afraid of the double tax and I actually have a strategy where the double tax can work to reduce my clients’ taxes.

What Is the Double Tax? The double tax is this:

First tax: A C Corporation pays its own tax on its net income. This is the first tax.

This is a great tax reduction strategy! Because a C Corporation pays its own tax, it has its own tax rules and you can legally use these rules to reduce your taxes.

Second tax: A C Corporation can use the cash it has after paying its own tax to pay dividends to its owners. When a C Corporation pays dividends to its owners, the owners pay tax on that dividend. This is the second tax.

At first glance, which is usually the only look most people (including CPAs) give a C Corporation, it seems that the double tax is the worst case scenario when it comes to tax planning. So many are surprised when I share this:

It Is Possible to Pay Less in Tax Even With a Double Tax!

Let’s take a look at how the C Corporation double tax can play out:

First tax = 15% A C Corporation pays 15% tax if it has net income of ,000 or less.

Second tax = 15% An individual pays 15% tax on dividends.

Total double tax = 30% (The double tax can end up being a little less than 30% but to keep things simple for this example, 30% will be used).

This means if an individual is in a 35% tax bracket, it is possible to pay less tax by incurring a double tax that totals 30%!

Prepare Prior Year Taxes Now

Steps to Solve Problems with Past Due Taxes

Steps to Solve Problems with Past Due Taxes

Having past due taxes should be stricken off your to do list.  This is a problem that can cause a lot of headaches for you.  However, no matter how diligent you are on paying your taxes there will be times when paying your taxes on time can be very difficult thus resulting to back taxes owed to the IRS.  You need not worry too much though because there are several solutions to this problem.  For one, you can hire a tax attorney to handle your case. You can also try the following steps before you hire a tax attorney.   

The first thing that you can do is to review IRS regulations and laws and find out if you are eligible for tax discharge.  It is possible for your past due taxes to be discharged completely so you will not pay anything at all.  However, there are certain requirements that you have to meet before you can apply for tax discharge.  First, your past due taxes should be at least three years overdue.  Second, you have to show that the delinquency is not due to fraudulent reasons or tax evasion.  This means you have to show proof that you really can not pay your taxes anymore because of economic troubles and that your prior tax returns are not fraudulent.   Discharge of past due taxes are specifically created for those who really can not pay owed taxes.  

Another way to settle your past due taxes is to negotiate with the IRS and see if you can set up a payment plan.  In most cases, this option is the best route that you can take in settling your issues with the IRS.  The tax service is very much willing to help you in setting up a tax due payment plan.  If you show that you really want to settle your account with the IRS, then you can get favorable payment terms.  If you are going to take this option, it would be best to consult a tax attorney or get free advice from tax support services.  In most cases though, the IRS will be able to provide assistance for you in setting up a payment plan.  

If your tax problems are really serious, then it is probably time to contemplate getting the full service of a tax attorney.   There are cases when simple negotiations will not work anymore.  In cases like these, a competent tax attorney can help you to fix things up pretty quickly.  You will also need legal advice if you are contemplating filing for bankruptcy so you can discharge your past due taxes in one swift stroke.  This should be your last option because filing for bankruptcy can be very complicated sometime.  As mandated by law, once you file for bankruptcy, the IRS will be compelled to withhold collecting past due taxes from you.  

Paying your taxes diligently is the best way to avoid getting into trouble with tax laws.  But if you are still unable to pay your taxes on time resulting to several back taxes owed to the IRS, then you have to take active steps to solve your tax problems by seeking professional tax advice or hiring a tax attorney.

How Taxes Affect Your Home Business

The Biggest Mistake With C Corporations and How to Save Taxes Using the C Corporation Double Tax

- The Biggest Mistake With C Corporations -

The key to saving $10,000 in taxes every year is knowing how to use a C Corporation correctly. When I meet with prospects and review their prior year tax returns, it’s not unusual that I find a C Corporation that isn’t being used correctly. In these cases, the C Corporation is not saving any taxes and in some cases it is actually creating more taxes! So what makes these C Corporations not work? These C Corporations do not save taxes because the wrong type of business is in the C Corporation.

Only certain types of businesses will generate tax savings by operating as a C Corporation. The type of business that does work is what I refer to as a support business or a secondary business. Now, you may be wondering, what is a support or a secondary business? Sometimes it’s easier to define what it isn’t.

The Types of Businesses That Don’t Save Taxes in a C Corporation:

Primary Operating Business. This is a business that creates the main source of cash flow for the owner. The owner relies on this cash flow for living and other personal expenses. The primary operating business is how the owner makes a living. In this type of business, it is critical that the owner be able to get cash out of the company in a very tax efficient way. While it is possible to get cash out of a C Corporation, it becomes inefficient from a tax standpoint to do so with large amounts of cash. Bottom line: if you rely on the cash from your business to pay for your living expenses, that business is not ideal for a C Corporation.

Investment or Rental Real Estate Business. There are several reasons why this type of business doesn’t work in a C Corporation. I’ll share the top two reasons.

First, this type of business involves assets that appreciate. C Corporations do not have a “special” lower tax rate for capital gains (which are generated from appreciated assets). Individuals do have a special capital gains rate so that benefit is completely lost in a C Corporation.

Second, the income generated from these investments is often subject to a special (additional) tax in C Corporations called a personal holding company tax. This tax only applies to this type of income and only in a C Corporation. The tax effectively eliminates the lower tax rates that a C Corporation normally has. This tax was specifically put in place to keep taxpayers from putting investment assets in a C Corporation as a way to pay less tax on their investment income.

The Type of Business That DOES Save Taxes in a C Corporation:

Now that we have eliminated primary operating businesses and investment businesses from the types of businesses that do not save taxes in a C Corporation, what is left? What is left is secondary or support businesses. These are best defined as businesses that generate a modest amount of profit (no more than $75,000 annually) and the cash flow that is generated is not needed by the owner to pay for living or personal expenses.

By far the biggest objection I hear anytime I bring up a C Corporation is…

But What About the Double Tax? Sometimes just the mere thought of paying a double tax sends people running in fear. Fortunately, I’m not afraid of the double tax and I actually have a strategy where the double tax can work to reduce my clients’ taxes.

What Is the Double Tax? The double tax is this:

First tax: A C Corporation pays its own tax on its net income. This is the first tax.

This is a great tax reduction strategy! Because a C Corporation pays its own tax, it has its own tax rules and you can legally use these rules to reduce your taxes.

Second tax: A C Corporation can use the cash it has after paying its own tax to pay dividends to its owners. When a C Corporation pays dividends to its owners, the owners pay tax on that dividend. This is the second tax.

At first glance, which is usually the only look most people (including CPAs) give a C Corporation, it seems that the double tax is the worst case scenario when it comes to tax planning. So many are surprised when I share this:

It Is Possible to Pay Less in Tax Even With a Double Tax!

Let’s take a look at how the C Corporation double tax can play out:

First tax = 15% A C Corporation pays 15% tax if it has net income of $50,000 or less.

Second tax = 15% An individual pays 15% tax on dividends.

Total double tax = 30% (The double tax can end up being a little less than 30% but to keep things simple for this example, 30% will be used).

This means if an individual is in a 35% tax bracket, it is possible to pay less tax by incurring a double tax that totals 30%!

How to File and Pay Your Taxes in California- For Individuals

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