Home Business Tax Planning for Year-End: Deductions

Don't pay more than you have to in taxes. Use home business tax planning to find the best end-of-the-year tax deductions.

I have no problem paying taxes, but that doesn't mean I'm going to pay more than I have to. Indeed, this is the time of year that I start casting about, looking for ways to pile on the deductions. My husband just started work as a college professor. I've increased my home business income. We are doing what we can to stay in our comfortable tax bracket for a little while longer.

This doesn't mean that we misrepresent our income to the IRS. Far from it. Instead, we look for ways to reduce our tax liability legally with the help of tax deductions.

What is a Tax Deduction?

A tax deduction is something that reduces your taxable income. There are two main types of tax deductions:

• Above the line deductions reduce your income and help you figure out your adjusted gross income (AGI).
• Below the line deductions are those that start from your AGI and reduce your income to help you arrive at what is considered your “taxable” income. Your taxable income might be tens of thousands of dollars lower than your actual income.

A tax deduction is less valuable than a tax credit, though. It lowers the amount of income you are taxed on. A tax credit acts like a gift card, directly reducing, dollar for dollar, the amount you owe in taxes. Tax deductions are useful since they reduce the amount of your income you are required to pay taxes on. With proper home business tax planning, deductions can help keep you in a lower marginal tax bracket.

General Tax Deductions You Might Be Able to Claim

Many homeowners know that the mortgage interest they pay can be tax-deductible. However, your mortgage interest tax deduction isn't really something you can easily ramp up to further reduce your income at the end of the year.

If you are concerned about your income, now is a great time to pile on the deductions. Plenty of tax deductions don't necessarily have to do with home business tax planning. You can receive tax deductions for:

• Charitable contributions: Make an end-of-the-year donation to your church or to some other tax-exempt charitable organization. If you don't have the cash but still want a deduction, you can get a tax deduction for the value of goods donated. I don't normally get a receipt for donations of goods, but this year I'm seriously considering going through my closet, donating, and getting the receipt.
• Retirement account contributions: If you have maxed out your traditional 401(k) or your traditional IRA, consider making an extra contribution. You'll be better at funding your retirement and increasing your tax efficiency for this year. You can wait on the IRA if you want. You have until Tax Day of the following year to make contributions. So you can hold off and see if it will benefit you as you prepare your taxes.
• HSA contributions: If you have a Health Savings Account (HSA), and haven't maxed out your contributions, put a little more in there. I plan to contribute a couple of thousand dollars more to my HSA for 2011 (as with an IRA, you have until Tax Day of the following year to make contributions).
• Investment losses: Did you lose some money in investments this year? If so, you can “harvest” the losses and deduct them. First, use them to offset any capital gains. Next, you can offset up to $3,000 of your other income with investment losses. As long as you pay attention to the IRS wash sale rule, you shouldn't have a problem.

Home Business Tax Planning: Don't Skip These Business-Related Deductions

When it comes to business tax planning, you don't want to skimp on business deductions. Here are some home business tax planning ideas that can help you reduce your taxable income:

• Home office tax deduction: If you have a dedicated space for your home office, you could be eligible for a deduction. Don't forget about the home office tax deduction, which can get you up to $1,500 or more.
• Office supplies and equipment: Ready for a new office chair? Running low on supplies? Now could be the time to buy what you need. Get what you need for your home business, and use it to reduce your income.
• Business travel: You don't have to complete the travel this year. If you know that you'll travel next year, arrange and pay for the travel — and claim that deduction.
• Other deductions: Don't forget about other deductions, such as trade publication subscriptions and mileage deductions.

Bottom Line

It doesn't hurt to take a preliminary look at your taxes right now. Go ahead. Check your situation. It helps to know where you're at. Determine whether or not a little more spending now —on the right things — can help you more in the long run. This is of special concern if you are worried about what happens if you end up in a higher tax bracket due to increased earnings. The right tax deductions can help you a little less this year.

Be sure to speak with a tax professional before moving forward to ensure that your paperwork is in order.

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