Do This Before You File Your 2022 Tax Return...

 We're diving into a topic that might not be the most exciting, but it's definitely something we can't ignore: taxes. It's easy to feel overwhelmed by the tax process, but understanding a few key things can help ease that stress and even save you money.

In this episode, I’m gonna give you the lowdown on some tax basics. I'll talk about how the tax system works and what you need to know to make sure you're not leaving any money on the table. I'll also dive into what kinds of things you need to account for, like income, property, and other sneaky taxable items.

So, get ready to learn some valuable tips that will help you keep more of your hard-earned money in your pocket. Trust me, this is one topic you don't want to overlook!

IN TODAY’S EPISODE, I DISCUSS: 

• The basics of how taxes work & using it to your benefit
• The difference between a deduction and a tax credit
• Key moves to consider before the tax filing time 
  IRS Code Section 179: How does it work?
• Retirement plans - How maximize them before filing
• Other strategies for reducing the tax burden
• The benefits of working with a tax professional
  
  

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Transcript

Mel Abraham  0:00  
Welcome to this episode of the Affluent Entrepreneur Sho. This one, I don't know, it's another one, it is one on taxes, people don't want to talk about taxes, but we got to talk about taxes. The fact of the matter is if 20% 30% 40% Even 50% of your income is gonna go to the government as taxes, it is important that we talk about it so we can get it reduced as much as possible. So you can keep more money in your pocket working for you, your financial freedom and your future. So I hope you enjoy this episode I'll see in the episode, cheers. This is the Affluent Entrepreneur Show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond well, so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect. So you can scale your business, scale your money, and scale your life, while creating a deeper impact and living with complete freedom. Because that's what it really means to be an affluent entrepreneur.  

Mel Abraham  1:09  
Hey there, welcome to this episode of the Affluent Entrepreneur Show. This one we're going to be talking about, well, something that feels like a root canal. Without dam setting. Yeah, we're gonna talk about taxes. I get it. It's not a topic that a lot of people want to talk about. But you know what, it is a topic that we need to deal with, because it is a fact of life. And so I am not a proponent of of having to overpay our taxes. But I am saying that there are things we can do when we understand the tax system, to start to move things forward and reduce our taxes. It's about paying your fair share, but not overpaying. We're gonna we're gonna we're gonna pay for the meal, but we ain't gonna leave a tip on this one. All right. So that's what we're going to do. Here's, here's the reality. The more you know about the tax system and how it plays out how it works, how it operates in your life, the more you can use it to your advantage and avoid getting getting yourself into hot water or getting yourself well frankly, tossed in jail. All right. Let me give you an example that you might even know this guy, his name, Wesley Snipes, passenger 57 Or maybe it was inmate 57. I don't know. But Wesley Snipes went to a person for tax advice. You know, it was making a lot of money doing his movies, and he went to a guy by the name of Eddie Ray Cohn. Well, the last name should have been a hit. Okay. And Khan got indicted for conspiracy to defraud. But the bottom line is, here's what's happening. snipes Wesley Snipes decided that that he was what he called a fiduciary of God, therefore, he didn't have to pay taxes. Okay, he's a non taxpayer and that he he was also a foreign diplomat. So he wasn't obliged to pay taxes. And so they amended the tax returns to avoid paying taxes on those tax returns. Now, here's the thing that comes up comes about when you sign a tax return here in the US, you sign under penalty of perjury. Okay. So if there's misstatements on the return, and everything there, there's a perjury issue there. But what he did is he actually crossed that out and said, No, I'm not signing under penalty of perjury, perjury, and he claimed that he was a tax denier. And he owed at the time 2 million bucks. But he went to audit, they went to trial to the tax tax court trial. And they lost I mean, it was, it was a frankly, it was a crazy position that he took and and in the end, he lost he ended up having to pay $14 million in taxes but also spent three years in jail. Okay? Factor is is that you, when you talk about taxes, it's something that you're we just have to deal with. And if you understand the rules, we don't end up like Wesley, we don't end up in trouble. We don't end up with with with all kinds of crazy bills and then coming after us, I will tell you this. Now I've had the I don't know the fortunate experience of being an expert witness on the side of taxpayers against the IRS. But I've also had the experience of being an expert witness for the IRS. So understand how they operate. And the bottom line is that if they believe that there is fraud coming into play here or anything like that, their Criminal Investigation Division, they'll start peeling you like an onion. So you don't want to ever play that game. So let's talk about this. I want to I want to walk through some principles. that I want you to understand around the tax system, I want to give you an understanding of how the tax system works a little bit, I'm not going to make you a CPA, I'm not going to make you a tax strategist, I just want you to understand enough so you can make some decisions. And then I want to hit hit on some things that you can still do before filing your tax returns on the tax deadline, that can still reduce your taxes. All right, so we're gonna hit on some of those things. Now, mind you, you're not a client of mine, unless you are a client of mine. So this is information only I want you to take take notes, I want you to take the information, I want you to go to your tax advisor, your consultants, your advisors, and make sure that they're doing the things on your behalf, that they should be to minimize your taxes. So let's jump to the iPad. Let's walk through this. And let's have some fun. All right, here's the first thing is that you, once we understand that you actually have a partner, like it or not, and that partner is the tax the tax authorities. I mean, it is if you're in a business, or you're an employee, you have a partner, and that partner is the tax system, and there's a percentage of your income that is going to go towards taxes, like it or not, like it or not. And so that's the first thing is once you acknowledge that, and once you accept that, All right, great. Second principle I want you to understand is that relying solely on professionals isn't enough. Okay. I want you to, I want you to question your professionals. I don't want you to relinquish responsibility. Remember, the person signing on the dotted line, is you and you're signing under penalty of perjury that so that means that you don't just relinquish the responsibility for your tax returns and all that stuff to an advisor, CPA or otherwise. Now we'll do another episode around. What's the difference between an enrolled agent a tax a tax preparer, a bookkeeper, a CPA, because they are different, and they have different trainings, different expertise, they're not the same. And too often we get them confused. But I don't want you to rely on your professionals without them explaining specifically what they're doing. So you understand it. It's not to make you a tax preparer. It's to make sure that you understand what you're signing under penalty of perjury. The third thing that I think is important to understand is what is the basic tax laws, the basic tax law is this, like it or not, everything you earn is taxable. That means if you get paid, and it doesn't matter how you get paid, if you get paid in cash, it's taxable. Doesn't matter whether it's less than $600. Not it is taxable. If you get paid in goods, if someone gives you a car in return for services, it's taxable, that is income, everything you get is taxable under the tax code. And nothing you pay is deductible. That's the basic tax law. Everything's taxable. Nothing's deductible. And the rest of the volumes of the tax code all the 1000s and 10s of 1000s of pages are the exceptions to the basic rule, or the exceptions. So that's where they tell you Oh, you don't have to pay tax on that type of income, or you can pay at a different rate, or you can take a deduction. So the baseline is this, everything you receive in goods, services, or money is taxable, and nothing you pay is deductible unless it's in an exception in the tax code. Now, the fourth thing is to understand this as a business owner, as a business owner, if that's what you have side gig included, you have the ability to to take a deduction for anything that is considered what we call ordinary and necessary business expense that is ordinary necessary to the business I would add something else here that it is not lavish, okay. That it is customary in in there so. So if it is an ordinary and necessary business expense for purposes of running the business, it is typically deductible unless excluded by the code. So you want to you want to look at and all of that and say, Do I have a listing have I have I got record keeping of all the ordinary and necessary business expenses that I've got that the next piece is for you to understand that there's actually a difference between deductions and credits. And I want to walk through an example of this so you understand that a deduction is something you pay, which reduces the income which is where you put your taxes. against a credit is something that is offsetting the tax directly. This will clarify this, when I run through an example, I'm gonna walk through a chart on this to the number six is to understand that capital gains and ordinary income are different. Here's the difference, okay. And why it's different is that there's different tax rates, maximum tax rates. Depending on state between capital gains and ordinary income, ordinary income is what you is the income you get for services. For the most part, it's your wages, it's your business income, it is it is ordinary income, and it is taxed at the rates. That Are we have a graduated scale of rates here in the US, so it's taxed at your appropriate tax rate. Capital gains, however, is when you sell something, a stock or a piece of real estate and asset for a gain. If you hold that asset for more than a year, you pay at the capital gains rate, which could be anywhere from zero to 20%, not including state.

Mel Abraham  11:15  
So knowing the type of income you have is important, because that will impact your taxes. And number seven, is to always, always review your tax returns in detail. In other words, when you get the returns from, from your CPA from your tax preparer, you don't just sign them and send them in, you review them and you make sure that the numbers are correct, you review them. And if you have questions you get on the phone with them, you have them walk you through it, it is important for you to understand in detail what it is you're signing and what it is you're filing, because you're the one that's ultimately responsible for it, okay, and so we don't just rely on the professional and we don't just sign them, we review them. So we understand that because now when you understand them, you can start asking more pointed questions to try and reduce the taxes. Further, that leads me to let's understand how the tax system works. And then I'm going to take you through some things that you can still do before tax filing time to kind of give you some help in reducing taxes. Alright, so the first thing is this is to understand that our tax code can be our friend. When we understand it, we can use it where we take and get deductions and get a write off. So we reduce our taxes. In effect, the tax system pays a little bit subsidizes some of our expenses, but here's how it works. You get income, you make money, and you take deductions. So I bring in revenues from sales from services, I pay internet costs or office expense, that's a deduction that leads to something called taxable income. Okay, that taxable income is where we apply the the tax to so the first thing to understand is deductions are the things that we can take that are ordinary and necessary against the income we generate, which gets us to something called taxable income. From there, we figure out the tax, you know, it could be depending on the kind of entity you are, you know, I don't know, maybe it's 15%. It could be more, it could be a lot more. All right. But you figure out the tax, and then from the tax, you look and see, are there any credits, I can use child credit, you know, is one, one, there's a number of credits, energy credits, that actually will offset the tax. And then after credits, that's the net tax you pay. So let's just run through some numbers. So you start to see how this can play out in in doing that, let's assume for argument's sake, that you make $100,000 in income, and you have as an as deductions $20,000 In deductions. So you'll take the 100,000 minus the 20, that gives you $80,000 in taxable income. Let's assume for argument's sake, that the tax rate that you're at is 40%. So on that $80,000, you're going to pay 40% or $32,000 in tax, so your tax on your taxable incomes 32,000. But you have a credit maybe it's a solar credit, maybe it's an energy credit, maybe it's it's some other credit that the code allows, and that credit is $10,000. So the net tax you will pay is the tax minus the credits, which means that you only pay 20 $2,000. So you can see the difference is that a deduction reduces the income, which makes it which is which the tax is applied to, but a credit is a direct offset dollar for dollar against the tax. Okay? So that's the difference. And this is why it's really important because I hear this all the time, people say, Oh, well, you know what, I'm going to go buy something because I, I want to save in taxes. Well realize that a deduction only saves you the tax rate. So in this example, if I spend $1,000, and my tax rate is, is 40%, I save taxes of $400 40% of the 1000. But if we think about it from a cash standpoint, $1,000 Saving $400 I still I'm still out 600 bucks. So the question is, do you really need to spend the money or do you want to just keep the $600 in your pocket, see too often we're willing to go spend the money to save 40% or 30% $400. But we're ultimately out 600 bucks. Now, if you happen to be in a situation where you're going to buy a new camera anyways, or you're going to you're going to buy a new computer anyways, then just accelerated and take the deduction, that's great. But we don't spend money just to save taxes if we weren't going to spend the money anyways. Okay, because in the end, your net cash goes down. Alright, hopefully that makes sense. So, with that understanding, let's talk about some things you can do before the tax filing time to still reduce your taxes. Okay. Some of these are things that I want you to go and look for. And, and some you may be talking to your advisor about. But here's the first is this. There is something called 179, section 179. Now, typically, when you buy a piece of equipment, or a computer, or a at an asset that you're going to use for a period of years. Even if if you spend $5,000 on a computer. Typically, they don't let you take the full deduction for the $5,000, they tell you to depreciate. In other words, if you're going to use it for five years, you'll take $1,000 a year now I'm not going to go into the depreciation rules, there's some there's tables and all that stuff. But literally when you're buying assets that can be depreciated over three to seven years in real estate is longer. But the point being is this, just because you wrote a check for a piece of equipment, doesn't mean you get the deduction. Today, it might be taking a portion of it over a period of years. And it's important for you to understand that but there is this provision in the code called Section 179. It's called Section 179. Because it's the Internal Revenue Code section 179. That says, when you buy personal tangible property, okay, could be a computer could be desks and chairs, when you buy personal tangible property. And it is used 50% or greater than 50% in the business. So it has to be used for business greater than 50%, you can actually expense it in the year of purchase. So if I buy a $5,000 thing, instead of instead of taking it over for three to five, three to seven years, I can literally take that $5,000 deduction, it's called 179. This year, you can do that for up to $1,080,000 worth of purchases. So if you bought a bunch of equipment, you may be able to take the full deduction in 2022. In 2023, that number goes up to 1,160,000. But it is limited by your income. So if you if you don't have enough income to take the deduction, you can't use it to make a loss, but you'll carry it over. So just know that there's some limitations. And when it comes to vehicles, this rule is very different. And there is some limitations there. But the bottom line is that I want you to go back and I want you to look at the things that you purchased and see if any of those things that you can accelerate the deduction under 179 Because you have up to $1,080,000 to take the deduction in the single year. Reduce the taxes Okay, that's the first thing and it's a huge one second, meals entertainment. Here's the deal. What happened here is that it it, if you look at meals entertainment, historically, we were only allowed to take 50% of meals entertainment. 

Mel Abraham  20:12  
So if you spent and it's actually just meals now. But if you spent $100 on a meal, you would get a deduction for $50. But with with the pandemic, they changed that. And they said, they will give you 100% of the deduction for meals, for this year, now, it was for 2021 and 2022, that you can do that. So if you spend $100, on meals in a restaurant, that's the caveat in a restaurant, you can take the fullness deduction of 100 bucks. If it's not in a restaurant, then you can, you can only take 50%. So it's important. And what this was doing is trying to get people back out, dining out and using it for business, and to try and incentivize it. Now. Remember, this is good for 2022. For 2023, it's it did not get extended. So you're back to the 50% rule. Entertainment is not deductible. So we're only talking about meals, and we're talking about meals in restaurants, meals and restaurants for 2022 are 100% deductible. Now, that means that you need to have the business purpose who was for what you discussed all that documentation in place to be able to take that deduction, but go back and separate out the meals that were the restaurants and meals that weren't and make sure you're getting the full deduction for the meals that were in restaurants, because in 2022 is the last year you can get 100%. Okay, if it is, if the meal was less than $75, you're not going to be required to keep as much documentation but keep the documentation, it's important to have it just to prove it, because our tax system, unfortunately, is the one place where you are guilty till proven innocent. All right. So that leads me to the next piece. And the next piece is this is retirement plans. Now we talked about building financial freedom and wealth and all that. And I truly believe that we should be getting involved in retirement plans, but many of them, you have to have done it before the end of the year. So if you missed out before the year, there are still some things you can do, for instance, you can still contribute to an IRA. Assuming you're not disqualified up to $6,000 per individual, if you're under 50, for over 50, you can do up to 7000, as long as you make the contribution prior to the filing date of the return without an extension. So April 15. So so you're able to make that deduction in 2023, those limits are going to go up by $500. So it'd be $6,500.70 $500. But the bottom line is that if you're if you need to take a deduction, and you want to try and reduce your taxes, look at the possibility of putting money into an IRA account for you or your spouse, or you and your spouse $6,000 Each or, or $7,000 Each, depending on age to get and reduce that now, if you have a business, you still can do something called a SEP IRA. Okay, now the SEP IRA, it's possible and you take 25%, up to $61,000, you can do that. However, however, you must cover all your employees. So it's got to be the same percentage for everyone to do that, but if you're sitting back and saying I got this income, and I'm trying to figure out how to reduce my taxes, instead of instead of paying it to to the government in taxes, why not put into a retirement account that you will get that money back somewhere down the road, in the form of retirement, and so you have IRAs, and you have the SEP IRA as a possibility. Okay, then, the other thing to think about is this, I want you to consider that make sure that you got all of your income. That means that if you've got income from Venmo, if you got income from PayPal, if you got him coming from from Xcel that you've accounted for it that you've you've done that it's not one of those out of sight out of mind. Remember, everything you receive is taxable unless it's excluded by the code. All right. So I want you to make sure that you've accounted for all of the income because here's the deal. If you take a deduction, and the IRS or the government comes in and says we are not going to allow the deduction Should, then all that's going to happen is they're going to slap you on the hand, they're going to say, we're not going to allow the deduction, you owe the tax, you're going to pay some, some interest, maybe some penalties. And you're done. And you go along your way. Taking a deduction that they disallow is very different than not putting your income on your tax returns. The fact of the matter is, is that we want to minimize taxes, not evade taxes, evasion, is illegal minimization, is legal. Okay, so we're going to minimize our taxes, but we're going to recognize 100% Of all the income no matter what the sources are, no matter what account they go into. So make sure that you've accounted for your pay pal, your, your Venmo, your Zell, whatever other accounts that are that are out there to make that happen. The other thing to do is this. I don't know if y'all are doing this. But if you are involved with any kind of crypto transactions, these things are a minefield, I'm going to do a whole separate episode on crypto taxes. Because what we what many people don't realize is, every time you do something with crypto, unless it's just moving it from one of your accounts, whether you if you use crypto to buy something, if you use crypto to, to to pay for something that is a taxable transaction, depending whether the crypto had gone up or gone down, not only are you putting money out, you're going to trigger a tax. I'll go deeper on that in another episode. And we'll make sure that we hook it up in the show notes here. So you have access to it. But beware of that if you are doing crypto transactions, that you need to be able to track them, give them to the taxpayer because they will have a tax impact. And in fact, on the tax returns, there is a question that is asked of Did you have any kind of crypto transactions during the year they're taking it seriously, they have task forces that are going after it. And so it is really important that you nail this thing down because it can be a problem. When you listen to the other episodes strictly on crypto taxes, you will see that crypto taxes are all over the place. Alright, that leads me to number six. Number six is charitable donations. Listen, they used to because of the pandemic, they were allowing you to take an above the line deduction of three to $600 whether you're married or single, depending where you if you didn't itemize your deductions, you still would get this charitable donation Well, that went away this year. So you can only take charitable deductions if you can itemize your tax return meaning that you have home mortgage and you have real estate taxes, and you have medical expenses, and you have enough to get over what we call the standard deduction. Okay, so, so you may or may not get benefit out of this. But I want you to go back and I want you to look at Have you made donations, cash donations, and non cash donations, do you have the receipts, accumulate them and figure out how much they are to make sure that you get the proper credit for that now, it is terrible donations used to be allowed up to 100% of income, but it went down to 60% of income in the current year. Okay, which leads me to number seven, and that is the child tax credit. This one was good. And they just changed it. Last year was much better. But here's the deal. For every dependent child you have that is under 17 years of age, you can get a child tax credit of $2,000. Remember, the tax credit is a direct offset for the tax. Okay. Now, unlike last year, last year, the credit was 100% fully refundable, meaning that if you didn't have income, if you didn't have tax, but you had the tax credit, you would get a check in the mail. Well, it's not 100% refundable. Starting this year, you can get up to 1500 bucks back of the $2,000 credit but you have to have certain income and income limitations. But bottom line is to make sure that your tax repairs are that you're taking consideration any child tax credit that you are qualified for, because it could be an offset to your taxes of up to $2,000 per child as long as they're under age 17. And the last thing oh man,this one. It is it's just something to think about.

Mel Abraham  29:50  
A refund is not a gift. I know I know I hear people go I got a great refund. It's like a gift. No a refund is a mistake. It is Not a gift. Here's what it is, when the government is refunding your taxes, what they're saying is you paid too much in, I don't want you overpaying your taxes during the year, I want you to have the use of the money so you can invest the money, build your wealth, get yourself out of debt, giving extra money in taxes to the government. So you get a refund at the end of the year is a mistake. Because one, you're not getting the growth on the money. You're not able to invest it and they're not going to take care of it. So now you got to wait. So don't look at a refund. If you're getting a big refund. I want you to relook at how you're doing taxes and say wait a second, I need to adjust it. So I'm I tried to get my clients right on the line. They're either paying a little bit or getting a little bit back. But that's it. I don't want huge refunds. The government isn't a savings plan. You need to take management of your your income, your taxes so you can take and maximize every dollar to work for you and your financial future. So I hope that this helps Listen, there is a ton of stuff with respect to taxes and the tax man is coming. The tax woman is coming however you want to look at the deadlines are here but there are some things you can do. And I hope that you took some notes I want you to sit with your tax preparer. I want you to talk to your CPA and I want you to make sure that they're getting every dollar every dime you deserve in tax deductions. So you pay the minimum tax legally possible. Without putting your foot over the line without doing thing that is untold, inappropriate or, or wrong, but you're paying your fair share. Remember, we're gonna buy dinner, but we're not gonna leave a tip. I hope that this helps you. All right, go out there, minimize those taxes, maximize your investing, maximize your life and as I always say, always, always strive to live a life that I'll lose you. I'll see you in another episode of the Affluent Entrepreneur Show. Cheers. Thank you for listening to the Affluent Entrepreneur Show with me your host Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com/group and I'll see you there.