Tax Deductible – Why Is It Important and What Does It Really Mean?

Ladies, it's that time of the year again... tax time!

How many of you believe in spending money because it is tax deductible? 

For those of you who like to spend money solely because the expense is tax deductible, then I have a deal for you.   How about you give me a dollar, and I will give you 30 cents back.   Sound like a good deal for you?  I didn’t think so. Yet, this is exactly what happens when you spend money for the sole purpose of getting a tax refund. In fact, I have overheard conversations between people, where they use spending additional money on a home mortgage versus what they are currently spending for rent because they can write off the interest.  Now, don’t get me wrong, as there is nothing wrong with buying a house to help build wealth by increasing your net worth. 

But, frankly, most folks have got it backwards.  The financially free and literate do not spend money for the sole purpose of getting a tax refund.  Instead, they learn ways to deduct expenses that they already have anyway through a legitimate business. 

 

I started my first business twelvve years ago. In essence, I was able to reduce my yearly tax bill by employing a simple financial model used by business owners.  Basically, it goes like this: Business owners take in income, incur business expenses, which they deduct, and pay taxes on the rest.  Employees on the other hand use another financial model.  They take in income, pay taxes, and use the rest to pay for their expenses. 

 

However, I want to re-iterate the statement I made earlier. The key here is not to spend more money in order to deduct the expenses from your taxable income.  That would be like spending $1.00 in order to get $0.30 back.  But, if you already have existing expenses, which can be legitimately claimed as business expenses, this is where owning a business can pay serious dividends. 

 

Consider the following scenario to illustrate this principle:

 

Say you have a business owner and an employee who each make $100,000 per year.  Assume they are both taxed at the same rate of 30%.  The business owner spends $40,000 in business expenses.  What is the result?  Well, the tax bill of the business owner would be substantially different.  Why?  Remember the financial model.

 

The business owner makes $100,000, but she gets to subtract the $40,000 from the original $100,000 and pay taxes on the rest.  So, the resulting taxable income is $100,000 minus $40,000 equaling $60,000.  30% of $60,000 is $18,000. The business owner pays $18,000 in taxes.

 

Now on the flip side, the employee makes $100,000 and is immediately taxed.  30% of $100,000 is $30,000. The employee pays $30,000 in taxes.

 

Ladies, this is a $12,000 advantage that the business owner has.  That is $1000 per month.  As the saying goes, “a penny saved is a penny earned.”  So in this case, a $1000 saved is $1000 earned.  What would you do with an extra $1000 per month? 

If you are wondering where to get the extra money to start building wealth, this could be it. You have probably already got it, and it is in the form of your existing tax bill.  Find a way to reduce your taxes.

All the best to you on your financial journey!

Aneshia

Comments

[Maria jones]

one of the best article l have come across on this precious topic. I quite agree with your conclusions and will eagerly look forward to your coming updates.

[Aneshia]

Hi Maria, thanks for your comments. All the time I meet women business owners who are excited about their business, but don't always think about the financial benefits and being wise about business expenses. On the flip side I also meet professional women who are struggling with their regular expenses and don't realize how easy it can be to consider business ownership opportunities to help improve their financial situation.

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Organized content is the best way to display or post an article, thank you for making it easy to digest your post.

[Aneshia]

Hello "Salsa" thanks for your response. I hope you gained some benefit from the content.

[jake ostler]

Great article. I keep reading things on a virtual stock exchange, are you familiar with it at all, and can you give me any insights if you are? (http://www.smartstocks.com/game-demo)

[Aneshia]

Hi Jake, thanks for your feedback. I am not familiar with a virtual stock exchange. I am however, familiar with virtual stock trading, also known as "paper trading." This technique uses the real stock market though. You set up a virtual trading account with a brokerage (optionsxpress.com is what I use). And they give you a certain amount of paper money. You execute trades in the real stock market using paper money. I used virtual trading because I wanted to practice trading with the systematic trading approach from my mentor. I wanted to feel comfortable before using my own real money.

Hope this helps!