• Emily Sang

Top 5 Smart Ways to Reduce Taxes Legally In 2018

Updated: Jan 16, 2019

By Emily Sang, CPA and MBA (323)509-6679 桑菁会计师

At the beginning of the year, it is a great time to learn how to reduce your tax bill

permanently. The sooner you get started, the greater the range of options you would

have. Here are the top 5 smart ways to reduce taxes legally.

1 Start a Business

Most people don’t realize that being an employee is one of the worst ways to save on taxes because a huge chunk are taken out of your paycheck before you pay for anything. In the meanwhile, if you own a business with the purpose of making money, you can effectively pay for everything business related using pre-tax dollars which can save you up to 37% tax rate.

2 Buy a Home (or Two)

Uncle Sam rewards home ownership. Besides the great benefits of ownership and appreciation in value, you can deduct property tax (up to $10,000) and mortgage interest for loan balance up to $750,000 starting 2018. Better yet, if you can afford buying a second home, do it right away. Renting out the second home, you could enjoy an additional source of income and great tax benefits of running a rental property. After having lived in Property #1 for two years, you can sell it and get $250,000 to $500,000 capital gain exclusion. You then turn the Property #2 into your principal residence and buy Property #3 at the same time. You could rent out Property #3 for two years and sell property #2, and buy Property #4... Every time when you sell a property, you could take advantage of the capital gains exclusion prorated for the years of principal residence. Do this over and over, you would not only avoid paying hundreds of thousands of dollars in taxes, but build yourself a fortune!

3 Hire Your Kids and Help Them Save

Are you stocking away big money for your children’s college education? How about going one step further – hiring your kids first (provided you have a legitimate business). Thanks to the Tax Cuts and Jobs Act (TCJA), your employee-child can use his or her standard deduction to avoid paying taxes on $12,000 of 2018 wages paid by your business. Your kids can then save some or all of the wages and contribute money to a tax free account and continue earning tax free money. As for you, you get a business tax deduction for money you might have just poured on the kids anyway. The deduction reduces your federal, state income tax, as well as your self-employment tax bill (if applicable).

4 Getting Paid with Stock Options

If you are an executive or key employee of your corporation, you may be able to choose to receive your compensation in stock options. Stock options are generally only taxed when you exercise them. This allows you to control when you pay taxes.

5 Hiring a tax professional

Would you file your own lawsuit or fly your own airplane when traveling? Of course not. The same goes to file your taxes. A good CPA can save you time and money. He (she) understands the complex tax code way better and lays out great tax strategies as well. In terms of missed deductions or triggering an IRS letter or audit, a tax pro can help eliminate mistakes and ensure your returns are prepared properly.