Taxes got you stressed? Reducing your tax bill doesn't have to be complicated. Tune in to this podcast episode for tax strategies to help you keep more of the money you earn - legally. Join Eric Scovill as he walks you through the basics behind taxes since so much of your income goes there!
Here are some topics from today’s discussion:
- Eric’s role as a financial planner
- Partnering with the IRS
- Understanding the basics of taxes
- The different types of taxes
- Historical tax rates for income
- Income tax rates and effective tax rates
- What would trigger an audit?
- Schedule C filers vs. S corp
- How to decide which tax structure to use
Episode Highlights:
[04:50] Partnering with the IRS: Reducing Tax Liability and Keeping More of Your Money
The key is to understand that the intention behind the tax code is to create a partnership with the IRS. They place great emphasis on providing you with tools and strategies to help reduce your tax liability. By aligning with their objectives, they offer incentives to ensure you can keep a larger portion of your hard-earned money.
[10:41] The Different Types of Taxes
- Income tax - This includes federal income tax based on tax brackets as well as state income tax. Income can be active income from employment or passive income from sources like rentals, dividends, and capital gains.
- Property tax - This is a tax based on the value of property, mainly related to real estate. The podcast mentions that property taxes vary significantly by state.
- Sales tax - This is a tax imposed on the sale of goods and services, usually at the state and local level. Some states have no sales tax while others have higher rates.
- Corporate tax - This refers to the tax imposed on corporate profits, currently at a 21% federal rate. C corporations pay this tax while pass-through entities like S corps and LLCs do not directly pay corporate tax.
- Self-employment tax - This is the Social Security and Medicare tax that self-employed individuals pay, currently at 15.3%. As pass-through entities, owners of S corps only pay this tax on salary, not distributions.
- Capital gains tax - This is the tax rate applied to profits from the sale of assets that have appreciated in value. Long-term capital gains have a lower tax rate than ordinary income.
- Estate tax - This is a tax imposed on the transfer of assets after death, currently at the federal level for estates over $12.92 million. Some states also have an estate or inheritance tax.
[26:05] How to Decide Which Tax Structure to Use
- Income taxes - C corporations pay corporate income tax at a 21% rate while pass-through entities like S corps and LLCs avoid this double taxation. However, owners of pass-through entities pay self-employment tax on their income.
- Self-employment taxes - S corps can help reduce self-employment taxes by requiring owners to take a reasonable salary, with the rest distributed as profit distributions that avoid self-employment tax.
- Legal protection - Different structures offer varying levels of legal and liability protection for owners. C corps offer the highest level of protection while LLCs and S corps offer some protection.
- Complexity - C corporations tend to be more complex due to requirements like holding board meetings, issuing stock certificates, and filing corporate tax returns. S corps and LLCs are generally less complex and have fewer requirements.
- Number of owners - C corporations can have an unlimited number of shareholders while S corps are limited to 100 shareholders and LLCs are typically limited to two or more owners.
- Estate taxes - Pass-through structures may allow business owners to transfer ownership to heirs in a tax-efficient manner to reduce estate taxes.
Overall, business owners should consider their goals, the number of owners, income tax implications, and legal protection needs when deciding between entity structures. Consulting with a tax professional can also help ensure the right structure is chosen.
