Maximizing Your Tax Savings: Unspoken Strategies

[harlin90]

We all know about the common tax-saving tools like 401(k)s, Roth IRAs, and backdoor Roth contributions. However, there are many lesser-known strategies that can also make a significant impact on your tax bill. Here are some collections I'm looking into. I'd love to hear your thoughts and any additional tips you might have.

1. Augusta Rule (Section 280A)

This rule allows homeowners to rent their homes for up to 14 days per year without paying tax on the rental income. If you own a business, you can host team retreats, parties, events, or meetings at your home and rent it to your own business.

**Example:**
- Rent at $500 per night.
- Rent it out for 14 days, earning $7,000 tax-free.
- Your business gets a $7,000 deduction, and you receive tax-free income.

2. Deductible Business Expenses

Business owners can claim a variety of deductions that salaried employees cannot. These include:
- Travel expenses
- Office supplies
- Advertising costs
- Vehicle expenses
- Home office costs
- Internet and phone bills
- Health insurance premiums
- Education and professional development

3. Hiring Your Children

If you own a business and have children under 18, you can pay them up to $13,850 tax-free while deducting the same amount from your taxable income. Children can perform tasks like administrative work, social media management, or other age-appropriate responsibilities.

**Benefits:**
- Deduct the wages as a business expense.
- Your child owes $0 in taxes.
- They can invest $6,500 of that in a tax-free ROTH IRA.

4. Section 179 Deduction

This deduction allows business owners to write off the entire cost of certain work-related vehicles. For tax years beginning in 2022, the maximum Section 179 expense deduction is $1,080,000.

5. Forming an S Corporation
S corporations can help reduce self-employment taxes. They allow business owners to take a reasonable salary from the company’s profits, minimizing the 15.3% self-employment tax.

**Example:**
- You earn $100,000 as the sole shareholder.
- Take a $50,000 salary and $50,000 in distributions.
- Only pay payroll taxes on the $50,000 salary, potentially saving thousands.

6. Live in States with No State Income Tax
Consider moving to a state with no state income tax to save money. These states include:
- New Hampshire
- South Dakota
- Washington
- Tennessee
- Wyoming
- Nevada
- Florida
- Alaska
- Texas

7. Rent Out Your Home for Business Events
You can rent out your own home to yourself for events like birthday parties or business meetings. The income from this rental is tax-free, and you can deduct the rental expense from your business income.

**Example:**
- Rent your home to your business for $1,000 per event.
- Host 10 events per year, earning $10,000 tax-free.
- Deduct $10,000 from your business income, reducing your taxable income.

[secondcor521]

Several of these are questionable or partly questionable.  For areas that I question, if the OP wants to come back with reputable sources I think that would be great.

1.  Yes, the Augusta rule is real.  However, I think the IRS would have issues with renting it to your own business.

2.  Approximately true.  But spending $100 on any of these expenses to save perhaps $25 in taxes means it should be viewed as a "self employed discount" rather than a way to save money.  You're still out $75.  Also, there are rules and restrictions that need to be considered for several of these items.

3.  Approximately true.  There are particulars, see https://www.irs.gov/businesses/small-businesses-self-employed/family-help.  You can get in trouble over paying them excessively.  Oh, and Roth IRA limit is now $7K.

4.  Yes, there is a Section 179 deduction.  But again, you're spending $50K on a truck and saving $12.5K on taxes.  You're still out $37.5K (plus gas/maintenance/repairs/insurance/etc.)  It's a "self employed discount".

5.  Approximately true.  The IRS is on to this tax dodge, though, and you're required to pay yourself a reasonable salary and pay the appropriate SE taxes.

6.  States differ in the level of taxes they collect and in the level of services they provide.  They also differ in how they collect those taxes.  So you might not pay income taxes, but your property or sales taxes or estate/inheritance taxes may be higher.  Or you might not get the level of services you want.  I think Alaska and Nevada are slightly different because of the oil and gambling revenues, respectively.

7.  See Augusta rule under item 1; it sounds like this is a duplicate.  If you're not invoking the Augusta rule, then I don't believe the rental income would be tax free.

Other ideas:

8.  529 plans.  Often a state tax benefit, tax free growth, tax free distributions for higher education expenses, leftovers can be rolled to a Roth IRA.

9.  Saver's credit.  Lower income folks can claim the credit on Form 8880.

10.  HSA.  Tax deductible contributions, tax free growth, tax free distributions for medical, lightly taxed after age 65 for non-medical.

11.  Roth conversions.  Voluntarily converting funds to a Roth in a low tax bracket now can avoid paying higher taxes at RMD/SS time.

12.  Annual gifting.  Some folks here are going to have problems with the federal (and perhaps state) estate tax system if the TCJA doubling expires on 1/1/2026 as scheduled.  Annual gifting gets those funds and future growth out of your estate.

13.  Save wage income and then invest.  Wage income generally has income and FICA taxes.  Unearned income avoids FICA taxes.  LTBH investing avoids income and FICA, and LTCG rates are lower than ordinary income tax rates and are only incurred when you sell.

14.  Buy index funds.  Minimal to zero capital gains distributions, usually no short term capital gains distributions, and low distributions otherwise, most of which are qualified, which all reduce tax drag.

15.  Track your business expenses.  Related to item 2 in the OP, you should only deduct what you can substantiate.  Keeping organized and knowing the rules helps you get the best outcome.

16.  Spend money carefully.  Any money you spend is generally money you have to generate from income (major exceptions are gifts and inheritances), on which you have to pay income and FICA taxes.  If you spend $1, you probably have to earn $1.50 to have the $1 after taxes to spend it, not to mention the money and effort and time you spend to earn the $1.50 in terms of commuting, clothing, stress eating, etc.

17.  If you have kids in higher education, read IRS Pub 970 to learn about all the various tax benefits (529, AOTC/LLC, scholarships, etc.)

18.  Pay attention to tax law.  It changes every year, and sometimes the changes are ones you can take advantage of.  For example, I have some leftover 529 plan money for my kids.  I was going to distribute it to them, but that would have incurred some taxes.  Now, with the new 529->Roth rollover option, I can avoid those taxes and get those 529 funds into their Roths.

[reeshau]

I think the 0% LTCG bracket is underappreciated for early retirees.  Without a base income, nearly all my earnings fall here.  (I do have some interest income)  considering that, if I sell a stock or fund, it's only the gains that are taxable, I can actually access a tremendous amount of money.  I currently balance my ACA subsidy and nonrefundable credits and do a Roth conversion, to make sure I am not leaving any money on the table.  As I get more comfortable with this, I will start to fill the lowest tax brackets, too.

As it is now, It's about the same for me, tax wise, as if I were living off my Roth.  Of course, when I was working I was paying taxes on dividends, so it's not quite as good.  But it really stretches the money in taxable accounts.

[SeattleCPA]

1. Augusta Rule (Section 280A)

This rule allows homeowners to rent their homes for up to 14 days per year without paying tax on the rental income. If you own a business, you can host team retreats, parties, events, or meetings at your home and rent it to your own business.

**Example:**
- Rent at $500 per night.
- Rent it out for 14 days, earning $7,000 tax-free.
- Your business gets a $7,000 deduction, and you receive tax-free income.

The so-called "Augusta Rule" doesn't really work this way. And for the record, what Section 280A does is basically try to prevent people from writing off expenses connected to a dwelling the taxpayer uses personally.

But a little chunk of Section 280A, specifically Section 280A(g) says that in really de minimis situations you can exclude the income. Part of the "de minimis"-ness is you only rent for 14 days or less. E.g., you need to use the property yourself as a dwelling.

The reason I'm even responding to this post though: Even if you get the Section 280A(g) exclusion, you only get to deduct the payments your business makes (or that anyone else makes) in very specific and limited situations. That determination requires looking at and understanding another chunk of the tax law, Section 162.

So this generalization: Most people can't make Section 280A(g) work with self-rentals. And because of Section 162.

Also in many localities, if you're doing this sort of short-term rental stuff, the local government has rules that would totally destroy the tax savings.

[SeattleCPA]

5. Forming an S Corporation
S corporations can help reduce self-employment taxes. They allow business owners to take a reasonable salary from the company’s profits, minimizing the 15.3% self-employment tax.

**Example:**
- You earn $100,000 as the sole shareholder.
- Take a $50,000 salary and $50,000 in distributions.
- Only pay payroll taxes on the $50,000 salary, potentially saving thousands.

I love S corporations. I've helped thousands of people set up S corporations with my DIY S corporation and LLC Formation kits.(Lots of those are free BTW.) Also our CPA firm specializes in S corporations.

But the example given above is probably one where the business owner doesn't actually save taxes. And this is case even if $50K is reasonable compensation. Which it probably isn't.

Above example maybe means the S corp reduces payroll taxes by $6K-ish. That sounds good.

But the two big things the example leaves out: The costs of running the S corporation (maybe 2K if you go inexpensive) and the lost Section 199A deduction (probably $2K-ish?). And those won't be the only costs.

So, just not enough saving here.

[cpa cat]

5. Forming an S Corporation
S corporations can help reduce self-employment taxes. They allow business owners to take a reasonable salary from the company’s profits, minimizing the 15.3% self-employment tax.

**Example:**
- You earn $100,000 as the sole shareholder.
- Take a $50,000 salary and $50,000 in distributions.
- Only pay payroll taxes on the $50,000 salary, potentially saving thousands.

I love S corporations. I've helped thousands of people set up S corporations with my DIY S corporation and LLC Formation kits.(Lots of those are free BTW.) Also our CPA firm specializes in S corporations.

But the example given above is probably one where the business owner doesn't actually save taxes. And this is case even if $50K is reasonable compensation. Which it probably isn't.

Above example maybe means the S corp reduces payroll taxes by $6K-ish. That sounds good.

But the two big things the example leaves out: The costs of running the S corporation (maybe 2K if you go inexpensive) and the lost Section 199A deduction (probably $2K-ish?). And those won't be the only costs.

So, just not enough saving here.

I think people should be colder toward S-Corporations than they are. They simply aren't appropriate for a lot of people.

More S-Corp traps are:

Distributions in excess of basis; suspended losses due to basis issues. Both common when debt is in the mix, especially when combined with bonus depreciation or Sec 179. You think something is deductible? Well, S-Corp Basis is here to say "Are you sure about that?"

I looked at a case this year where an accountant put a business into an S-Corp from the formation date and it's cost the owner over $100,000 compared to Sch C.

You can't utilize the tax free kid W-2 Strategy in an S-Corp (or C-Corp).

Health insurance needs to be reported on W-2 (often missed).

Sec 105 plans can work really well in Sch C, but not at all in an S-Corp.

People don't follow the formalities required of an S-Corp and can land themselves in significant audit trouble. Are you ready to justify your reasonable compensation to an auditor? Do you understand the necessity to have your 1099 income reported in the Corporation's name/EIN? Do you understand the importance of not mixing business and personal expenses?

The tax savings from S-Corps come with a cost: Social Security contributions. That's fine if you're replacing it with something else, but many S-Corp owners don't really understand the trade-off they're making. I can still hear the tears of all the S-Corp owners crying about their lack of PPP funds and COVID Unemployment because they intentionally kept W-2 wages ridiculously low.

What's the tax savings on your $100,000 example if the owner is maxing out Social Security tax at their other job? What if you're in Tennessee and you just turned your sole proprietorship into an entity subject to franchise tax?

I don't hate S-Corps, but I'd say I reject the idea for about 50% of businesses who come to me asking if it's the right fit.

[SeattleCPA]

5. Forming an S Corporation
S corporations can help reduce self-employment taxes. They allow business owners to take a reasonable salary from the company’s profits, minimizing the 15.3% self-employment tax.

**Example:**
- You earn $100,000 as the sole shareholder.
- Take a $50,000 salary and $50,000 in distributions.
- Only pay payroll taxes on the $50,000 salary, potentially saving thousands.

I love S corporations. I've helped thousands of people set up S corporations with my DIY S corporation and LLC Formation kits.(Lots of those are free BTW.) Also our CPA firm specializes in S corporations.

But the example given above is probably one where the business owner doesn't actually save taxes. And this is case even if $50K is reasonable compensation. Which it probably isn't.

Above example maybe means the S corp reduces payroll taxes by $6K-ish. That sounds good.

But the two big things the example leaves out: The costs of running the S corporation (maybe 2K if you go inexpensive) and the lost Section 199A deduction (probably $2K-ish?). And those won't be the only costs.

So, just not enough saving here.

I think people should be colder toward S-Corporations than they are. They simply aren't appropriate for a lot of people.

More S-Corp traps are:

Distributions in excess of basis; suspended losses due to basis issues. Both common when debt is in the mix, especially when combined with bonus depreciation or Sec 179. You think something is deductible? Well, S-Corp Basis is here to say "Are you sure about that?"

I looked at a case this year where an accountant put a business into an S-Corp from the formation date and it's cost the owner over $100,000 compared to Sch C.

You can't utilize the tax free kid W-2 Strategy in an S-Corp (or C-Corp).

Health insurance needs to be reported on W-2 (often missed).

Sec 105 plans can work really well in Sch C, but not at all in an S-Corp.

People don't follow the formalities required of an S-Corp and can land themselves in significant audit trouble. Are you ready to justify your reasonable compensation to an auditor? Do you understand the necessity to have your 1099 income reported in the Corporation's name/EIN? Do you understand the importance of not mixing business and personal expenses?

The tax savings from S-Corps come with a cost: Social Security contributions. That's fine if you're replacing it with something else, but many S-Corp owners don't really understand the trade-off they're making. I can still hear the tears of all the S-Corp owners crying about their lack of PPP funds and COVID Unemployment because they intentionally kept W-2 wages ridiculously low.

What's the tax savings on your $100,000 example if the owner is maxing out Social Security tax at their other job? What if you're in Tennessee and you just turned your sole proprietorship into an entity subject to franchise tax?

I don't hate S-Corps, but I'd say I reject the idea for about 50% of businesses who come to me asking if it's the right fit.

I agree. Rules of thumb are dangerous. You want to work through the numbers.

BTW to explain why I've helped so many people, for a while I had a little website that was the second "search result" listed when someone searched on the term "S corporation." IRS was number. My little site (https://www.scorporationsexplained.com/)was number 2. (It was an informational site that sold ebooks and DIY kits.) I will mention that most of the kits were bought by attorneys.