It’s not likely the first thing that comes to mind when looking to lower your taxes, but borrowing money (the right way) can save you thousands.
Borrow Your Way to a Lower Tax Bill
Taxes are going up. Way up. Starting this year and continuing through 2018, a series of taxes on earned income, investment income, payrolls and certain benefits will increase dramatically. Healthcare reform, the Fiscal Cliff resolution, adjustments for inflation and other factors are the root cause. The net impact on business owners will be greater than that experienced by workers because there are tax increases at both the company and the personal level. There are different strategies you can implement—with proper planning—to soften the blow of these tax increases. A single approach just won’t work anymore. It’s important to coordinate your personal and business tax planning strategies to reach the goal: paying the least amount of taxes required to comply with the law.
Borrow Money
Borrowing money is a relatively simple and proven way to lower your business and personal income taxes. Borrowing just for the sake of lowering your taxes may not be a good idea, but the ability to put that money to work and pay lower income taxes—as an added benefit—is attractive. Here are some simplified examples.
For businesses, interest expense lowers your taxable income dollar for dollar. Let’s assume that your company is a single-member LLC, which for tax purposes means that your profits flow through to your personal income taxes and you will pay personal income tax rates on the business income. If you have taxable income of $300,000 and zero debt, then your tax liability would be $82,900 (27.6 percent) on this income using 2013 tax brackets.
