Here is what our house in the Blue Ridge looks like now. See how, by writing, I can reduce tax with two offices. Hint: this message was written from my second office in Florida.
A USA Today article “7 things the middle class can’t afford anymore” (1) shows that most people who earn the median income can no longer afford to:
Buy a new car or truck.
Pay off debt.
Create Emergency savings.
Build retirement savings.
Afford medical care.
Keep dental work up to date.
Wage growth is slow, plus the middle class pays an unequal share of tax.
At the same time the top earners who are seeing their income and wealth skyrocket, pay less and less tax. Income inequality is growing this is not an easy condition to fix quickly because high earners to move or move their profits and income to lower-tax locations.
These tax moves are supported by another NYT article “For the Wealthiest, a Private Tax System That Saves Them Billions” (2). This report reveals how the very wealthiest earners have quietly reshaped tax policy so they save billions in income.
The article says: “They use esoteric tax loopholes such as routing income to Bermuda and back. At a deeper level they operate, out of public view, in tax court, and use arcane legislative provisions and private negotiations with the IRS to whittle away the government’s ability to tax them. Then they use influence to steadily change tax laws to their favor. This creates a kind of private tax system, catering to the wealthiest of all.”
The middle class, on payroll tax, is caught losing purchasing power and paying even more of their fair share of tax.
If the system is not likely to change, what can we do?
One way round this crunch is to use the same loopholes and gain the same tax breaks by having one’s own business.
For example, according to my tax adviser, if you have your own business you can gain $12,976 by using two vehicles for business. Today, tax law requires you to keep a mileage log to prove business use. That changes the game. With today’s rules, you gain nothing by using only one car. But the new mileage log rule gives you a possible opportunity to increase your tax deductions. The IRS official method for computing business use of a single vehicle is to divide business miles by total miles driven. IRS Form 4562, which is filed by proprietorships and corporations, contains spaces for up to six vehicles.
Here are the two basics that make the two-vehicle strategy work:
1: You drive more miles than your spouse, and
2: Both vehicles are somewhat close in adjusted basis.
To see if you can benefit from this two-vehicle strategy, and by how much (the minimum amount, really), apply the arithmetic from the before-and-after example below to your vehicles.
Before. You drive 2,000 personal and 28,000 business miles on your vehicle (93% business). Your spouse drives 8,000 personal miles on vehicle 2. Each vehicle has an adjusted basis of $24,000. Your maximum depreciation and/or Section 179 deduction is $22,400 (93% times $24,000) on the one vehicle you currently drive for business.
After. You switch vehicles with your spouse every week. You now have 73.7% business use of vehicle 1 and 73.7% business use of vehicle 2. This produces $35,376 in maximum depreciation and/or Section 179 deductions (73.7% x 2 x $24,000).
You gain $12,976 in new deductions ($35,376 minus $22,400). You did not have to drive one mile further or spend one additional penny. You simply had to know (as you learned here) that this strategy could work for you.
There are similar benefits by having a second home office defined in IRS publication 463 and IRS publication 587.
These are huge tax benefits that are lost when one does not have a real legitimate business, so the first step to earning and saving tax is to create a business. When one does it makes sense to keep it fun and fulfilling as well as profitable.