Before embarking on this year’s game of taxes, review your strategy so that every transaction puts money back into your pocket.
5 min read
Opinions expressed by Entrepreneur contributors are their own.
This new year is the perfect time for entrepreneurs to revise their tax strategy: Strategic changes you make in 2019 could potentially result in millions in tax savings over a lifetime. The biggest winners will be people who know how to play the “chess” version of taxes, versus the “checkers” kind, and it’s important to understand the differences.
Related: How Amazon and Entrepreneurs Can Pay Zero Federal Income Tax, and Do So Legally
For now, instead of running from taxes, entrepreneurs should be investing time learning how to benefit from the tax code. The Tax Cuts and Jobs Act of 2017 is a game that can put a lot of money back into your pocket if you legally follow the incentives the government’s provided for deductions. So, to play this tax game of chess, entrepreneurs need to know the rules and consider hiring a good tax advisor who can explain how to maximize savings with the new tax plan.
By understanding that every transaction has a tax implication, entrepreneurs, business owners and investors can hold onto way more money. The tax law was written to reward entrepreneurs for doing things that fuel the economy, including creating jobs, investing in infrastructure and launching new products.
Employees, in contrast, typically invest little thought into their tax strategy, and that’s like playing checkers with your money — versus entrepreneurs who make (or should make) every move akin to what they’d do in a game of chess. It’s important for entrepreneurs to recognize that taxpayers can reduce the biggest expense most of us will face in our lifetime, by using the right tax strategy.
So, here’s what you need to know about this distinction:
A “checkers” tax game for employees
Most employees make simple tax choices that take very little time and are very costly. Everything is black or white (or actually black or red) in the checkers tax game, versus the multiple-player options in the chess tax game. In the latter, you may be moving around a queen, bishop, knights, rooks and pawn.
In the checkers game, employees get a job, fill out a W-4 with the number of deductions they want automatically taken out of their paycheck; then they go to work and leave everything else to their employer. Every time they are paid, the employer deducts taxes from their income and pays the government.
When it comes to filing tax returns in April, most employees elect the standard deduction, file their own taxes and/or hire a tax preparation chain. This simplified approach can cost the individual significant savings over a lifetime; most employees don’t comprehend the tax savings that they are missing.
A “chess” tax game
Business owners, entrepreneurs and investors — in contrast — are advised to play the chess tax game. For those of us putting money back into the economy as business owners and investors, there are awards from the government, and multiple incentives, including a potential 20 percent pass-through deduction, significant automobile deductions and a new, 21 percent, corporate tax rate. This chess tax game is much more complex than the checkers version and impacts every daily transaction.
Related: How Entrepreneurs Can Significantly Reduce 2018 Taxes by Choosing the Right Business Entity
As happens in the game of chess, entrepreneurs have to look at the big picture and all the players on the board before buying real estate, hiring employees or investing in precious metals. It may take hours versus minutes to make a decision because the stakes are just that high. Entrepreneurs also tend to hire tax advisors to help them develop a long-term wealth and tax strategy, because they realize that getting an expert’s advice may result in a more sustainable business, that second dream home and/or the ability to make a difference by starting a foundation.
The fun part of the “chess” game
Then there’s the fun part about this higher-level tax game — which is that the government actually wants you to accumulate wealth by following the incentives in the tax code. By spending money, entrepreneurs and investors actually create an economic stimulus.
For example, if you hire employees or contractors, there’s a deduction. If you invest in research and development, there’s a deduction — and a credit. Buying business equipment? Deduction. Investing in a real estate property for cash flow? Deductions. And if you go to dinner and discuss business with anyone, including your spouse, there may be a tax deduction there too.
Playing the chess tax game, in short, can be much more profitable than the checkers game.
The reality is that most adults play checkers with their taxes and should instead learn how to play chess in 2019 to keep more of their earned money. An employee can shift his or her tax strategy by simply starting a business on the side, setting up a legal business entity and selling products online. And these moves have never been easier, given the changes in the new tax law.
Related: The Supreme Court’s Decision on Online Sales Taxes Will Reshape Retail — Again
So, which tax game will you play in 2019? With the right advisor, you can find legal ways to play the chess tax game, pay way less tax and keep way more money.