Empty Nesters and Tax Deductions
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As parents, we work hard all our lives to help our children be smart and wise and independent. Finally, the day comes when they go off into the world on their own. As we proudly wave good by, we realize that for doing such a good job of parenting, the IRS will now penalize us.
Now that the children have grown and gone so has many tax deductions such as Personal Exemptions, Child Tax Credit, Earned Income Credit, Child Care Credit, and the College Tuition Credit. To make matters worse, at this point in life many people are at their peak earning and many have homes that are paid off or almost paid off. All this makes for higher income and less deductions which of course means higher taxes.
For single parents the problem only increases because there is not a spouse to claim, the standard deduction is lower and if they had children, they usually had some sort of child support that was non taxable and has now ended.
What is a person to do? One of the popular ideas is to pour more money into your IRA or 401K plan. As I was passing through a town in Montana, there was a bill board from a nationwide bank, that said, "Retire a millionaire with an IRA." My thought was, "in order to retire a millionaire using and IRA you would more than likely have to put a million dollars into the plan and then hope it doesn't loose money."
In defense of the bank, there is a tax deferment on contributing to those types of plans. However, there are limits to how much you can contribute each year. Also, you still have to pay on the money when you take it out and if you take it out early you must pay a 10% penalty.
It is interesting to note that 401K plans were originally set up for wealthy individuals to have a place to dump large sums of money tax deferred. Since then IRA and 401K plans have been changed for the average person with the idea that when people retire they have less expenses and would be better able to with stand the tax hit. As time has proven, most retired people have less expenses, but also have less income and so paying the taxes is usually a burden.
So, what's a person to do? The secret to paying less income taxes is simple. Find ways to make the things you already spend money on tax deductible. The best way to do this is to turn a hobby or interest into a business. There are many things you can deduct when you own a business that you cannot deduct ordinarily.
Look at the example of a person why has a hobby of wood working. This person has a room in their home and has bought many tools and he loves to tinker and make decorative items out of wood. If he turns it into a business, now he can deduct all the tools and supplies he used to make the items.
The room you use in your home can be deducted by claiming a percentage of the rent, interest, taxes, utilities, insurance, and repairs to the house. All of those things you are going to pay for whether you have a business or not. Much of your travel expense may be deductible now.
As you travel to visit your children and grandchildren you can make the trip deductible by checking on new ideas and materials that will improve your products, attending trade shows, etc. You may travel to craft and trade shows to sell your products. If you choose to sell products over the internet, your internet costs will now be deductible. The list goes on and on.
Besides tax deductions, owning your own business can be part of your retirement plan. After you retire, you can keep doing what you love and create income to supplement your retirement and still keep the tax deductions. If you choose a business that you can train others to do, then that business can produce income after you stop and generate passive income to supplement your retirement.
The good news is that we don't have to be penalized for being a good parent. There are many laws within the IRS code that we can use to structure our tax situation. Doing the things in life that you enjoy and are passionate about will always create success and joy.
About the Author
Christopher Anderson feels that peoples' money does them and the economy more good than in the Government's hands. He is dedicated to educationg people on the tax deductions that are available to them. Lone Peak Business Solutions
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