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Another wonderful income-shifting benefit you can offer family members that can help reduce your taxes is “supper money” funds. Such funds are what you agree to pay an employee when overtime work is required.
Under this allowance, you get a deduction and the employee, that is, your spouse, gets that money tax-free.7

First of all, you should be aware that you cannot pay supper money to yourself. But if you are a sole proprietor and you hire your kids and/or spouse and they put in overtime, you can pay them supper money.

Nothing in the IRS code dictates the amount you can pay in supper money. But the chief counsel of the IRS has said that their internal policy is no more than $20 a day, two days a month for every employee who works overtime. Thus, occasional supper money can be paid to any employee who works more than 10 hours and one minute a day (except yourself). That can mean tax-free money of up to $40 a month for your spouse and/or children.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

The plan works the same whether you are married or single with
children.

• Step 1: Hire your spouse (or a child) part-time. Keep in mind that this will only work if you are a sole proprietorship, partnership, LLC, or “C” corporation, not an “S” corporation.

• Step 2: Draw up formal paperwork for both a medical plan and a reimbursement plan. This can be done through a good attorney for about $500 or you can do it yourself by referring to the toll-free number and kit materials available in Appendix A of this book. Such medical reimbursement packages will include properly drawn up employment contracts, independent contractor contracts and a legal self-insured medical reimbursement plan. If you use such packages, you may still want to have your lawyer tailor it to your needs.

• Step 3: Make your spouse or child the primary insured on a written medical plan.

• Step 4: Have your spouse or child elect family coverage. This means that you, your spouse, and your kids will be covered.

Note: IRS Regulation 1.105-5 states that a medical reimbursement plan for a sole proprietorship, partnership, or LLC can have as few as one employee. Thus, if your only employee is your spouse, you can still qualify for a medical reimbursement plan.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

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A Medical Reimbursement Plan is a written plan whereby the employer (you) hires an employee (spouse) and reimburses that employee and any of his or her family members (your children), for medical expenses not covered by medical insurance.

Some of the healthcare needs that you and your family might have that
are not covered by a standard medical insurance policy include:
Eyeglasses Hearing aids
Contacts Insurance deductibles
Co-pays Dental
Orthodontics Medically-required cosmetic surgery
Preventive care Routine physicals
Well-baby care Chiropractic care
Acupuncture Other non-traditional forms of medicine
Prescriptions drugs Pre-existing conditions your policy declines to cover

These expenses can be written off using a self-insured medical reimbursement plan. This type of plan is probably one of the best tax loopholes ever created. The IRS has ruled that amounts reimbursed underan accident and health plan covering all bona fide employees, including the owner’s husband or wife and family, are not included in the employee/ husband or wife’s gross income and are therefore deductible by the owner as business expenses.6 You get a deduction and your spouse gets that reimbursement money tax-free. This money does not have to be included in the 1099 form or the W-2 statement. It is absolutely and completely taxfree! Now doesn’t that sound nice?

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

What if you aren’t married? You do have some options for taking advantage of this medical deduction:

1. You can hire your kids, if you have children, and pay for their medical premiums, thus qualifying you to take these as a business expense at 100 percent.

2. You can incorporate as a regular non-Sub “S” corporation (either as a regular C Corp or as an LLC) and deduct all the premiums.

3. You can get married!

Note: Remember from our explanation in Chapter 12, if you are structured as a Sub S corporation, you cannot deduct 100 percent of your medical insurance premiums by hiring your spouse. You must be either be a sole proprietor, a partnership, a Limited Liability Corporation (LLC), or a regular “C” corporation. In fact, if your business is structured as a regular “C” corporation, you don’t even have to hire anyone from your family to take advantage of this medical deduction—as we outlined in Chapter 12, this is one of the very big advantages of incorporating as a regular “C” corporation.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

Once you have legally hired your spouse, take advantage of their employment with a plan to pay his or her medical insurance premiums and deductibles and your children’s medical expenses. That way you can deduct 100 percent of your family’s medical insurance expenses.

Here’s how it works:
Suppose you are a sole proprietor paying $400 a month for a highdeductible, catastrophic medical insurance policy, the only policy you can get as a small self-employed business owner. If you do not hire your spouse and set up a medical benefit plan for her, then you can only deduct 60 percent3 of your family’s medical expenses, which is $240 per month out of the $400 per month premium. In order for you to get a tax deduction on the remaining 40 percent, those expenses must exceed a certain threshold (which in 2001 was 7.5 percent of your adjusted gross earnings).4 Unless you have lots of medical expenses in a year, it’s doubtful that the remaining 40 percent of your $400 a month premium will be deductible.

But what if you hire your wife part-time? Even if she has a regular W- 2 job but works for you as your bookkeeper, she is still considered an employee of your business by the IRS. As your employee, you make her the primary insured on your medical plan and select to have her covered along with your children on that plan. Now 100 percent of your medical insurance premiums are deductible.5 Why? Because these premiums are now considered a business employee expense; the IRS gives you a tax-free benefit for such premiums paid out through the business that it would not give to you if you were simply to take them as an itemized deduction as an individual on your Schedule C tax forms. In this way, you are deducting the expenses as an employee fringe benefit, and not as a regular itemized medical premium.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

Since the inception of the income tax, people have been developing methods of shifting income within family groups in order reduce excessive taxation. The concept is simple: Spreading income among several people, especially among those in lower tax brackets, is much cheaper when it comes to paying taxes, than having one person pay tax on all the income. Thus, income shifting is a technique wealthy people often use to protect valuable assets from over taxation. But income shifting is not just for the rich; anyone can take advantage of various aspects of this tax-saving strategy—married people, single people, single individuals with children, it doesn’t matter.

Tax Strategy #6: Shift part of your income to family members by hiring
and leasing from them.
Most of the income-shifting opportunities we will outline in this chapter
have the potential to put from $500 to $1,000 in saved tax dollars in your pocket—some even more.

Income-Shifting Methods
Hire Your Spouse in Your Home-based Business
If you are a sole proprietor, partnership, C Corp, or LLC, and you employ
your spouse in your business, remember that all wages you pay your“employee” spouse are subject to Social Security tax (FICA)1 taxes that can eat into your business profits. The best way to avoid all those extra taxes is to pay your spouse a minimum wage and then give him or her as many tax-free fringe benefits as possible.

In order to take advantage of the tax-free benefits we will outline in this
chapter, the hiring of your spouse must be legitimate and bona fide.2 Don’t be tempted to just call your spouse an employee without evidence of actual work performed.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

2. Get the most out of your automobile by reviewing the following automobile deduction checklist:

? Figure your car expenses using either the “Actual” method or the “IRS” method.

? Figure your business mileage by keeping a daily log, a 90-day log, a weekly log, or through the “no hassle” method.

? Determine whether you should use two cars in your business.

? Decide, based on your particular business situation, whether you should lease or buy a car.

3. This week, get the most out of your travel by reviewing the following checklist to be sure you plan your next business trip appropriately:

? Make weekends deductible by sandwiching Saturdays and Sundays between business meetings on Friday and Monday.

? Mix business with pleasure by planning meetings around play time in a destination of your choice.

? Locate seminars, conventions, or courses related to your line of work that are being held in a city to which you would like to travel and plan a trip around them.

? Hire your spouse so that you can deduct his or her expenses when they travel with you on business.

4. Using the flowchart found in this chapter and the tax saving strategies we have covered, plan your next vacation so that you can deduct 100 percent of your transportation costs, 100 percent of your on-the-road expenses, and 50 percent of your food costs.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

1. This week, review the following checklist to ensure that all of your meals and entertainment are being properly expensed:

? Pick a “trigger” that will help you remember to write down each of the substantiation requirements for meals, entertainment, and travel on the day the meal, event, or travel took place. Be sure to obtain a tax diary or use your spending booklets to track such information if you have not done so already. (Refer to the Appendix for more information on how to obtain Money Mastery Spending Booklets or the TRS Tax Diary.)

? Eat in a location conducive to business, i.e, where a contract can be signed. Remember, no floor shows. ?

Remember, you cannot deduct meal expenses when you do not attend the gathering or when you take your spouse out to eat alone. Feed and entertain your spouse along with other prospects. ?

Deduct Dutch-treat meals; document personal meal costs to support your Dutch-treat deduction. ? Talk business either before or after entertaining a prospect or client and document in the same 24-
hour period.

? Deduct home entertainment by talking business with guests at small dinner parties.

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever

What should you be writing down about your business travel in your tax
diary?

• Amounts spent daily on food, lodging, taxi fare, haircuts, laundry, and so forth.
• Dates of departure and dates of return.
• Destinations to which you traveled.
• Your purpose for making the trip.

Remember, the IRS will not allow you to make approximations.64 What do you think happens to those deductions you forget to write down? They are lost forever because you can’t go back and try to reconstruct a paper trail later. (Refer to Appendix A for more information on how to obtain Tax Reduction Institute and Money Mastery tax organizer items.)

As you can see from everything we have outlined in this chapter, there are many ways to deduct your meals, fun, entertainment, car expenses, and travel. Simply follow the guidelines we have outlined exactly as noted and be sure to document your activities daily. By following this advice, you can put thousands of extra dollars in your pocket each year. Plus, you’ll never have to worry about an IRS audit again!

Taken from : Money Mastery “10 Principles That Will Change
Your Financial Life Forever