Deducting business costs, hiring your kids can save cash at tax time

Wealthy people understand that it’s not how much money you make, but how much of that cash you keep. Earning a fat paycheck is fifine, but it doesn’t mean much if you end up paying all that income back in the form of taxes.

S mar t a c c ount a nt s us e every legal trick in the book to minimize taxes and help keep their rich clients wealthy. Even if you aren’t a billionaire, you can use a few of these tax strategies to lower your tax bill.

Deduct business costs If you run a business, you might reap big tax benefifits. Business owners who are fifiling taxes can claim potential tax deductions for some business expenses, including those tied to vehicles, meals and travel.

However, not every venture qualififies as a business entitled to such tax writeoffs. To qualify, you must intend to try to make a profifit in your business rather than engaging in what the IRS considers to be merely a hobby.” How do you distinguish between a hobby — an activi t y t h a t p r o d u c e s s o me income — and a bona fide business? The IRS consid- ers many factors that can be found on the IRS website. A few of them include:

Whether you c arr y on the activit y in a businesslike manner

Whether the time and effffffffffffort you put into the activit y indicate you intend to make it profifitable

Whether you depend on income from the activity for your livelihood

Hire your kids

Business owners who turn their venture into a “family affffair” can put more money back into their pockets. For example, hiring your kids offffffffffffers potential tax benefifits.

According to the IRS: “Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to Social Security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.”

Instead of paying high taxes on your business income, transfer some of that income to Junior as wages for services he performs. However, your child’s work must be “legitimate,” and the salary must be “reasonable,” said Gail Rosen, a Martinsville, N.J.-based certifified public accountant. Investment earnings

Instead of working for their money, the wealthy can make their money work for them, said Pompano Beach-based account a nt Er i c J. Ni s a l l , founder of AccountLancer, which specializes in accounting for freelancers.

The tax on earned income can be as high as 39.6 percent. So, consider investing in high-yielding dividend stocks. With these stocks, you collect dividends that the companies pay at regular intervals. Later, you can sell the stock after it has appreciated and pay a relatively low capital gains tax rate. People in the 39.6 percent tax bracket pay a 20 percent tax rate on long-term capital gains.

Or, you can invest in real estate by purchasing rental properties. But you should learn about your obligations as a landlord before jumping in. Before you become a landlord and rake in rent money, you have to make a substantial fifinancial investment to acquire properties and fifix them up.

Also, it can be risky to try to pick lucrative properties in the right locations. You have to fifind tenants who will pay the rent on time and won’t trash your place. Urgent repairs and periodic improvements can be costly as well.