But, does this mean you should spend more money just to increase your deductions?
The answer is no! You are always better off financially if you save your money rather than spend it.
Don’t follow this logic: “Last year I spent $800 on toys and supplies, and I’ve only spent $500 so far this year. I need to go out and buy more toys so I can reduce my taxes.”
Let’s say you had $500 in your wallet. You have two choices. First, you could spend the $500 on toys and deduct the full amount on your taxes. If you do this you will reduce your taxes by about 30% of this amount (federal and state income tax, plus Social Security tax). So, you would reduce your taxes by $150. At the end of the year you spent $500 and got back $150. You now have $150 in your wallet.
What if you decided not to spend the $500? You would pay tax on a higher profit of $500 and owe $150 in taxes. But, you would have $350 left in your wallet!
Your goal should not be to lower your taxes, but to have more money after your taxes are paid. After all, if a parent offered you an extra $20 a week, you would accept the money, even though doing so would increase your taxes.
If you spend money for your business, do so because your need it for your business. Don’t spend money just so you can claim a deduction. Keeping your expenses low does pay off.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/68751915@N05/
For more information, see my Family Child Care Money Management & Retirement Guide.