Tax Tips: Saving Money through Tax Exemptions and Incorporations
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Tax deductions aren't the only way for you to shave off a considerable amount of cash from your taxes. Here we briefly discuss two other possibilities: exemptions and incorporations.
Tax Exemptions
According to Wikipedia, a tax exemption is:
An exemption to the tax law of a state or nation (i.e. the United States) in which a part of the taxes that would normally be collected from an individual or organization are instead forgone.
Now, don't let that lengthy sentence confuse you – a tax exemption basically means you don't have to pay some part of it. There are many reasons why; usually, tax exemptions are there to reduce the tax burden from some sectors of society. Common criteria used for tax exemption include the taxpayer's age, the taxpayer's income level, the amount of public service the person has rendered, and the types of homeowner's property.
In 2005, an individual taxpayer received a $3,200.00 personal tax exemption, another $3,200.00 for his/her spouse, and a smattering of $3,200.00 exemptions for dependents (one for each dependent the taxpayer had claimed).
In addition, US non-profit organizations (such as churches and charities) are granted tax-exempt status by the government. However, there's no blanket exemption coverage for all non-profit organizations – there are conditions that depend on the type of entity.
Incorporation
A good way to ‘work around the taxes' (legally, that is) is to set up a limited liability company (LLC), then go for an S Corporation status. One advantage of an LLC is that it can elect how it should be treated by the IRS for federal and state tax purposes. An LLC avoids double taxation, and members of the company may deduct losses of the LLC on their individual tax returns.
LLCs are especially attractive to self-employed people with decent wages, such as writers. These people pay a self-employment tax, and this burden can be eased with LLCs.
An LLC can qualify for S Corporation status if it's a small business corporation, a domestic company, possess no more than 100 shareholders (all US citizens or residents), and possess only one class of stock [link]. Also, an S Corporation LLC must allocate its profits and losses to its shareholders proportionately to each one's interest in the company.
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