Starting a business can help you save money on your taxes.  However, beyond choosing what business to go into, you also have to decide on the best form for your business: a sole proprietorship, an S corporation, a C-Corp, or a limited-liability company (LLC).  Speaking with a financial planner or CPA specializing in small businesses may help you make the best choice;  your choice will have a major impact on your taxes.  If you have children and your business is unincorportated, hire them – it will have great tax benefits.  You can deduct what you pay them, thus shifting income from your tax bracket to theirs.  Since wages are earned income, the “kiddie tax” does not apply.  And, if the child is under age 18, he or she does not have to pay Social Security tax on the earnings.

Starting a business can be quite costly; make sure you watch start up costs when starting your business.  Generally, the costs of starting up a new business must be amortized, meaning, deducted over years in the future.  But you can deduct up to $5,000 of start-up costs in the year you incur them, which is when the tax savings may be the most helpful to you.

If you choose to do your new business’ taxes on your own, make sure you don’t fall into the trap of filing certain costs as hobby costs rather than for-profit business.  If you want to file deductions as hobby costs, you still have to report any earnings as income, but there are restrictions on deducting expenses and you can’t deduct a loss.  To avoid this problem, run your activity in a business-like manner, including having a separate bank account and having business cards printed.

If you run your own businesses, you ten to have a lot of flexibility at year-end.  To push the receipt of income into the following year , delay mailing bills to clients until late in December that payment is received after December 31.  Or, pay business expenses before January 1 to lock in deductions.

If you decide to run your business out of your home, don’t be afraid to use that deduction.  You just have to use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance costs.  Some home-business operators steer away from these breaks for fear of an audit.  But if you deserve them, claim them.

If you feel comfortable starting the business and filing all the taxes on your own, make sure you take advantage of all your possible deductions.  If you are at a loss as to what form of business will work best for you, don’t want to be bothered with the financial planning or taxes with regard to the business, hire a respected business planner and/or CPA.  Either way, starting a business can save you money.

Are you one of those people that keeps every receipt, tax return, and bank statement and then box them all up at the end of the year, only to fill your spare bedroom, attic, or garage with unnecessary clutter?  Well, then this is for you.  As you finish up your tax return this year, take the opportunity to clean house.  You don’t need to keep all of those documents.  I know going paper-free sounds crazy, but if you are willing to start online banking and create a digital archive of important documents, that too, is a possibility in the near future.

Before you begin tossing, you should invest in a shredder (or a furry friend) to protect your identity.  The first things that can go are ATM receipts, bank withdrawal and deposit slips, and credit card receipts once they have been checked against statements.  You also only need to keep your pay stubs until you receive your W-2.  The last things that you can get rid of are monthly bills (credit card statements, cable bills, utility bills, etc) that you will not be using to write off business expenses.

You should talk to your local CPA in Rockville for guidance on business deductions.

The most important documents to hang on to are your annual tax returns.  You should keep the actual returns forever, but you can discard the supporting documents after 3 years.  (That’s how long the IRS has to initiate an audit)  Included in these papers are thank-you letters from charities and year-end investment statements.  Also, be sure to keep records that show the initial purchase price for stocks and mutual funds so you can calculate your basis when you sell them.

You also need to save records pertaining to your house as long as you live in it.  Records showing your purchase price and what you spend on improvements may be important when you go to sell your house.  An important tax reason to keep these records: If you sell your house at a hefty profit, certain expenses can be used to lower your tax bill.  Again, the 3 year rule applies, 3 years after the selling of your home, go ahead and shred the documents.

And finally, hold on to all records showing how much money went into and came out of IRAs and 401(k)s, especially if you have made non-deductible contributions.  This is important so you don’t overpay taxes when you withdraw funds.  Also, keep any 8606 forms on which you reported non-deductible contributions to traditional IRAs.  If you have any questions about this paperwork or want to know the best tax strategies for investing in retirement accounts, you should talk to your financial planner/adviser.