Your hobby is a great way to start a tax shelter.
Most people understand that taxes are a part of living in a civilization. This doesn't stop them from finding ways to reduce their gross income or finding additional tax credits to reduce their tax bill. One excellent tax shelter is your hobby or business. This is because you write-off the losses or expenses from your business from the adjusted income paid by your employer. The one drawback is that you have to keep track of your transactions and receipts to prove the validity of your business in case you're audited.
Instructions
1. Identify a hobby or something you already like doing. Perhaps you started a jazz band and have played a few shows or you took up jewelry making. Both of these can be turned into businesses that can be used as tax shelters.
2. Estimate how much money you will spend on equipment, permits and inventory. Assume you spend $10,000 on beads and other equipment. Be sure to keep all receipts for the items purchased. Some equipment that provides a benefit over a number of years may be depreciated. The rest can be expensed during the year it was purchased.
3. Determine how much you can make from the business. Be sure to make a record, either physical or virtual, of all purchases. You can do this by keeping a diary of transactions and purchases. Most credit cards and debit cards also act as proof of purchase. The first year, your sales may be minimal. Assume your adjusted income is $50,000 and your estimated sales for the first year are $200.
4. Identify your tax shelter. Deduct your losses from your total adjusted gross income. For instance, you can subtract $9,800 ($10,000 minus $200) as your losses from your net income.
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