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E25: The Art of Tax Optimization: Home Office Deductions, Mileage Deductions, and Fair Payments to Your Children with Thomas Castelli
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Did you know there are many tax deductions available to small business owners and real estate investors that could save you thousands per year? Tune into the latest episode of the Wealth Well Done podcast to learn about home office deductions, vehicle expenses, paying your children, and more!
Thomas Castelli from Tax Smart Investors breaks down these deductions in plain English and explains how to take advantage of them properly without raising red flags with the IRS. You'll also get tips on record-keeping to withstand an audit.
Here are some topics from today’s discussion:
- Thomas’ career background
- A look into the Tax Smart Insiders group
- What is a home office deduction and how to calculate it
- How to calculate the mileage deduction for vehicles
- The importance of paying your children
Episode Highlights:
[09:14] What Is A Home Office Deduction?
A home office deduction allows a business owner to deduct a portion of their home expenses that are related to a home office or workspace. To qualify for the home office deduction, the home office must be used exclusively and regularly for your business as your principal place of business. There are two main methods for calculating the home office deduction - the standard deduction of $5 per square foot up to 300 square feet, or the actual expenses method where you calculate what percentage of your home is used for business and allocate that percentage of total home expenses like mortgage, utilities, insurance, etc. to the deduction.
[15:06] How to Calculate The Mileage Deduction for Vehicles
There are two main ways to calculate vehicle deductions for business use - the standard mileage rate method or the actual expenses method. With the standard mileage rate method, you multiply the number of miles driven for business purposes by the IRS standard mileage rate, which is currently 65.5 cents per mile for 2023. For example, if you drove 10,000 miles for business, you would get a $6,550 deduction. On the other hand, the actual expenses method requires over 50% business use of the vehicle, and you calculate the percentage of business use to determine which expenses, such as gas, insurance, and repairs, are deductible.
[20:51] Paying Your Children
When paying your children for work performed in your business, it's important to consider a few key factors. The amounts paid should be reasonable for the work done and the child's age/ability. If the payments are below the standard deduction ($13,850 for 2023), the child doesn't need to file taxes as a W-2 employee. Providing documentation to substantiate higher rates, like online salary data, is necessary when paying over minimum wage. It's also important to keep records of the work and payments to ensure compliance during an IRS audit. Fair wages and supporting documentation are crucial when questioned by the IRS.
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