Annual Elimination of Tax Debt

Q. My husband and I own a small business and I work as a manager, full time, at a software company. Our small business, which my husband tends, does not gross much money, but every year we owe the IRS thousands of dollars because we do not have any tax shelters. We do have some business expenses, but not enough to break even.

What is your advice on how we can eliminate costly tax debt yearly? We are currently renting a house and are not property owners. We would like to own investment property, but we’re afraid we won’t qualify for a home loan because of credit history. Is there any hope for us?

A. It really comes down to cash-flow. Some things that you can do to reduce your taxes are to make sure that you are contributing as much as you can to a 401(k) if offered at work. The money comes out of your check before taxes and thus reduces your taxable income. This would thus reduce the taxes due on the self-employed income. Usually, contributing to a 401(k) doesn't impact your take-home because of the tax savings.

Secondly, you can set up a SEP for the business. This would function sort of like the 401(k) in that it would allow up to 20% to be put into a retirement account each year pre-tax. It is completely flexible so that you only contribute if the money is available.

Owning a home would provide the interest deduction but you may be limited because of your credit history and/or cash flow. I wouldn't even think about an investment property until after you have your own home.

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