"Over and over again, courts have said that there is nothing sinister in arranging one's affairs as to keep taxes as low as possible. For nobody owes any public duty to pay more than the law demands." -Judge Learned Hand

Billions of dollars are overpaid each year in taxes as a result of people not using all the deductions and tax laws available. According to the IRS Commissioner, millions of taxpayers are overpaying their taxes. Americans pay more in taxes each year than they spend on food, clothing, and housing combined, so reducing your taxes to the legal minimum can greatly increase your ability to build wealth. Judge Learned Hand said, "Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one's taxes." Supreme Court Justice Sutherland declared, "The legal right of a taxpayer to decrease his taxes or to altogether avoid them by means which the law permits cannot be doubted."

You can use legal entities to structure your assets and income in such a way as to reduce your taxes to the legal minimum, thereby saving you thousands of dollars each year. Such entities allow you to reduce your taxes by enabling you to maximize deductions, create nontaxable income, spread income across multiple entities, and defer income to a new tax year. For some, charitable entities (Charitable Remainder Trust, Non-Profit Corporations, and Family Foundations) can also be used to reduce taxes. The following are a few examples of strategies you can use to minimize taxes.

Minimize Social Security and Medicare Taxes

For sole proprietors, all profit (up to the taxable maximum) is subject to Social Security and Medicare taxes. In an S corporation, profits are distributed through a K-1 and are not subject to Social Security and Medicare taxes. Having your profits flow to you as K-1 income, instead of as profit from a sole proprietorship, could save you thousands each year in Social Security and Medicare taxes.

Maximize Medical Deductions

Within a sole proprietorship or an S corporation, there is a limit on the medical expenses you can deduct. With the right provisions in a C corporation, you can deduct all medical insurance premiums and all out-of-pocket medical expenses.

Home Office Deductions

If you use a portion of your home for business, you may be able to take a home office deduction.

Create Nontaxable Income

The IRS allows you to rent out your home for up to fourteen days each year without having to declare the rent as income. This is one strategy you can use to create nontaxable income. When a business partner or client comes into town and stays at your home, you can charge your corporation rent for the room. You can also have a company party or trainings at your home and rent your home to your corporation for the day. The corporation deducts the rental expense, and you enjoy the rental income tax free.

Spread Income to Children in Lower Tax Bracket

Instead of paying your children's expenses directly with after-tax dollars, hire your children and pay them for the work they do and have your children pay for their own clothes, food, school, etc. from the money they earn. You can deduct the wages as a business expense, and your children will pay taxes at their lower tax bracket.

Defer Income with Contributions to a Retirement Plan

One way the IRS allows you to defer income is by contributing to a retirement plan. A retirement plan that works well for a business with no employees (you may have another business with employees) is a Simplified Employee Pension Individual Retirement Account (SEP IRA). The IRS allows you to contribute 18.58% of net profit (maximum of $45,000 per year) to your SEP IRA for retirement. If you have $100,000 net profit in your business, you would be able to contribute up to 18.58%, or $18,580, to your retirement account. You would get to deduct the contribution, saving you thousands in federal and states taxes. Thus, money goes into your SEP IRA tax-free and grows tax-free. SEP IRA funds are taxed at ordinary income tax rates when qualified withdrawals are taken after 59.5 years of age.


This article provides some general principles and ideas to reduce taxes, but every person's situation is unique. The American Society for Asset Protection can create a customized plan based on your state, assets, business, and goals to assist you in reducing your taxes.