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If you’re like most spa owners, you probably view each dollar as being the same as every other one. In truth, there are two kinds: before-tax and after-tax. After-tax dollars are real dollars; when you go to spend them, each and every one is worth 100 cents. Before-tax dollars are something quite different. Although they may appear to be the same on paper, a before-tax dollar is something of an illusion. It’s worth less than 100 cents. How much less depends upon your tax bracket and how well you do your homework.
Slash your taxes
So how do you go about maximizing those valuable after-tax dollars? By taking advantage of every legitimate way to slash your income taxes. The best way to do this is to avoid last-minute attempts to make up for your failure to plan early. The best time to reduce your 2006 income taxes—and those of every subsequent year—to a minimum is right now. Here’s how.
Organize your records. If you scramble every April, looking for receipts and other tax documents to pass along to your accountant, you’re probably missing some healthy deductions. So start out right by organizing your records well before tax time. Set up separate manila folders for expense and income records, and file them as they accumulate. You will make your accountant’s job much easier—and make your bill much lower—next April.
Maximize your tax-deferred retirement account early. “Don’t wait until tax-filing time to fund your retirement account,” advises certified public accountant (CPA) Carol I. Katz, of Baltimore. “If you have the cash available, making the maximum allowable deposits into your 401(k) or IRA account as early in the year as possible not only will reduce your tax load, but it also will add months to the tax-deferred compounding of your investment.”
If you haven’t set up a retirement account yet, now is the time to take action. “The latest increases in allowed contributions to pension plans offer important tax advantages,” explains Katz. “For example, 401(k) annual allowable contributions for 2006 are $15,000, with an extra $5,000 allowed if an individual is age 55 or older. This means that a working couple whose employers each offer 401(k) plans—even if the employer is their own corporation—can deduct $28,000 pretax, or $36,000 if both are 55.”
Of course, not everyone is in a position to make the maximum contribution, but making the highest one that your finances will permit is a wise move when considering both taxes and investments.
Take advantage of the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. The JGTRRA lowered marginal federal tax rates across the board. Among the changes that may affect you are a reduction in the tax rate on qualified dividend income and long-term capital gains from 20–15%. With tax rates on this type of income at a much lower amount than ordinary, now is the time to examine your investment portfolio in order to identify whether you should take some capital gains at the lower tax rate. “If you plan to buy any stocks this year, it may be best to invest in quality dividend-paying stocks in order to take advantage of the 15% tax rate on dividends,” notes Katz.
Take full advantage of Section 179. “One of the most important tax-savings possibilities opened up by the JGTRRA is the Section 179 deduction,” explains CPA Cheryl Pimlott, of Roseland, New Jersey. “This provision allows you to deduct the full cost of capital assets in the year of purchase, up to a defined limit.”
“If you are planning to purchase any equipment or other assets in 2007, you may want to purchase them this year,” says Navin Sethi, senior tax manager at Rothstein Kass in Walnut Creek, California. “Each year, the tax law allows you to purchase qualifying property, which you may expense immediately, rather than allowing it to depreciate over time. The maximum for this immediate deduction is $108,000 for 2006. The ability to expense your costs also applies to certain sport utility vehicles, trucks and vans, but generally is limited to $25,000.”