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.