Before-tax dollars are something quite different. While they may look the same on paper, a before-tax dollar is something of an illusion. It's worth less than 100 cents. How much less depends on your tax bracket — and how well you do your homework.
Steps to take So how do you go about maximizing after-tax dollars? Take advantage of every legitimate way to slash your income taxes, and one of the best ways to do that is to avoid last-minute attempts to make up for your failure to plan early.
If you scramble at tax time looking for receipts and other records to pass along to your accountant, you're probably missing out on some healthy deductions. So start out early this year by organizing your records as they accumulate. Set up manila folders for expense and income records and file them as they accumulate. You'll make your job much easier next April.
Don't wait until tax filing time to fund your retirement account. 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 reduces your tax load, it also adds months to the tax-deferred compounding of your investment.
Among the changes that affect you is a reduction in qualified dividend income and long-term capital gains from 20 percent to 15 percent. With tax rates on this type of income at a much lower rate than ordinary income tax rates, now is a good time to examine your investment portfolio to see if you should take some capital gains at the lower tax rate.
If you plan to rebalance your portfolio this year, it may be best to invest in quality dividend-paying stocks to take advantage of the 15 percent tax rate on dividends.
This provision of the tax law allows you to deduct the full cost of capital assets in the year of purchase, up to a maximum of $100,000. Capital equipment purchased any time during the year qualifies for this huge tax break.
"Small business owners often miss out on important tax deductions by waiting until the last minute," says Paul Rich, certified public accountant . "Among tax benefits easy to overlook are credits on both federal and state tax returns. For example, a federal tax credit can now be claimed by eligible small businesses for pension plan start-up costs. Designed to encourage businesses with fewer than 100 employees to establish retirement savings accounts for their employees, the credit equals 50 percent of the start-up costs incurred to create or maintain a new retirement plan."
The pension plan tax credit is limited to $500 in any tax year. You may claim it for qualified costs incurred in each of the three years beginning with the tax year in which your plan becomes effective. The procedure is rather complex, so you should consult with your tax adviser.
Deductions for travel, meals and entertainment also are often-missed tax relief possibilities. "Most business people do not keep adequate documentation for these expenses," says Mr. Rich. "As a result, they lose out on deductions that could provide significant tax relief."
Do you have children? Are you giving them an allowance?
By putting your children to work in your business, you convert their personal allowance into deductible compensation.