Maximizing After-Tax Dollars

Now's the time to make the most of your money by formulating a spending plan

By William J. Lynott

If you're like most eyecare professionals, you probably think of each dollar as being the same as every other dollar. In truth, there are two kinds—before- and after-tax dollars.

After-tax dollars are real dollars; when you spend them, each one is worth 100 cents. Before-tax dollars are 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.

How can you maximize those valuable after-tax dollars? By taking advantage of every legitimate way to slash your income taxes. The best way to do that is to avoid last-minute attempts to make up for your failure to plan early.

FINANCIAL PLANNING

The best time to reduce your 2011 (and every year from now on) income taxes to a minimum is right now. Here's how:

● ORGANIZING RECORDS. If you scramble every April looking for receipts and other tax records, you're probably missing some healthy deductions. Organize your records well ahead of tax time. You'll make your accountant's job much easier (and your bill much lower).
● RETIREMENT ACCOUNT. “Don't wait until tax filing time to fund your retirement account,” says 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 reduces your tax load, it also adds months to the tax-deferred compounding of your investment.”

The maximum allowable 401(k) contribution for 2011 is the same as last year, $16,500, with an extra $5,500 allowed if age 50 or older.

● CAPITAL GAINS. In 2011 and 2012, the long-term capital gains tax rate will remain at 15 percent (five percent for taxpayers in the 15 percent bracket). With tax rates on this type of income at a lower rate than ordinary income tax rates, examine your investment portfolio to see if you should take some capital gains at the lower tax rate.
● SECTION 179. “One of the most important tax savings possibilities opened up is the section 179 deduction,” says CPA Cheryl Pimlott in Roseland, N.J. “This provision allows professionals in practice to deduct the full cost of capital assets in the year of purchase up to a defined limit.”

The Small Business Jobs Act (SBJA) of 2010 increased the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years. Under SBJA, qualifying businesses can now expense up to $500,000 of section 179 property for tax year 2011.

● T&E. Deductions for travel, meals, and entertainment are also among the often-missed tax relief possibilities. Documentation for travel and entertainment expenses that you incur during the year should include a description of the business purpose and such details as where and when you traveled or entertained. In the case of entertainment, your record should include the name of those entertained and the nature of the business discussion. You should keep receipts for any expense over $25.
● CAR. Whether you use your car for business regularly or only on rare occasions, you are entitled to deduct the costs of maintenance and operation for the business-use portion.

There are two ways to calculate your auto expense deduction—actual expenses or the standard mileage rate. Katz advises that you or your accountant figure out your auto deduction both ways and use the biggest deduction.

When you calculate deduction using actual expenses, you may include the business portion of all automobile operating expenses, including depreciation, gas and oil, insurance, licenses, parking, registration, repairs, tires, tolls, and garage rent. If you use the standard mileage rate, remember that the IRS adjusts the deductible rate per business mile twice yearly. It's currently $.51/mile.

● PRE-PAYING EXPENSES. Your practice may or may not use the cash method of accounting. Under the cash method, a business recognizes income only when it constructively receives the payment. Expenses are deductible only after you make the payment.

One way to lower this year's tax bill is to pre-pay in December any expenses due in January 2012. This will increase your deductions for this year. For example, if your rent is due at the beginning of the month, date and mail the check for January rent a few days before the end of the year.

Maximizing your after-tax dollars requires a little early planning, but the time you spend chipping away at your income taxes may well be one of your most profitable investments. EB

William Lynott is an Abington, Pa.-based business writer.