Keep it on the table
How to maximize your after-tax dollars in 2011 — and all the years to come.
By William J. Lynott
If you're like most chiropractors, you probably think of every dollar as being the same as every other dollar. In truth, there are two kinds of dollars — before-tax dollars 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.
So, how do you go about maximizing those valuable after-tax dollars? By taking advantage of every legitimate way to slash your income taxes, and the best way to do that is to avoid last-minute attempts to make up for your failure to plan early.
The best time to reduce your 2011 income taxes to a minimum is right now. Here's how:
Organize your records. If you scramble every April looking for receipts and other tax records, you’re probably missing some healthy deductions. So, start out right by organizing your records well ahead of tax time. You’ll make your accountant’s job much easier (and 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,” says CPA Carol I. Katz. “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.”
If you haven’t yet set up a retirement account, now is the time to take action. “The latest increases in allowed contributions to pension plans offer important tax advantages,” says Katz.
The maximum allowable 401(k) contribution for 2010 was $16,500, with an extra $5,000 allowed if one is age 55 or older. This figure changes every year. As of this writing, the IRS had not yet released the allowable amount for 2011.
Of course, you may not be in a position to make the maximum contribution. For anyone in that situation, making the highest contribution that finances will permit is a wise move from both a tax and investment point of view.
Take advantage of lower tax rates on capital gains. In 2011 and 2012, the long-term capital gains tax rate will remain at 15 percent. With tax rates on this type of income at a much lower rate than ordinary income tax rates, 2011 may be the time to examine your investment portfolio to see if you should take some capital gains at the lower tax rate.
Take advantage of Section 179. “One of the most important tax savings possibilities opened up by the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) is the Section 179 deduction,” says CPA Cheryl Pimlott. “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.
Start searching now for those tax-reducing deductions that you may have missed last year. “Small business owners often miss out on important tax deductions by waiting until the last minute,” says CPA Paul Rich, of Rothstein Kass. “Among tax benefits easy to overlook are tax 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 startup costs. The credit equals 50% of the startup costs incurred to create or maintain a new retirement plan up to a maximum credit of $500.
You must use IRS Form 8881 to set up a new retirement plan and the procedure is rather complex. So, it’s important to consult with your
tax advisor before proceeding.
Deductions for travel, meals, and entertainment are also among the often-missed tax relief possibilities. “Most small business owners do not keep adequate documentation for these expenses,” says Rich. “As a result, they lose out on deductions that could provide significant tax relief.”
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 — a lunch or dinner, for example — your record should include the name of the person or persons entertained and the nature of the business discussion. You should keep receipts for any travel/entertainment expense over $25.
Put the kids to work. Do you have children? Are you giving them an allowance? By putting your children to work in your practice, you convert their personal allowance into deductible compensation. Since you’re giving the kids an allowance anyway, putting them to work in the practice, for even the simplest of chores, allows Uncle Sam to help fund that expense.
Will you use your car for business this year? 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, either actual expenses or the standard mileage rate. Katz advises that you or your accountant figure out your auto deduction both ways and use the method that gives you the bigger deduction.
When you calculate your deduction using actual expenses, you may include the business portion of all car operating expenses including depreciation, gas and oil, insurance, licenses, parking fees, registration fees, repairs, tires, tolls, and even garage rent.
If you decide to use the standard mileage rate, the 2010 deduction was 50 cents per business mile (the highest rate ever). The IRS adjusts that rate twice yearly.
Combine those pleasure trips with a bit of business. If you’re planning any pleasure trips before the end of the year, consider the possibility of adding in some business. Can you visit with a chiropractor or other type of professional to discuss management techniques? Any activity involving an attempt to improve your business skills should qualify for a partial deduction of travel expenses.
If more than half of your time will be devoted to business, you may deduct transportation costs as well as all directly business-related expenses. However, if you spend more than 50 percent of your time on pleasure, you cannot deduct the cost of transportation.
If the trip is entirely for business purposes, such as attendance at a convention or trade show related to the chiropractic profession, you may chalk up the entire expense to business.
Consider 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 actual payment.
If you’re expecting a good year in 2011, 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.
These are just a few of the ways you can reduce your income tax liability. Maximizing your after-tax dollars requires a little early planning with your tax advisor and effort on your part, but the time you spend chipping away at your income taxes may well be one of the most profitable investments you’ll make this year.
William J. Lynott is a freelance writer whose work appears regularly in leading trade publications and newspapers as well as consumer magazines including Reader’s Digest and Family Circle. He can be reached at firstname.lastname@example.org or through www.blynott.com.