Maximize your after-tax dollars

April 1, 2005

Making the maximum allowable deposits into your 401(k) or IRA account as early in the year as possible can reduce your tax load.

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 plan to rebalance your investment 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.

"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," he adds.

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 before proceeding.

Deductions for travel, meals and entertainment are also among the often-missed tax relief possibilities. "Most business people do not keep adequate documentation for these expenses," Mr. Rich says. "As a result, they lose out on deductions that could provide significant tax relief."

By putting your children to work in your business, you convert their personal allowance into deductible compensation.