As we are counting down to December 31, 2006, the end of another tax year, it is time to see if there is anything that needs to be done in order to minimize your income taxes.
If you have a business and you want to set up a retirement plan certain plans must be set up before December 31, 2006. They include pension and profit sharing plans as well as profit sharing 401(k) plans. A SEP-IRA checlklist
If you don’t set up one of these plans you can set up and fund a Simplified Employee Pension SEP-IRA before the due date of your return (including extensions).
The SEP-IRA has different vesting requirements that a pension or profit sharing plan. The pension and profit sharing plan has several vesting schedules with the longest vesting schedule being 5 years from entering the plan (6 years from date of hire). The SEP-IRA has an immediate vesting, where your employee does not lose a share of the retirement contribution if he or she leaves after the plan is funded, usually 2 years.
The radio is constantly playing advertisements for donations of cars, boats and other items of value. Remember that only donations completed by December 31, 2006 will provide a deduction for 2006. Also, if the vehicle is sold by the not-for-profit organization your deduction is limited to the amount of the vehicle proceeds. If the vehicle is kept and used by the not-for-profit organization (not sold) then you can deduct the value of the car. The values can be obtaind from Kelly Blue Book (KBB), Edmunds, or National Automobile Dealers Association (NADA).
Buying equipment before December 31, 2006. It is only a good idea if you really need the equipment now or early next year and you know what specifically want to buy.
If you buy equipment to reduce taxes, it not only reduces the tax; however, it also reduces cash or puts you in debt for 100% of the cost.
An example, if you are in the 40% tax bracket and buy a piece of equipment with a cost of $10,000.00, you will save $4,000.00 in taxes or the equipment only cost $6,000.00 ($10,000.00-$4,000.00). However, if you didn’t buy the equipment you would have $6,000.00 in your pocket ($10,000.00-$4,000.00).
The only reason to ever buy equipment is if you need it.
Bunching of deductions, if you are planning to give charitable contributions in early 2007, paying them in 2006 reduces your income taxes by 1 year.