Picking up Nickels

Tuesday, March 27, 2007

The Taxman Cometh

My 2006 personal income tax returns are done, and for the first time in seven years I have to write checks to both the state DOR and the IRS.

Ironically, my newfound tax debt is pretty much due to the 5%+ yields on cash that have been available for about one year now. This led to me doubling my year over year personal interest income to ~$4400 for 2006 and made it more attractive to hold cash in my S Corporation's Capital One money market account.

Since my S Corp's cash wasn't wasting away in my business checking account, I focused on completing my 2006 SEP IRA contributions at the expense of giving myself a salary bump last year. That contributed to an increase in my 2006 S Corp income, which means I owe more tax on that income. Fortunately, there is a bright side to the way things unfolded in 2006:

  • Since I owe income tax to both the state and feds, I didn't end up giving them a tax free loan like I so generously did in 2005.
  • I have positive equity in my S-Corp and can take an equity distribution based on that amount. In a nutshell, I can write myself a modest check from my S Corp's checking account without having to worry about paying taxes on that money since they are already accounted for on my 2006 personal tax return.
  • I have a decent sum of cash earning 5%+ in a variety of CDs and savings accounts

I have one client that may have a bit more work for me to do this year, so that potential increase in revenue could mean paying estimated taxes in 2007 and perhaps even approaching Roth IRA income eligibility limits this year. While that might be a pain to deal with, I need to remember that those are the kind of problems that aren't so bad to have... :)

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