Five Things You Gotta Know
About Taxes
There are certain things that you must know in life: Don't touch
a hot stove. Look both ways before crossing the street.
Always say "please" and "thank you." Don't try
to shoplift 20-pound turkeys. And there are hundreds more of
these essentials that you must know to get through life.
Some of these "must-knows" have to do with taxes. While they
are just a portion of your real life, taxes are a very
large portion. (Just take a look at the money taken out
of your paycheck next payday.)
So come and sit around the campfire as your Uncle Taxes tells
you about the five tax essentials.
1. Understand the tax
impact of any transaction before you enter into it!
Too many times I hear stories about people who made horrible
tax errors because they got ahold of some bad information.
Here are some of the common misconceptions out there:
– "I'm buying a home, and I'm going to save
a ton in taxes!" (Perhaps, but not always).
– "I'm taking an early distribution from my
retirement account because it'll only be taxed at 20%!"
(Completely untrue. The 20% is the withholding only; the actual
tax and penalties will almost always be much greater!)
– "I'm getting married, and filing jointly
will save me mucho taxes!" (OK, so marriage is not exactly
a "transaction" -- unless there's a dowry or catalog
involved. Regardless of how you acquire your spouse, though, you'll
have to deal with the marriage penalty.)
If you are contemplating a transaction with potential tax implications,
and have questions or concerns please email
us or give us a call at 408-267-1003
to set up an appointment.
2. Understand that YOU
control much of your tax destiny
It's true that taxes are certain, but the amount of taxes that
you pay aren't as certain as you might think. Consider the kid that,
at an early age, begins working and depositing some money
in a Roth IRA instead of a regular brokerage account.
The decision to invest in an account that offers tax-free
growth could add tens of thousands of dollars to his retirement
nest egg.
You can buy a home or rent, the decision is yours. There are
a number of non-tax issues that will drive that decision. But
that decision does have a tax consequence, now and in the
future (in the form of not only interest deductions but also
the potential tax-free sale of the home in the future).
How about pre-tax savings in the form of a 401(k) or other employer-sponsored
retirement plan? Sure, you can decide not to make contributions
-- and not reduce your taxable income -- instead using
that money to go out to a dinner and a movie more
often. But you'll also be paying more in income taxes than
the person who is taking advantage of his or her 401(k).
It might take some work, effort, and up-front sacrifice,
but you really can lower your tax liability with some smart planning.
If you would like to explore your options, and have questions
or concerns please email
us or give us a call at 408-267-1003
to set up an appointment.
3. Don't let the tax
tail wag the dog
Don't make an economic decision based purely and entirely on
the tax issues involved. Sometimes it might work out for you,
but in many cases you'll be very disappointed. Remember that
taxes are still a percentage game. That means that, in the 27%
bracket, a tax deduction of $100 will only save you $27 in taxes.
What happened to the other $73? Gone forever. So when somebody throws
money away and glibly claims, "It's OK, it's a write-off,"
remember that there might be tax benefits, but some
real, live cash flew out of this person's pocket.
Instead of looking only at the tax benefits of any transaction,
instead look at the economic benefits of the transaction, and
then apply the tax rules to provide the maximum tax benefits.
The more you focus on the economic realities of the transaction
and then maximize the tax benefits, the better off you'll be.
4. Get and keep those
records
Record keeping is key. Remember that deductions and credits
are not a part of your birthright. Instead, they are given to
you out of legislative grace and largesse. You have to
prove those deductions. And the only way to prove those deductions
is to maintain the underlying records.
Every year, I talk to folks who tell me how much they contributed
in clothing and furniture to their local charitable organization...
but just didn't stop to get the receipt. No receipt, no deduction.
Period. Consider somebody in the 30% combined federal and state
tax bracket. A $500 contribution would save them $150 in
taxes. Since it might take about 10 minutes to grab that
receipt, that tax saving would equate to an hourly rate of about
$900/hour. So is it really that much of a hassle to get the
receipt?
Keep those records. Keep them safe. You never know when Uncle
Sammy might want to see them.
5. Understand the basics
of the tax laws as they apply to you
Knowing the rules and reducing your tax liability (and possibly
penalties) is an ongoing process. It doesn't happen
just once at the end of the year when you're meeting with your
accountant. If you understand the laws as they apply to you,
you'll be able to make tax-smart decisions throughout the year.
This doesn't mean that you have to understand how obscure tax
issues work if they don't apply to you. But if you're planning
on selling a home, it's important that you know the rules regarding
that transaction. If you have business deductions, you'll need
to know how those deductions can be applied. The more that you
know, the better job that you can do for yourself.
So there you have it: the five issues that you really need to
know about taxes. Read them. Hold them dear. Pass them down
from generation to generation. You, your children, and your
grandchildren will be that much better off for it. And the only
loser will be Uncle Sammy.
If you have questions or concerns regarding any aspect of your
tax planning, please email
us or give us a call at 408-267-1003
to set up an appointment.
Used with permission:
5 Things You Gotta Know About Taxes
By Roy Lewis (TMF Taxes)
September 7, 2001
www.fool.com
(The Motley Fool)
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