Some tax-cutting strategies make good financial sense. Others are simply bad ideas, often because tax considerations are allowed to override basic economics.
Here’s one example of the tax tail wagging the economic dog. Let’s say that you operate an unincorporated consulting business. You want an additional tax write-off, so you decide to buy $10,000 of office furniture that you don’t really need. If you’re in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you’ll still be out of pocket $7,200 ($10,000 minus $2,800) – and stuck with furniture that you don’t really need.
Other situations in which the focus on tax considerations ignores the bigger financial picture include:
- Increasing the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.
- Hesitating to pay off a mortgage, just to keep the interest deduction.
- Turning down extra income, due to worries about being “pushed into a higher tax bracket.” – This one in particular shows a lack of understanding of the tax code.
- Holding an appreciated asset indefinitely, solely to avoid paying the capital gains tax.
Tax-cutting strategies are part of a bigger financial picture. If you’re contemplating year-end tax-related moves, we can help make sure that everything stays in focus.