It has been my privilege to serve as a tax adviser for the last three decades. Though I am pretty much retired from the tax consulting business, this time of year always reminds me of the hustle and bustle of trying to make clients’ tax problems disappear before December 31st.
In addition to deer season, the holidays and upcoming bowl games, another item on the minds of many is that realization that the fruits of their labors will soon be divided by the government. This realization usually occurs at the end of a particularly profitable year where the cash has been spent and no provision has been made for income taxes.
Alas, ‘tis human nature.
What is the truth about tax planning? Can one plan away their tax liability? Are there tax maneuvers known only to a select few which will allow bountiful income and no tax?
Let’s start at the beginning. Ours is a self-assessment tax system, which places the burden of computing the tax squarely on the shoulders of the taxpayer. Tax is necessary to fuel the engine of government. Regardless of whether we believe that government uses our money efficiently or not, none of us would want to live anywhere else. So, taxes we shall pay.
What about shady deals that promise to eliminate taxes entirely? They are just that, shady deals. Most require that you take your money “offshore” and simply lie to the U.S. government about your financial doings. Building financial security on a strategy of dishonesty and deceit doesn’t seem very attractive to me. Additionally, you can’t bring the money back into this country without your deception being found out.
What about legitimate tax planning? No problem there. Our convoluted tax law has enough twists and turns that a skillful tax consultant can usually find some legal strategy to reduce your taxes. If your personal situation is much more complicated than a W-2 form and mortgage interest statement, you need help. The law is much too complex for amateurs.
Many so-called “loopholes” are not government blunders at all, but were put in the law to encourage us to do something. If we do that thing, we reap the benefits. If we do that thing just to reap the tax benefits, we are stupid. Tax-deductible retirement contributions, accelerated depreciation on business assets and deduction for charitable donations are examples of tax benefits which were enacted to persuade us to do something.
Our attitude about our tax responsibility says a lot about us. I have known successful folks who pine away hour after hour worrying about their income taxes. These same people think nothing of paying for expensive automobiles, houses and vacations at faraway places. But just the mention of taxes puts them in a tailspin. I often wonder how much human productivity is wasted on lamenting taxes rather than being channeled into doing whatever we do for a living.
Learning to live with taxes is really pretty simple. Ask your tax consultant what percentage of your income should be set-aside for taxes and open a separate bank account for that purpose. Then as income is received, clip off the portion destined for taxes and put it in the tax account. At the proper time, send it in. Seems pretty simple, doesn’t it? The same principle applies to salaried employees. Adjust your tax withholding to an amount sufficient to cover the taxes and spend the rest with total abandon.
You say you can’t afford to do that because your bills take all your income? Well, you need to change the way you’re living. If you can’t discipline yourself to set the tax money aside during the year, how are you going to come up with it in April?
Self-employed people seem much more sensitive to taxes than those with salaries subject to withholding. I believe that is because the self-employed must actually write a check to the IRS for taxes while salaried folk never really feel the taxes being withheld. We think of our income as being our take-home pay and don’t really pay too much attention to the amount withheld, unless we have to pay more with the tax return.
I think Americans would be better citizens if there were no withholding of taxes from paychecks. Then everybody would have to write checks to the IRS. I believe that Americans would be much more vigilant about the cost of big government if we were brought face-to-face with the reality of our tax burden.
But, alas, the government knows the advantage of collecting their pound of flesh through painless withholding of taxes and would roil in terror at the thought of it being otherwise.
Though taxes are a reality, they can be minimized through legitimate planning. Many times your financial objectives can be accomplished in a tax-favored manner. Consult a pro about a customized plan. Then reconcile yourself to pay what you owe and get on with your life.
Thought for the Moment — There is nothing wrong with men possessing riches. The wrong comes when riches possess men. — evangelist Billy Graham
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.
BEFORE YOU GO…
… we’d like to ask for your support. More people are reading the Mississippi Business Journal than ever before, but advertising revenues for all conventional media are falling fast. Unlike many, we do not use a pay wall, because we want to continue providing Mississippi’s most comprehensive business news each and every day. But that takes time, money and hard work. We do it because it is important to us … and equally important to you, if you value the flow of trustworthy news and information which have always kept America strong and free for more than 200 years.
If those who read our content will help fund it, we can continue to bring you the very best in news and information. Please consider joining us as a valued member, or if you prefer, make a one-time contribution.Click for more info