The conversation surrounding taxes has always been an interesting one. Balancing the desire to minimize tax payments while keeping more money in your pocket inevitably leads to the side of taxes nobody talks about. While this week's blog is brief, I think it dives into a topic that needs to be discussed:
First and foremost, it's important to acknowledge that there are no loopholes to entirely evade taxes. I should add – legally. Unless you want a friendly visit from the IRS, then I would recommend avoiding any tactics that suggest you’re trying to avoid the bill.
Paying more taxes is usually a good thing
Contrary to popular belief, paying more in taxes often means increased income. Remember, under the U.S. marginal tax rate system, as income increases, so do taxes. However, this increase occurs gradually, not all at once. Just because you make one dollar more than the previous tax bracket does not mean every dollar will be taxed at that new tax rate.
If you end up paying more this year than you did last year, it most likely means you have increased your income. Isn’t that the goal?
To lower taxes means you have less money today
Everyone wants to play the game of paying less in taxes, however of all the ways to lower your taxes typically means you make a sacrifice with your current financial resources. For instance, a common method is contributing to your 401(k). It can reduce your taxable income, but you no longer have that money in your pocket today. Similarly, if you can itemize deductions, such as charitable contributions, it reduces tax obligations, but the cash is no longer there to spend.
Write-offs do not equal free
For you business owners out there, it's crucial to know that writing off business expenses does not equal free. The simple way to think about it is all that you are doing is writing off the price of the item multiplied by your tax rate. In other words, that $100,000 truck you bought for your business does not mean it was a free vehicle. It just means you saved approximately $32,000 in taxes ($100,000 x 32%).
It’s one of the benefits of owning a business but it does not mean you should purchase unnecessary items thinking it’s free.
While it's not an uncommon goal to aim for minimal tax burdens, it should not be the primary objective. The goal of financial planning is minimizing taxes over your lifetime rather than just in the present. When navigating tax considerations, it's important to assign a purpose to every dollar. If that means lowering taxes today, think of what the result will be from that decision.
I hope you enjoyed.
Five Pine Wealth Management is an Investment Adviser registered with the Securities & Exchange Commission (SEC), principally located in the state of Idaho. All views, expressions, and opinions included in this communication are subject to change. The information provided should not be relied upon as the sole factor in an investment making decision. Past performance is no guarantee of future results.