Don’t let the tax tail wag the financial dog. That was a famous saying that means don’t make financial decisions based solely on tax considerations.
Hello, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
When clients asked me about a particular tax issue that concerns cash and tax, I always tell them that “cash is king”. Tax is important, but cash will always trump tax! Pardon the pun, it was not intentional. Some tax reduction strategies make good financial sense. Others are simply bad ideas, often because tax considerations are allowed to override basic cash sense.
Here’s one example of the tax tail wagging the financial dog. Let’s say that you operate a sole proprietor consulting business. You want an additional tax deduction, so you decide to buy a $70,000 SUV that you don’t really need. If you’re in the 40% tax bracket and you deduct the entire amount, this purchase will reduce your taxes by $28,000 (40% of $70,000). But even after the tax savings, you will still shell out $42,000 ($70,000 minus $28,000) – and stuck with an SUV that you don’t really need.
Here are other examples that focus solely on tax considerations and ignore the bigger financial picture:
● You increase the size of your home mortgage just to get a larger tax deduction for mortgage interest.
● You don’t want to pay off a mortgage because you want to keep the interest deduction.
● Turning down extra income, because you don’t want to be “pushed into a higher tax bracket.”
As you can see, tax-reduction strategies are important in minimizing taxes. However, if you focus solely on the tax savings, you might lose sight of the overall financial picture. Because, you have to realize at the end of the day, “cash is king”.
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Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.