OK, everyone is familiar with the phrases above but let me make a revision to the 1st one – Don’t let the tax tail wag the dog. Any decision should make economic sense before jumping into something to save some taxes. A few examples of letting the “tax tail wag the dog” are:
- Running out to buy an OVERSIZED 6,000+ lb. SUV in the last week of December for the sole purpose of getting the extra Sec. 179 depreciation deduction. Yes it’s a great deduction and you get some tax savings but you probably can’t afford it, don’t’ need it, and weren’t going to buy it anyway.
- Holding onto a rental property that loses money every month because you get a “tax break”. Real estate is a slightly different story b/c (in most cases) you are gaining the appreciation over time but is it worth losing money each month? I would think no. Any appreciation may be offset by the accumulated losses + tax due on the gain.
- Selling stock holdings at a loss to get the deduction. This also is a case by case issue. If you have some winners triggering gains and don’t think the “losers” are going to come back then yes, it’s a great decision. If you desperately need the cash and don’t think they will come back, another good reason.
In many cases the tax affect has to be considered to determine the economic affect but it should not be considered exclusive of everything else.
Remember, in the best case scenario, for every deductible dollar you spend you save 35 cents in taxes. If you want that kind of a deal, hand me $10,000 and come April 15th I’ll give you back $3,500