Wag The Dog: Don’t Let The Tax Tail Wag The Financial Dog!

TaxConnections Picture - 2014It’s that time of year again. Time to start planning for your tax situation for 2014. You might be saying, “Wait! I haven’t even finished my 2013 planning yet!”. If that’s the case, my best advice is to see your tax adviser right now. It’s already too late for most elections and planning to have much effect on the end result of your 2013 taxes. There are still things that can be done for the end of the year, but that’s another blog entirely. (See tomorrows article)

This time of year we see lots of clients coming in with questions about how they can lower their tax liability for next year. Your tax professional is great at handling just that situation. However, as with all in life, don’t lose sight of the bigger picture. A slightly lower tax liability in this tax year may mean a much larger one in a following tax year. Structuring your income and deductions with only one year in mind is the road to long term disaster.

Here are four examples:

In 2012 your state income tax withholding was $100 more then your allowed optional sales taxes, so you take the state withholding and get a larger itemized deductions. Did you consider that in 2013 your are probably going to have to take the amount of your state refund into income because of this? Did you consider that small increase in your AGI might make a big difference in certain credits or deductions? Did you consider that the increase in your AGI may mean your child won’t be eligible for student loans or grants based on need?

In 2012 you purchased a large piece of equipment for your business and it is eligible for the total Sec 179 deduction, the 50% bonus depreciation, or regular depreciation. You chose to take the total deduction via Sec 179 and this lowered your tax liability by a substantial amount. Great! Until 2014 when the equipment either becomes obsolete, broken or needs replacement. Now you must recapture the deduction you took in the first year and not just two years worth of depreciation, the whole thing. This boosts your taxable income up into a higher level and you lose your credits, deductions, IRA deductions, and dependency exemptions, costing you much more then it saved you in the year you took the deduction.

In 2012 you inherit a large traditional 401K from your mother. You have the option of spreading the distributions over 5 years or taking it all at once. You are 67 years old and on Medicare. Since you other income is negligible and you would like to do some traveling, you take it all at once and pay the taxes on your income for that year. It isn’t much more then if you spread it out over the 5 years. But, did you consider that due to the size of the IRA, this method is going to raise your medicare premiums for the next several years when you will no longer have the additional income to pay them?

In 2012 your broker has the opportunity to get you invested in a fund that has been turning over double digit growth for years and is only open for a short period of time for new investors. The only income you have available at this time is in a taxable brokerage account. You would love to take advantage of this bargain, but, you are committed to only investing pre-tax money into growth funds so you can defer the taxes on them. So you pass. Did you realize that even though you are in a higher tax bracket at this time you may have just cost yourself big money in the end. If the fund is earning more then the difference in your current and projected tax brackets, you lose with this situation. You need to have an understanding that “pre-tax” doesn’t mean “tax-free”.

You and your tax professional should always consider short and long term ramification of any decision you make regarding your taxes. In all of the examples listed above your tax professional, working with you and your financial planner, can help you make the decisions that are right for you and get that financial dog wagging the tax tail instead of the other way around.


Anything and everything taxes. I also write the Louisiana State book to go to our new Income Tax Course learners and the state-wide training for upper level Tax Professionals. I am an Instructor of all levels of tax related classes. I love to teach and write as well as taking the absolute best care of my clients all year round.

26 years in Law Enforcement (13 in the Air Force and 13 at the Bossier City PD), 20 years doing income taxes professionally.
My goals now are to spend many years being my 3 grandchildren’s MeeMaw, taking the absolute best care of my clients, and continually learning new things.
Taxes! I specialize in military, states, small business, and rentals.
The postings made on this site are my own and do not necessarily represent HR Block’s positions, strategies or opinions.

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