The Tax Deductions Trap

The Tax Deductions Trap

Do not misunderstand me. Tax deductions are great. I love them. They are also often times misunderstood and thought of as a dollar for dollar savings on your taxes. How many times were you more excited about spending some money when you found out it is tax deductible? I know I have gotten excited many times about it. The problem is you have to spend more to save more. So you better make sure to buy something needed and not wanted. It is best to not fall into the tax deduction trap altogether. Let me explain.

The following example explains how tax deductions work. If you spend $1,000 on an item that is tax deductible, what you save is only a percentage. This percentage is your marginal tax rate. Say you are in the 25% tax bracket, a $1,000 deduction saves you $250 in taxes (0.25 x $1,000 = $250). A savings of $250 is great but you still spent $750.
Effective tax planning can be very helpful when done right, especially with the help of a tax expert. It is unwise to buy something based on its tax deductibility. As a rule of thumb, only buy something out of need not because of what you could save. Thinking this way will allow the deduction to be an added bonus and not the deciding factor.

Controlling what you spend will produce your biggest savings in life and business. In other words, your daily habits determine your destination. Deductions are the opposite. To save more, you have to spend more. If you struggle with controlling your spending, reach out to us for help.

I will leave you with this Proverb: "The simple believe anything, but the prudent give thought to their steps".


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