OMG-It’s Tax Time! What’s The Deal With Taxes?
There’s a great scene in the movie Butch Cassidy and the Sundance Kid where Paul Newman and Robert Redford, as Butch and Sundance, are chased by a posse to a rocky crag high above a canyon with no way out. With the lawmen’s bullets flying past their skulls, Newman tells Redford that they have no choice but to jump to the stream below and hope for the best. Redford demurs and finally admits that he doesn’t want to jump because he can’t swim. Newman responds dryly:
“Why, you crazy — the fall ‘ ll probably kill ya!”
So it is with taxes. If you spend all of your time worrying about the tax implications of things instead of focusing on creating a great product and serving your customer, you won’t need tax benefits. The failed business will probably kill ya.
There’s another great adage: “don’t spend a dollar to save 20 cents” (assuming a 20% tax rate). Taxes are levied on top of earnings, not in place of them. Still, for most left-brain types, the right-brain thinking involved in tax planning is enough to make them put it off entirely. But here’s the thing: if tax planning is an afterthought, you’ll inevitably pay too much in taxes.
“I’m not good with numbers!” you say. Doesn’t matter. Either way, you have to pay your taxes. Columns like this usually follow up by saying that you should find a good tax professional and pay them a few hundred bucks to get your return done. But that’s not my advice early in your business or career. Your first few years out of school, I recommend doing your taxes on your own so you can begin to understand what gets taxed and why. There’s lots of software that can make this process less painful. You can even get free tax forms & booklets from the IRS, sharpen a pencil, and do your taxes manually. Either way, you’ll learn what the government wants to encourage, and what it wants to tax.
Before you can begin to do tax planning, it helps to know what the goal of taxes are in the first place. Seems obvious: to raise money for the government, right? Well, if that’s true, then why is there a $22 trillion national debt ? Clearly, taxes don’t raise enough money to offset all government spending. Until the 16 th amendment in 1913, there was no federal income tax at all in the U.S. Our country has spent more time without federal income taxes than with them. So what’s the point of income taxes?
The tax code does two things: encourage spending and discourage it. In general, taxes encourage spending on stuff that the government deems good for its current vision of society. Hence: business expense deductions (the government wants you to start businesses), 401K and other pension plan deductions (the government wants you to save for your retirement), home mortgage deductions (the government wants you to buy a house). The limitations placed on deductions fall into the “discourage” category—you can
deduct a mortgage on up to two homes, up to $750K in mortgage expense, but not on three, and not on the amount over $750K. “Two pretty big homes are enough,” says the government. You can deduct meals where you talk business, but only 50% of the charges, which means the government thinks that 50% of the time, you’re probably not talking business.
With a little understanding, there’s a lot you can do to take control of the tax beast.