Is Saving Taxes Worth the Trouble and Cost?

There are a lot of people who are eager to help you to pay less taxes.

There are the stock brokers who are selling tax exempt bonds or the insurance agents who are pushing tax deferred annuities. Real estate sales people are quick to remind you that you get lots of deductions when you own a home and that you can make up to $250,000 of gain on a personal residence that is tax free. Sales people who are involved in one of the dozens of multi-level marketing programs will point out the variety of tax breaks that you get from owning a business. Financial planners will often offer to show you enough tax saving opportunities to more than cover the cost of their fees. Tax preparers often offer to help you save taxes by finding over-looked deductions. Lawyers often encourage you to prepare an estate plan in order to avoid federal estate taxes.

But many of these promoters are slow or reluctant to explain the downside to their tax saving tactics. With very few exceptions, there is another side to every coin that represents some kind of tax saving opportunity. And it's not just the potential risk of a dispute with the IRS. The hidden downside is the time and the opportunity cost; it is the alternatives that are not utilized.

First of all, there is the cost of hiring the professional or the hidden risks involved with whatever investment they are promoting. For example, tax exempt bonds rarely pay as high a yield as U.S. government or corporate bonds. Thus, the difference in the yield is like a hidden tax. When a U.S. bond is paying 4% and a tax exempt bond is paying 3%, that's equivalent to a 25% tax rate. And exempt bonds are subject to unique market risks that require expertise to evaluate. An annuity might be a simple way to reduce your taxable income in some circumstances, but the return on your investment will be fully taxable, even if the annuity was receiving income from long term capital gains or tax qualified dividends. In effect you would be trading a potential tax rate of 15% (or even zero %) for 25% or more.

Financial planning and estate planning might result in a net tax savings over time that is in excess of the fees you will be paying to the professional. But don't overlook the time you will have to invest to engage in the process -- which will require you to gather and organize a LOT of your personal financial records and information.

I have seen very few tax saving opportunities that were not without some cost in time or money that reduces the payoff. Clearly, the goal is to find those particular opportunities that are suitable for you and that provide a payoff that is greater than the costs -- including the hidden costs.

Vern Jacobs
http://taxangles.blogspot.com/