Taxation With Representation - Article 2.

Paying a "Fair Share" of Taxes

I prepare tax returns for all of my financial planning clients. In my experience, the only fully satisfactory way to provide sound financial planning is to integrate tax planning and preparation into the process, at each stage of the process. Virtually every financial decision made by middle class Americans is likely to and should be influenced by intelligent tax planning. Some of the usual suspects include:

	Should I pay off my mortgage sooner or later?
	How should I finance my kids' college education?
	What type of retirement savings should I use?
	When should I make my desired charitable contributions?

As my clients and I engage in these periodic planning conversations, there is always the unspoken assumption that we will be paying income taxes. And there is a companion - and usually spoken - assumption that we do not want to pay more than our "fair share" of income taxes.

What is meant by "fair share"? In this context, it means that we do not want to be paying any more taxes than we are legally obligated to pay.

Do you think that you are paying more than your "fair share"? In my experience, most of us are. But that provides only a small part of the answer.

Not all taxpayers are created equally. In fact, many among us are virtually predisposed to pay more in taxes than their legal obligation would require. Why might that be?

	I see people who are so afraid of the IRS letter that they willingly pay too much in taxes (mostly by refusing to take deductions perfectly permissible to them) - they think that they are avoiding risk, but they are wrong for it is far "riskier" from a financial perspective to give hard-earned money away like that than to pay the right amount and invest the difference;
	Some take a sort of moral or ethical stance that instructs them that it is "wrong" to take advantage of the tax code for personal "gain" - I suppose that it is not my place to interpose myself between someone and her moral sensibilities; however, I view the tax code as a set of legal rather than moral precepts. In this light, I think it could be argued that we have a legal responsibility to take advantage of all that the tax code allows;
	Many are do-it-yourselfers, individual who just know that they can prepare their own tax return. Some of these even buy over-the-counter tax preparation software to facilitate the process. It is possible to do an excellent job on your own taxes, so long as you devote the time and energy to learn how to use all of the current tax law changes as they apply to you. I have been impressed by some of these returns, but not by many of them, for even the smartest among us are likely to either pull our punches when preparing our own tax return or become too aggressive. Just as a doctor should not treat herself and a lawyer should not represent himself, I do not prepare my own tax return;
	Then there are those who suffer from procrastination or laziness, and the return is prepared on April 13, meaning that no planning has been done and that some vital tax information has probably been misplaced and that the return will just be a sloppy effort all the way around.

If you see yourself in any of these descriptions, you are just about guaranteed to be paying more than your fair share of taxes.

In our next conversation, we will talk some more about fairness - and look at some parameters that might apply to you.