Tax Planning

"Unquestionably, there is progress.  The average American now pays out twice as much in taxes as he formerly got in wages."  H. L. Mencken, early 20th century journalist.

The above quote by Mencken is really an understatement.  About the middle of May the average American reaches what has been publicized as the "Tax Freedom Day."  This is the date at which the typical American taxpayer stops working to pay combined federal, state and local government tax liabilities and starts working for his or her own self and family.  The world has seen many revolutions started over lesser levels of wealth confiscation.

In our parents’ day, the Tax Freedom Day was in late January or early February.  The extraordinary growth has, of course, paralleled the growth in the size of federal, state and local governments.  Since most of us are neither politicians nor revolutionaries, we are compelled as law-abiding citizens to absorb this ever‑increasing tax liability number.  Dropping out and joining some radical tax protester group is not the answer (see my discussion of this topic at page 42).  The solution is two-fold: get involved at some political level in changing the size and cost of government and/or take whatever steps are available to legally avoid the payment of taxes.  We will focus on the second possibility. It is relatively difficult to manipulate income taxed by state and local (municipal) governments.  This is because state and local governments tax us largely on our total or gross income.  Our federal income tax liability, however, is based not on gross but on "Taxable Income."  We reach Taxable Income after subtracting deductions from gross income.  Thus, to the extent we can increase our deductions, we can lower the Taxable Income number that is the tax base for federal income tax purposes.