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Financial Planning / Tax Strategies


Subject:  Re: Tax Bubble Date:  6/11/1997  10:18 AM
Author:  TMFTaxes Number:  48 of 127616

<<The moral is: Use the 401K to the max, invest the remainder Foolishly, and don't be overly concerned about the taxes. Remember, you only pay taxes if you earn money. Better to earn more and pay more, than to earn less and pay less.>>

While I agree that maxing out the 401k is an excellent idea, I'm not so sure about not purchasing the home part.

Buying a home has many benefits OTHER than tax reduction. So you really have to determine if those OTHER benefits are ones that you want to have in your life, and accept the responsibity of ownership. If you do, then buying a home may be a good thing for you. If not, don't.

But as was pointed out, I would certainly NEVER recommend buying a home just to reduce your tax liability. As was noted in the post, the interst expense could be a killer. And as was also pointed out, taxes are still a percentage game.

If you are in a combined 45% tax bracket, the $100 that you pay in interest expense to the bank will reduce your tax liability by $45, but the other $55 that you paid is gone forever. You'll never get it back unless the property appreciates this amount AFTER taxes on the gain on the sale. So handing over $100 only to receive $45 in direct benefits is really kinda silly, unless there are OTHER benefits (personal and economic)that account for the $55 that you have to pay out.

And if you don't think this is silly, send me $100, and I'll send you back $45. And I'll continue to take every $100 bill that you have.

But there are methods by which you can compare your current living expenses after taxes to the after tax cost of purchasing a home. Run the numbers and see what the economic impact is for you.

Finally, with respect to other methods to defer your tax or spread your bonus out over a number of years, there is not much that you can do. Income Averaging is long gone. Maxing out your 401k is certainly your best option to defer the income. Since you are involved with a 401k plan, you would receive NO tax benefit for making an IRA contribution (althouth you could make the contribution and allow those funds to earn tax deferred in the future), which may be an option for you.

But as W-2 employees throughout the US know, there are not many ways to defer the income that shows up in the "wages" box of your W-2.

TMF Taxes
Roy Lewis
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