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You Can Keep Uncle Sam's Hands Off Your Cash

By Denis Kleinfeld   |   Monday, 06 Dec 2010 08:47 AM

In the Senate Finance Committee hearing on tax reform, the Congressional Budget Office (CBO) Director presented the CBO report on Trends in Federal Tax Revenues and Rates.

Basically, what it says is that the government expects to tax more of your money.

Actually, from the government's point of view, it’s not your money. It's their money.

And what they don't get from you, they consider “foregone” revenue and therefore a “tax expenditure.”

No, I am not making this up. You keeping and spending your own money is a “tax expenditure.” A classic example of Orwellian newspeak.

According to the CBO, “tax expenditures reduce income on which taxes are levied.” To the government, a tax expenditure isn’t money which the government spends; it is money you spend and therefore it reduces the amount of income on which they can levy a tax rate and take your cash.

What this means to you is that efficient tax management is more important than ever.

Being tax-educated and adjusting your tactics can spell the difference between surviving — or even prospering — financially or letting the government keep you essentially in tax slavery.

With interest rates being low to non-existent, and the stock market being a volatile environment, it requires significant tax planning to obtain after-tax returns from the investments that are obtainable without taking undo risk.

If you're not a tax-savvy investor, then you had better hire a professional who is. The government doesn’t like to forgo its tax revenues because of your “tax expenditures.”

I have found that the most difficult part of advising on managing tax is keeping up with the never-ending changes in the tax rules.

Trying to explain the consequences of legislation or changes in regulations, court cases and everything else that goes into the tax system — without sounding like The Mad Hatter — is a daunting challenge faced by every tax-planning professional.

The CBO Report makes it crystal clear that the government does understand that tax influences the economic behavior of the taxpayers.

Without question, the tax laws of today won’t be the tax law prevailing tomorrow.

As the tax-impact changes, so should the tax-planning tactics of tax-smart, or well-advised, investors.

It is critical to think of tax in terms of the amount of money you will be paying. It isn’t just the rate of tax that is important but also what income on which the rate is applied. Or what deduction is lost.

The bottom line is to focus on what remains in your wallet at the end of the day and what amount of your hard-earned money you have successfully made the government forgo.

You have three choices of how to respond to the affect of tax on your economic lives: First, you can change the timing of your income-recognition activities; Second, you can change the form of your activities (think tax deferred-comp plans over current taxable wages); Third, you can change the fundamental way you invest and live (think holding gold or non-dividend paying stock and borrowing instead of generating taxable income).

Have you reviewed your investments as to their tax efficiency recently?

The CBO Summary Report shows that the government is thinking about it even if you aren’t.

If you want to make sure that your “tax expenditures” stay in your pocket and not the government’s, then managing your net after-tax investment exposure with your tax professional is critical.

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