Tony's Tax Tips

The Tax Chess Board Part 1

This article originally appeared in the Pasadena Star News on March 25, 2006.

THE TAX CHESS BOARD – Sophisticated tax planning is like playing a game of chess. The moves are complex and the game has many offensive and defensive moves. You not only have to learn how each chess piece moves, but you also have to learn how to choreograph the movement of your chess pieces. The more you know about chess, the better a player you will be; the more you know about playing the tax chess game, the less tax you will pay. You can't learn how to play chess in one lesson, just as you can't learn everything you need to know about tax laws by reading one article.

C. Anthony Phillips, CPA

You have to read and understand a number of tax publications before you can effectively play the tax chess game.

IRS CHESS PIECES – The Internal Revenue Service has all of their chess pieces in place on the tax chess board.  They are very experienced at playing the tax chess game.  The IRS has all of the pawns, rooks, knights, bishops, a queen and a king sitting across the chess board and is ready to quickly capture you.  You should never forget that the IRS is a very formidable opponent.  However, even the best chess player can be outmaneuvered.

YOUR CHESS PIECES - If you are employed and only receive a paycheck, you have one pawn on the tax chess board--you.  You have no options.  Your employer calculates the amount of tax due, withholds it from your paycheck and sends it to the IRS.  You can’t play a good tax chess game with only one pawn.

A FEW MORE PAWNS - Adding the deductibility of medical expenses, state income and county property taxes, home mortgage interest, charitable contributions or miscellaneous itemized deductions adds a few more pawns to your side of the tax chess board.  While you can play better with a few more pawns, it’s still not much of a tax chess game.

ADDING MORE CHESS PIECES TO THE GAME - Becoming self-employed adds a significant piece to your side of the tax chess board.  As a sole-proprietor, additional business related expenses now become deductible, such as business related transportation expenses, entertainment and a portion of your home, if you use space in your home to administer your business.  The next article will discuss the addition of Partnership, Corporation, and Trust entities to add more chess pieces to your side of the tax chess board.

Tony Phillips, CPA has a certified public accounting firm, Phillips & Company in Pasadena and is President of Downstream Exchange Company which helps investors save taxes when they sell their investment property.

The above is not intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.