Tony's Tax Tips

The Tax Chess Board Part 2

This article originally appeared in the Pasadena Star News on April 1, 2006.
THE TAX CHESS BOARD – Learning about sophisticated tax planning is like learning to play a game of chess. Your opponent, the Internal Revenue Service, has all of their tax chess pieces in place on the tax chess board and is very experienced at playing the tax chess game.

YOUR CHESS PIECES - If you are employed and receive only a paycheck you have one pawn on the tax chess board--you.

C. Anthony Phillips, CPA

Adding the deductibility of medical expenses, state income and county property taxes, home mortgage interest, charitable contributions or miscellaneous itemized deductions merely adds a few more pawns to your side of the tax chess board. While you can play the tax chess game with a few pawns, you need to add some stronger pieces in order to play the game well. Becoming self-employed adds a significant piece to your side of the tax chess board.

ADDING MORE CHESS PIECES TO THE GAME – The addition of a partnership, corporation, or trust is a chess move in the right direction. A partnership allows you to pool your skills and/or capital in a business venture with others. A subchapter C type corporation allows you to accumulate earnings in the corporation at a lower tax rate. Another favorable attribute of a corporation is being able to make contributions to various types of employee benefit programs. Living trusts allow a married couple to avoid having assets taxed at the time of death of the surviving spouse.

SOME OF THE BEST CHESS PIECES TO ADD TO YOUR GAME – The goal of tax planning is to control the timing and flow of your taxable income. You can accomplish this by investing in common stocks, real estate and retirement accounts. If your investments appreciate, your net worth will increase without any income tax unless you chose to sell them. While investment considerations may influence your tax decisions, you can choose when to sell your common stocks and real estate. You will be taxed in general at the 15% federal capital gains tax rate which is less than the maximum 35% tax rate on ordinary income.

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.