RTS #016 – You can’t spend your way to tax savings, but people love to try

The appeal of saving money in taxes can, at times, prompt people to irrational behavior. While there are no patriotic awards for overpaying the IRS, spending additional money you weren’t planning to just to get a tax benefit rarely puts a taxpayer ahead. The most common offenders are charitable giving, tax credits around solar panels and electric vehicles, and business expenses. These are all commonly touted online (especially on social media), but they only make sense if they relate to something that you were already planning to do.

Let’s take one of these a step further. Best case scenario, giving to charity could save a taxpayer in the highest federal tax bracket $370 for every $1,000 they give (this assumes they can itemize their deductions; only ~10% of taxpayers actually can). This means that you have to spend $1,000 to save $370, or in other words, you have $630 less than you had before. If it’s an organization the taxpayer is passionate about and wants to support, that can be a great thing. If they are just trying to pay the IRS less in taxes, that is a very expensive way to go about it.

The same is true for business owners looking to lower their tax bill through “tax write-offs”. Yes, buying a new laptop could potentially be deductible for a business. But spending $2,000 on a laptop that you don’t need to save a fraction of that off your tax bill is a losing proposition. The approach should be to make great financial decisions that are in line with your goals and only then look for a tax-efficient way to execute on those decisions.

Rockstar advisors practice having this conversation ahead of client meetings. While it’s the wrong logic, it’s common and understandable that taxpayers don’t sort these issues out on their own. Never scoff at tax questions, no matter how off the logic is. “Mr. Client, that’s a great question, and I love that you are thinking proactively about saving on taxes. While the IRS rules do provide opportunities for us to plan over the long-term, taxes is just one of the things we are going to look at as we work together on your financial plan”.

What can you do about it?

Make sure that ALL tax planning is tied to a bigger why. We love tax savings, and so do your clients, but the dollars and cents aren’t the only important thing to focus on. Include education in your discussion and guide your clients to make great decisions in line with their goals and then look for the most tax-efficient way to the strategy done.

Happy Tax Planning!

P.S. It’s here! The RTS Tax Planning Summit is next week, and we couldn’t be more excited! We have an incredible lineup of speakers and fantastic sponsors and are looking forward to the inaugural Next Level Tax Planning Summit. Virtual tickets are still available, so join in and get the actionable insight you need to make 2024 your best year for tax planning yet.

About The Newsletter

The tax code is 80,000+ pages and Google has 875,000,000 results when you search “Tax Planning”, so each week we are going to help you wade through all of that noise and get to the Relevant Tax Stuff.