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March 17, 2006

The Wall Street Journal released a poll this week (link for WSJ online subscribers):

About two in five U.S. adults did nothing this year to minimize their U.S. income tax liability, a new Wall Street Journal Online/Harris Interactive personal finance poll shows.

The poll includes a chart showing the popularity of various "strategies":

(Source: Wall Street Journal online edition.)

The listing of these "strategies" is puzzling. Many of these aren't really tax savings strategies at all, or are self-defeating if done solely to save taxes.

Let's start at the top:

"I contributed to charities." Contributing to charities is insane if done strictly as a tax savings strategy. Sure you can reduce your taxable income by your contribution, saving up to 35% on your federal tax bill. But you got that by giving away 100% of the amount you contributed. Deducting contributions you'll make anyway might be considered a tax-savings strategy, but not making the gift in the first place.

"I gave deductible monetary gifts." This seems to repeat the first question, because the only "deductible monetary gifts" are those made to charities. Gifts to your children can save taxes if they are in a lower bracket, but those gifts aren't deductible, even though your kids may seem like charity cases some days.

"I Itemized/plan to itemize travel or commuting as a work expense." Don't hire whoever wrote these poll questions to do your taxes. "Commuting" from your home to your job is never deductible. There is a deduction for travel expenses away from home if you itemize and your employer does not reimburse you, but that deduction has to exceed 2% of your adjusted gross income (AGI) to work, and it doesn't work if you have AMT. In other words, it is unlikely to apply to the 12% of taxpayers who say they will claim it.

"I filed/plan to file taxes separately, rather than with my spouse." This is a "tax-savings strategy" only in the rarest of cases. It can work if both spouses have income and one spouse has extraordinary medical expenses; separate returns can then enable one spouse to deduct expenses that would otherwise be barred by the 7.5% of AGI floor for medical expense deductions. In 20 years of tax practice, I think I've seen this work twice.

Separate return filers ordinarily go up the tax brackets much faster than joint filers, and there are some serious limitations on their deductions. Separate returns are best reserved for cases where you don't want anything to do with your loved one's return, and are willing to pay a little extra to avoid being entangled in a spouse's tax problems.


To me a "tax-savings strategy" doesn't mean just filling out a return properly. It means actually doing something to reduce your taxes. The only two strategies listed in this survey are "purchasing an IRA" and timing the sale of stocks. Both are good ideas, even if the IRA is not deductible. Some other useful strategies for your toolkit:

-Maximize your 401(k) contribution; at the very least, maximize your employer match.

-When you give to charity, use appreciated long-term stock.

-If you have the opportunity, set up and fund a Health Savings Account."

Remember that tax-saving is only a means to a goal: a full cigar box. If you have to spend a dollar to save 35 cents in taxes, you're not putting any cash in the cigar box.

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