There is a large population of taxpayers who want nothing to do with taxes; they simply retain all of their mail that is labeled "important tax document" and hand them off to their tax preparer sometime before April 15th. Just as they hate filing their tax returns, they love anything that can be taken as a "tax deduction." I put those words in quotation marks as often times the taxpayer receives no benefit from them.
Two common deductible expenses that regularly offer no benefit to the taxpayer are cash charitable contributions and medical expenses. It's true that medical expenses are tax deductible. But it is also true that the vast majority of people end up never realizing these deductions on their returns, as the only portion that can be used is that amount greater than 7.5% of your adjusted gross income (AGI). That means if a taxpayer's AGI is $100,000, only the amount of medical expenses over $7,500 are tax deductible. It doesn't sound too appealing anymore, right?
Cash charitable contributions that are not made solely for the tax deduction are of benefit to the taxpayer. But, when they are made solely for tax deduction purposes, the taxpayer is doing himself a disservice. Assuming a 20% tax rate, every dollar donated would save the taxpayer $.20 on his tax return. But if no cash donation is made instead, the taxpayer would save himself $.80 for every dollar not donated. That's four times the savings! Don't get me wrong, I'm not encouraging anyone to stop donating to charities; just don't do it solely for the tax deduction--it's not worth it.
Both deductions mentioned in the paragraphs above are further limited by the fact that the deduction can only be used if the taxpayer's total itemized deduction is greater than their standard deduction, making them even less likely to be useful.
Remember, you want to be sticking it to Uncle Sam, not vice versa, so don't be fooled by some of those "tax deductions."
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).