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Every year, as April 15
approaches, I sit down to figure out my taxes and think of the same old
joke.
Doctor: (walking into bank) I need a
loan.
Banker: No problem. I can offer you a
loan at, let’s see, 8 percent interest.
Doctor: Eight percent!!! No, no, no, that
won’t do.
Banker: I’m sorry, I can’t go any
lower than 8 percent.
Doctor: Lower. Who said anything about
lower? I’ve got a huge tax problem and I need deductions. I have to pay at
least 10 percent!
While the joke is not a belly-buster and in
fact discriminates against the financial acumen of doctors, it does drive
home a point. Namely, some taxpayers have a distorted view of reality.
Anyone who itemizes their personal tax
return knows the value of deductions. The problem is that some of us
actually begin to think that an expense is an advantage.
I know it happens to me every year. I’ll
sit down to figure out my taxes and the only time I perk up is when I start
adding up the deductions. When I tabulate the amount I spent for interest on
my home mortgage, I pump my fist in the air and dance a little jig, knowing
the tax bite will be reduced as a result of my wise financial decision to
acquire an enormous debt burden.
Then I ask my wife to gather all the
information from her separate checkbook along with some year-end notices
from some minor investments she made over the years.
"Let’s see," she says, ever
so proudly, "I sold the Raychem stock I’ve been holding for 17 years
and made a profit of $500."
"Nice going," I replied,
thinking only of the taxes. "What else?"
She rattled off the interest on her
money-market checking account (taxable), interest on out kids’ college
savings account (taxable), a dividend from a mutual fund (taxable) and a few
other assorted items (all taxable).
"My God," I cried, "we’re
in huge trouble here. Didn’t you do anything stupid in 1992?"
"Well, there was the flier I took,
putting $1,000 in that little biotech company that was on the verge of a
cure for the whooping cough."
"What happened?" I asked,
unable to contain my excitement.
"They went bankrupt," she
replied. "I lost every penny."
"YES!" I shouted, taking her
into my arms. "Another deduction! Good going."
"Always happy to help," she
said, pushing me away gingerly.
I went back to compiling the information
for our tax return. "Wait a minute," I said, catching my wife on
her way out the door. "What about charitable deductions? What did we
give away last year?"
She sighed and went back to her
checkbook. A few minutes later she gave me the figure.
"That’s all?" I whined.
"Where’s your sense of social responsibility? I can’t believe you’re
so stingy."
"You’re the one who made me return
the light bulbs I bought from the American Motorcycle Police Officer
Veterans of Foreign Wars Association."
I sighed.
"This year I’m making a pledge to
be more charitable. We really could have used the deductions."
While my wife’s charitableness and
meager blunderings were of some help to the bottom line, nothing came close
to topping the sense of satisfaction I got from my mortgage interest
deduction.
I looked at it again. What a savings!
Purchasing a home and putting me and my family on the brink of financial
disaster each month was really paying off.
Who cares if the property actually
depreciated a little last year? Through the shrewd financial planning tactic
of acquiring debt, I was lowering my income dramatically, thereby reducing
my taxes.
What is lost in this scenario, of course,
is that it only makes financial sense to borrow money when the proceeds can
generate more income than that which is being paid to service the
debt.
At tax time, though, that thinking tends
to go out the window. A deduction becomes a valued commodity, regardless of
the extenuating circumstances.
Take dependent children, for instances.
All the struggles, all the headaches, all the expenses last year–all
forgotten.
At tax time, for one brief shining
moment, deductible kids are king.
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