Here is some tax planning basics:

* The difference between tax avoidance and tax evasion is $10,000 and five years in prison! Tax avoidance is the lawful and ethical use of accepted procedures to reduce your tax liability. Tax evasion is a willful misrepresentation or concealment of information. Despite growing public acceptance of cheating on tax returns, reckless tax evasion is a very dangerous matter. There are many legal ways to reduce your tax liability - too many to risk your future with tax fraud.

* There exist many situations where a taxpayer has a choice of accomplishing the same end by more than one method. The smart tax planner approaches each personal and business transaction with a view towards reducing taxes by analyzing how and when to conduct the transaction to get the most tax advantages.

* The first criteria for evaluating any transaction, strategy or technique should always be financial. Taxes are second.

Many, many years ago, when I was still an "apprentice" tax preparer, one of my mentor`s clients came in and proudly announced that his employer had offered to reimburse him for job-related mileage, but he turned it down because then he would not be able to deduct business travel on his Form 1040 (back then it was deductible in full "above-the-line" as an Adjustment to Income).

My mentor avoided the temptation to tell the client that he was a complete idiot, and attempted to explain, with great patience and tact, that taxes are only pennies on the dollar, and it is much "more better" for someone to give you $1.00 tax free than it is to be able to save 30 cents by claiming a tax deduction. Similarly, there is no benefit in spending $1.00 needlessly to save 30 cents in taxes. You have not saved 30 cents - you have lost 70 cents!

* Tax planning is a year-round process, and must incorporate short and long-term considerations. While handling a transaction in one way may produce a greater short-term tax savings, it may be more costly in the long run.

* The application of any tax planning technique or strategy is dependent on the special "facts and circumstances" of each particular situation. One man`s tax savings may result in another man`s overpayment. You must evaluate each technique or strategy considered in the context of our own individual situation.

copyright (c) 2006 by Robert D Flach LLC