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Tax planning never stops. And it makes sense for everyone
— not just the wealthy.
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No one can take a job, buy a house, get married, raise children,
invest money or start a business without plunging into a sea of tax implications.
While those implications are daunting, there are helpful principles you can use
to keep your head well above water.
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GETTING STARTED: TAKE STOCK OF WHAT YOU HAVE The best way to start tax planning is to analyze what you have now.
That list includes your job, your home, your family, your life — and health
— insurance plans and your retirement program. Most people start with their
latest tax return and run scenarios. What can you do to ease the tax bite next time
around? What about your deductions and credits? How can you keep better records
of your deductible expenses?
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PRINCIPLES TO KEEP IN MIND
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Don't think of tax planning as something you do only once
a year when preparing to file your tax return. To be really effective, tax planning
must continue throughout the year.
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Be wary of making financial decisions — especially investment
decisions — for tax reasons alone. It's the total payoff that counts,
not the immediate tax savings. Tax-free earnings from a
municipal bond, or muni, for example, may yield less over
time than the after-tax gain from a taxable investment.
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Develop a long-term financial and tax strategy, and make short-term
moves to fit that strategy.
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In shopping for investments, remember the difference between tax-deferred and tax-free
(or tax-exempt)
income. If the income is tax-free, such as the
interest from a municipal bond, you'll never have to
pay federal tax on it. If the income is tax-deferred, such as retirement-plan earnings
or the increase in a stock's
value while you hold the stock, you delay paying taxes until you withdraw the plan
earnings or sell the stock.
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Anyone may so arrange his affairs that his taxes shall be as
low as possible; he is not bound to choose the pattern which will best pay the Treasury;
there is not even a patriotic duty to increase one's taxes.
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