I was talking to an accountant friend once and he mentioned that, while deductions are great, everyone always makes the mistake of thinking that it will save them the same amount of taxes. (i.e., a business buys a new computer for $2,000, thinking that the deduction will save them $2,000 in taxes)
In reality though, the average tax savings is less–and this is the number I can’t remember; he gave a rule-of-thumb figure like “every $1 worth deduction will save you $0.28 in taxes” or something.
Has anyone heard of this rule of thumb before, and do you know what the actual cents-on-the-dollar figure is?
The answer depends on your marignal tax rate. Your marginal rate is the highest bracket into which your income falls. This depends on how much income you have and your filing status (single, married filing jointly, etc.)
That 28 cents per dollar is now 25 cents per dollar with the recent tax cuts. Of course, not everyone falls into the 25% bracket, but I’d guess that a large percentage of people do.
I wonder who your accountant is dealing with. Every reasonably intelligent person I’ve ever met understands exactly what a deduction is. Do your taxes once, you understand it.
You’d be surprised. The specific context was this: He tells me that, every December, many of his clients come to him and say, “It’s the end of the year … should we buy a computer/etc. now in order to get the deduction?” To which he replies, “Do you NEED a new computer? If you do, then buy it–because you need it. The deduction alone isn’t reason enough to buy a computer…”
This could be the problem. All these people go to him so that they don’t have to do their taxes. They may never have done their own taxes.
PS–“dollar”, for crying out loud … I need to proof more …