If you ask me what one item a household should increase its expenditure on in the upcoming year, my answer would be to think seriously about paying for a good tax accountant. A tax accountant is different than an accountant that helps you file your taxes. On a very general basis, a tax accountant structures your affairs in a tax efficient basis before you file your taxes while a “regular” accountant minimizes the damage afterwords (in other words, a tax accountant deals with strategy and a “regular” accountant deals more with tactics). Why?

Our taxes are going up. The only question is by how much.

There are three large factors why this is occurring:

1. It is simple demographics. Even without the credit crisis, the number of people claiming government benefits (old-age, health-care etc.) will soon outnumber the number of people contributing to the pool. In other words, outputs will soon exceed inputs and you can raise taxes, lower taxes to stimulate the economy (which, if you are unemployed or underemployed, means little) or cut services to solve the issue. The 3rd option often encounters stiff resistance, the 2nd option is most likely not feasible right now which leaves us with raising taxes.
2. Governments running massive deficits. We spend much of our time on North American issues but we may want to look across the ocean for a harbinger of things to come. England’s real estate bubble burst earlier, its government has taken large ownership stakes in 2 of the largest 6 banks and its official unemployment rate stands at 7.1%. Like the U.S., the English government has to enter into a large deficit to keep the economy afloat. How is it paying for this? In April, it announced it was increasing its top personal income tax rate from 40% to 50% (to add insult to injury, the VAT, a consumption tax, is going back up from 15% to 17.5% in 2010)
3. The pension time-bomb has exploded. Related to point #1, as Michael James on Money wrote: ” If there are only 20 cookies on a plate and ten people are owed three cookies each, something has to give.”  Pensions may prove to be more problematic than health care. There are ways, politically repugnant to some, to reduce government expenditure in health care. For pension short-falls, you can’t manipulate market returns in a defined pension plan. If the GM pension bailout is a precedent, this means the taxpayer funds private pension short-falls for financially insolvent companies (next up, Air Canada). It gets worse. The Treasury Board of Canada estimates that the taxpayer is funding 72% of the service costs of defined benefit pension plans for federal civil servants (if you are in the U.S., read this article on public pension short-fall and try to keep your lunch down at the same time). How do we pay for both gold plated public and private pensions? Yep, more taxes.

Essentially, while necessary, the money sent to keep the economy afloat has a tab and the tab will be called soon. The only way to avoid increased taxes is if the taxpayer collectively says “let’s cut services across the board now” which is a remote possibility and ignores the fact that, even after such cuts, there are long term obligations governments must continue to fund.

On a personal basis, what can you do?

As a practical manner, arrange an appointment with a tax accountant now (while they are on their down season) to review your personal affairs or to obtain a 2nd opinion. There may be deductions which have been missed (remember you can file amendments to your taxes) or ways to be more tax efficient. For example, business income is generally more tax efficient than employment income and dividend income more tax efficient than interest income. The key is not to completely re-arrange your life for the sole purpose of paying less tax but to be as tax efficient as possible to prepare for the coming tax increases.

I will try to devote more time to this issue but, in the meantime, Canadian Tax Resource is a good place to start. Good luck.