Startup finances are the trickiest part to handle when launching your business adventures. You are probably tempted to make some investment to help your company grow and to keep your personal finances in good footing while testing your entrepreneurial wings. One part of picking the right investment is about understanding how those investments affect your taxes.
Taxes are the necessary evil in life, but you can make the filing and payment process more bearable by being smart about your taxation. Opt for investments that help reduce your tax bill rather than make it more complicated and costly. This will guarantee you yield a better return and with the following tips you won’t have to scratch your head during the filing period.
So, let’s look at the three investments that can reduce your tax bill.
Where does investment income come from?
Before we explore the investment examples, let’s clear how investments yield income in the first place. Knowing how income is generated can be a great help in finding those affordable investments that don’t create a huge tax bill.
There are essentially three types of income you can enjoy as a result of investing:
- Interest income – Usually paid on a savings account or money market fund.
- Divident income – Received as part of shares in a publicly traded company. The dividend is usually paid quarterly, semi-annually or annually and it is a portion of the share price.
- Capital gains or losses – You attract capital gains or losses when you sell your shares, mutual fund units or bonds before the expiry of them. This can generate either a gain or a loss.
Each of the above incomes attracts a different kind of tax. The final tax treatment is not just about the type of income, but also about the specific investment and where they are held.
The three investments to reduce tax
So, where do you invest if lowering the tax bill is your primary concern? Here are three great investment opportunities to keep in mind.
Buying stocks with no income
You might want to consider investing in companies that are focused on reinvesting the capital they receive rather than paying dividends. This might sound an odd strategy, but certain companies do hold the view that reinvesting is better than giving the money to its shareholders. As an investor, no income from the stocks naturally means you won’t need to pay any tax.
The option works as a long-term strategy. You essentially buy stock and sit on it until you decide to resell it and receive the capital gains. The capital gains you make is naturally subject to tax, but you can save a bit of money over the years for not having to pay any tax on the investment.
The downside to this type of investment is of course the loss of dividends during the year. You essentially won’t have income from the investment until you decide to sell. When you do sell, you might also incur a loss if your company has tanked in the market.
Using corporate class funds for less tax
In some instances, you might be better off using corporate class funds. These allow smart investment strategies that let you to invest in things like bonds, yet have the income treated as dividends or capital gains. Furthermore, you can even defer the capital gains taxes until you fully exit from the fund. This means that you can choose a more beneficial tax code and avoid paying high taxes until you leave the investment behind altogether.
The downside to corporate class funds is the fee structure, which can be higher than in regular funds. So, the investment can be beneficial if you are already at the highest tax bracket.
Invest taxable income to non-taxed investments
You could also look outside of the traditional investments and put your taxable money into non-taxable investments. What are these investments? It can be anything from buying properties to investing the money within a life insurance policy. The investment can yield a lot of money in the long-term and you won’t need to pay anything in order to make these investments. The reduction in your tax bill can be noticeable.
The downside is the inflexibility of these investments. Your residential property, for example, won’t provide you an additional source of income and turning it into cash won’t be as straightforward as simply selling off your stocks. You will essentially suffer a few liquidity issues.
Remember to ease your tax code planning with proper accounting software. Consider using software like Xero, which can be bought cheaper with the help of discounts available with OZCodes.com.au. It would help you make better investment decisions and to budget your startup and personal finances better.
Taxes don’t need to take your energy and with careful planning, you can keep a bit more of your investments. If you want to hold on to your hard-earned cash, then the above three investment options are worth looking into.