Tax Efficient Investing
Tax efficient investment is the art or discipline of investing your money in such a way as to eliminate, minimize and defer as much taxes as is legally possible, while maximizing the return on your investment.
Taxation and inflation may be two of the biggest obstacles to wealth creation and preservation. Taxation is all pervasive and intrusive. It is imposed when we earn income, whether the money is received or not and when we spend. Taxation has a direct impact on our cash flow and liquidity.
Over time, inflation erodes our buying power and stifles growth and returns on investments. It fluctuates according to our spending habits and affects and is affected by interest rates and commodity prices.
Money is earned from employment or from investments. The earnings actually received from employment income are after-tax dollars which means taxes have been withheld before we receive our paycheques.The earnings received from investments are usually not yet taxed.
Investment income can be passive which means it is produced on an ongoing basis even if we do not work. Employment income stops if the taxpayer does not work.
Different investments are taxed in different ways; some in preference to others, so investments offer more options to minimize taxes. On the other hand, regardless of the type of job, employment earnings are all taxed using the same tax bracket-based style system. The more money earned in a pay period the more taxes will be deducted. The source of income determines how it is taxed.
Tax efficient investing addresses such issues as the various types of investments, the time horizons, goals and objectives, strategies to achieve these goals, risk tolerance and management and trade-offs in choice of investment vehicles.
For most employed taxpayers, investments will, initially, be funded with after tax dollars, usually after we take care of our living expenses. The more after tax dollars we make, the more money we have to invest. The more tax efficient our investments, the more wealth is created.
True wealth can be achieved when a tax payer leverages his time and money. Time is leveraged when he is employed or employs others, as well as, when his funds are invested simultaneously, over periods of time
Money is leveraged when invested in assets which produce more income, passive or active. These assets may include owning a business, stocks , bonds, real estate and many others. Assets are investments which produce income, while liabilities cost money.
Net worth is the difference between what is owned and what is owed,in other words between assets and liabilities. .