Tuesday, January 29, 2013

The Tax Tail

It has often been said that one should not let the “Tax Tail” wag the dog.  In the context of financial decisions, that means that tax effects are a part of the picture but not the whole picture.  For example, when deciding to buy a house vs. renting, the interest deduction is one of the considerations but by no means the main one.  You must also consider other factors such as: will the house appreciate in value; do the house payments, taxes, and maintenance leave me enough cash to live on; and do I want the added responsibility of maintaining a house?
Most decisions that involve some tax consequence have other important considerations.  Take for example, whether to invest your savings in securities vs. a rental house.  The differences in tax treatment are important, but so are the differences in management responsibility.  There are many times when the rental house would yield a better long-term financial result but the investor may not be cut out for managing rental property and all the hassles that go with it.
In conclusion, to make a good financial decision you need to know how your taxes will be affected, but don’t stop there.  Consider all the other aspects of the decision too, including whether you are just plain comfortable with your decision.

1 comment:

  1. Does this mean I shouldn't start another new business so we will have another tax loss to offset hubbie's business gains?

    ReplyDelete