This common tax tip could get you $1,000’s back in tax…but make you poor in the process.
Is a little money back at tax time worth making you poor in the long run?
Hey everyone, Boz from OpenCorp here. For this week’s wealth WOD …
Now, it’s not long after tax time. We’re into the new financial year, and one thing that I’m hearing a lot from people that we’re talking to of late is some of the tax advice that they’ve been given once they get their tax return back. So they’ve done their tax return, they’re paying a lot in tax, and some of the tax guidance is around how they can reduce the amount of tax that they’re paying.
Now unfortunately, quite often, a lot of this tax advice that we hear is around buying specifically cars, ’cause the tax benefit can be pretty good. But, it’s about understanding depreciating assets versus appreciating assets. Depreciating assets drop in value, appreciating assets rise in value. I’ll map it out for you.
Let’s say that the tax advice that you received was to buy a car for $60,000 because you could reduce your tax. Now, because a car is a depreciating asset, in two to three years that car might be only worth $35,000. So if I just said to you, on face value, you could buy something worth 60 grand, and in a two to three-year period it’s dropped in value to $35,000, will that sound like a smart investment? Absolutely not.
But it’s okay. Wait. There’s a set of steak knives, because what you can actually do is you can get some tax benefit by claiming this car. Having this car and claiming some tax benefit, you might get $10,000 back. Does that make it any better? Still doesn’t make it any better because what you’ve done is you’ve spent $60,000, and even though you’ve got $10,000 back, that only brings you up effectively to assets worth $45,000, therefore you’ve lost 15 grand or 25% of the value of this investment. So actually, you’re better off not getting this tax benefit, paying more tax, because then you’re still in front.
What would be really smart, however, is what if you got this tax back in your pocket in a more effective way? And instead of buying depreciating assets that drop in value, what if the arrow went this way and you’re actually able to put this tax benefit towards assets that appreciated in value?
So there we have it, guys. Be really discerning about some of the tax advice that you’re receiving. Just put a filter on what you’re hearing, and most importantly make sure that it’s not just about getting some tax back, because you’re only getting tax back on money you’ve spent already, so you want to make sure that any assets that you’re buying to get tax back go up in value rather than drop in value.
Finance management 101. Appreciating assets versus depreciating assets. Invest in the former, you’ll go pretty well. We’ll see you next time.
Drive the worst car your ego can handle Propert.