My 3 (S) corporate partners and I need help understanding some of the tax implications of invest ing some of our assets long term (7-10 year time frame). Since we are responsible for taxes on interest income, dividends, and capital gains at our respective individual rates, should we try to find investments that tend to give capital gains rather than dividends because of the lower tax rate? How would different investments such as an S&P 500 Index Fund, tech sector fund, or individual stocks ? Would a fund managed to avoid taxes be something to consider? We are now investigating if we should pick mutual funds (or other vehicles) designed to avoid or lower taxes. Any thoughts? Thanks in advance!
You are correct that capital gains would be the best way to go because the income passed through the corporation would retain its character.Of the three you suggested:Tech funds would be the worse because these funds generally have high turn over ratio, so you could get hit with large year end capital gain distributions. These will usually have little interest and dividend income.Index fund is more tax efficient because it tends to have low turn over ratio and minimal dividend and capital income passed through.Individual stocks gives you the greatest control on the tax aspects but has the highest risk because you have no or very little diversification unless you have alot of cash to invest. You could buy a stock like Microsoft that has never paid a dividend (no current taxable income) and hope for appreciation. The other choice could be a stock like Phillip Morris/blue chip that pays dividends every year. This will give you current taxable income and possible appreciation.With funds you want to look at the history of capital gain and dividend distributions to see the current tax affect. With stocks you can see the dividend history.Which of these investments or combination of these depends on your individual facts and circumstances, this advice was given as an overview of the tax consquences and not to be taken as any type of specific investment advice.
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