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Pros & Cons of Tax Credit Fund Investing

Original post by Michael Wolfe of Demand Media

There are a number of investment funds known as tax credit funds in which investors are allowed to invest money in projects that receive tax credits from the government. This may include projects such as low income housing and certain types of alternative energy production. In exchange for their investment, these investors receive tax credits. These funds can be an excellent to save money and invest in a way that's socially responsible, but they have downsides.

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Pro: Tax Credits

Perhaps the biggest advantage to the investor is that by investing in these funds, he stands to make not only a potential profit, but he is provided a guaranteed credit on his tax burden. For investors who have an extensive tax burden, then this can provide a way that they can reduce their taxes, while also making a financial investment.

Pro: Socially Beneficial

In addition, most tax credit funds are used to finance something that benefits society. For example, the government provides tax credits for a number of different types of clean energy. By investing money in these types of funds, the investor is helping replace fossil fuels, which cause pollution, with cleaner-burning fuels. Or, by financing low-income housing, an investor is helping provider shelter for those who might otherwise not be able to afford it.

Con: Restrictions

One of the main downsides of these funds is that investors are often given steep restrictions on their investments. For example, unlike most investment funds, the investor may not be allowed to pull out his money whenever he wishes. Rather, he may be required to keep the money in for a certain period of time, whether the investment prospers or turns sour. He may also have limited control over how his money is used.

Con: Can Distort Market

While many of the projects will provide social benefits, some believers in the free market may believe that government intervention -- in the form of incentives provided through tax credits -- distorts the working of the market. Additionally, some of the projects being financed, such as low-income housing, may also affect free markets and disadvantage those not receiving preferential treatment, such as through discounted housing.


                   

References

  • "The Complete Idiot's Guide to Socially Responsible Investing"; Ken Little; 2008

About the Author

Michael Wolfe has been writing and editing since 2005, with a background including both business and creative writing. He has worked as a reporter for a community newspaper in New York City and a federal policy newsletter in Washington, D.C. Wolfe holds a B.A. in art history and is a resident of Brooklyn, N.Y.


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