Tax smart investing is a way of thinking rather than a way of investing. This site does not make specific investment selections – in fact we highly recommend that you speak with an investment professional about which investments are best suited to your needs. Instead, on Deductions.TAX we talk about the tax framework of investments to help you understand which type offers a strong tax benefit and which does not. Most people spend a lot of time thinking about which investments will give them the best return. This is natural of course, because you want a return on your money. The most astute however, also think about which investments give them the best tax advantaged return. We call that group ‘Five Percenters’ on this site.
As a generalization though there are six types of tax advantaged investments:
- Those that allow you to take pre-tax income from your earnings, invest the money, and then the amount is taxed when you take it out. This is typically a vehicle such as a 401k or SEP IRA, for example.
- The next is one that allows you to take post tax income (i.e. what’s left over after you pay taxes), invest it and then take the money out free of taxes on the growth. This is typically in a vehicle such as a 529 account for education related savings, as well as a retirement vehicle such as a Roth IRA.
- The third is “markets” related and provides for special incentives to investors who invest in the stocks (and sometimes bonds) of companies. The tax advantage comes through lower tax treatment of long-term capital gains and dividends.
- The fourth is property related and allows the investor to take advantage of depreciation on property, even if the property itself is going up in value.
- The fifth relates to the tax-advantaged nature of municipal bonds and sometimes US savings bonds.
- The final, and often the single most powerful tax advantaged investment, is the investment in your own business, if you are a small business owner.
There are many, many other categories of course, a big one now is energy related investments to help America become less depended on the Middle East for oil, and special situations like Indian reservation investments, because of the sacred nature of the land upon which the business sits. etc.
We touch upon many of these on this site. If you are not sure where to begin, simply pick a keyword below, key it into the search menu above and hit enter.
14 Important Deductions.TAX Keyword Search Terms:
five-percenter
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investments
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business deduction
trust
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S corporation
limited liability company (or LLC)
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Of Special Note:
Deductions.TAX uses the case study method, bringing life to examples (and dare we say – making them fun?!?) that address the tax question or idea being discussed. Look for these on complicated issues and decisions.