Tax Deductible Investments

To be a tax-efficient investor, it is important for you to know the particular investment vehicles out there that can be used to reduce your tax bill. These investments can provide a way of growing your wealth while at the same time adding to the amount you can deduct each year.

Oil and Gas Investing

Investing in oil and gas can be accomplished in many ways; from purchasing stock in large public companies to participating in private, independent projects. These types of investments are tax-deductible because you can write-off your portion of expenses such as drilling costs, depreciation, depletion allowances and other expenses.

Real Estate Investing

Few investments offer as many tax advantages as real estate. For example, property tax payments for your home or any other real estate investment are deductible. If you rent the property to another person for income, you may also deduct payments for maintaining, repairing or improving the rental property. In addition, unlike stocks or bonds, income-producing real estate can be depreciated. Depreciation is the loss in value of an asset or building over time due to wear and tear, physical deterioration and age.

Employer Sponsored Retirement Account Investing

For profit-oriented companies the 401k, and for non-profit organizations the 403b, are solid tax-deductible investments. The 401k plan is an employer-sponsored retirement savings plan in which the employee transfers a portion of his wages into the retirement account. This plan allows an employee to save for retirement without attracting any immediate income tax on the deferred amount. The 401k tax deductions are granted until the money is withdrawn. The 403b has the same tax treatment as the 401k plan, but is designed for employees of educational institutions and certain non-profit organizations.

Self-Employed or Small Business Retirement Account Investing

The Simplified Employee Pension Plan (SEP) and the Keogh are good tax-deductible investments for the self-employed and small businesses. SEP-IRAs allow you to contribute up to 15 percent of your income or $30,000, whichever is less, to a retirement account if you are self-employed or work for a small business, all of which is tax deductible. If you own a business, your contributions on behalf of your employees are tax-deductible to your company.

The Keogh plan is a defined-contribution plan that is also designed for the self-employed. Keoghs are somewhat more sophisticated than SEP-IRAs. They require more paperwork, but can also provide more benefits to employers. As with SEP-IRAs, Keogh contributions are tax-deductible and their earnings are tax-deferred. If you own a company, a Keogh permits you to make tax-deductible contributions of up to 20 percent of your earned income.

Individual Retirement Account Investing

Individuals also have retirement investment vehicles available to them that are tax-deductible. They are called Individual Retirement Accounts, or IRAs. IRA contributions are fully deductible. There are two types of IRAs--the Traditional IRA and the Roth IRA.

References

• Wall Street Secrets for Tax Efficient Investing; Robert Gordon; 2001

Resources

• Internal Revenue Service