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Maximizing Deductions from Your Investments

There are a number of ways that you can maximize your tax situation. One of those ways is to make sure you are getting the most out of your investments, and not overpaying on the gains that you make. If you want to learn more about getting the most out of your taxes, check out the book Outsmarting the System by Anthony C. Campidonica. It’s a fantastic write-up on the best way to do your taxes. Here is one of the concepts that he talks about.

Skip the Retirement Account

Did you know that the concepts that we have been drilled to follow are actually designed to maximize the taxes that we pay? That’s right, they’re not all about saving us money, but really they are about putting more into the government’s pockets. Think about it, you are told to get a good education, then get a job where you will be paid a wage. Those wages mean more money for the government. You are also told to use a retirement savings account because it is tax deferred. Great advice, until you realize you could pay less in taxes now than you will later in life.

Use an Individual Account

Let’s suppose you are in the 25% tax bracket. For every $100 you put into a retirement account, you can reduce your taxes by $25. Sounds like a great deal, but then you realize that when you retire, you will pay that 25% back to the government; and you pay 25% on all the gains in the account. This means if your investment grows to $200 you pay $50 in taxes.

Instead, take that $100 and put it into a non-qualified account. Using this account you can let your money grow for at least 1 year. At that point you can sell your investment and only pay capital gains taxes (currently they are 15% for those in the 25% tax bracket). This means if your investment grows to $200 you pay $25 in taxes now, and $15 in taxes later; a total of $40. You save $10 (or 10%) by using an individual account rather than using the account touted as the best financial vehicle around.

Keep in mind that if you qualify for a Roth IRA, that is still your best bet.

Hire an Accountant to do the Hard Work

There is a lot more to the book than just this simple scenario, I suggest you read it if you are serious about lowering your tax bill. In the meantime, you focus on doing what you do best: working and earning money. Then hire an accountant to get you the most discounts possible, and to maximize your deduction.

Of course the best way to maximize your earnings is still to freelance on the side.

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