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5 Great Tax Breaks for Investors

By Matthew Frankel, CFP® - Updated Feb 15, 2017 at 10:38AM

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If you save and invest your money, here are a few of the excellent tax benefits you may be entitled to.

Source: Phillip Ingham via Flickr.

With tax season right around the corner, now is a great time to think about the deductions you'll take advantage of on your upcoming tax return and to start planning for the 2015 tax year. With that in mind, here are five great tax benefits for investors that can lower your taxes and boost your investment returns.

Losses are tax-deductible
One of the best tax breaks available to investors is the ability to use investment losses to offset capital gains. For example, if you sell one of your stocks for a gain of $2,000 and sell another at a loss of $500, you can reduce the amount of capital gains subject to tax to $1,500.

You can deduct your losses from your taxable income even if you don't have any capital gains for the year. You can deduct up to $3,000 per year in investment losses, and any excess can be carried over to the next tax year. You can find the complete rules and guidelines regarding investment losses on the IRS website.

Long-term capital gains tax rates
If you hold your investments for at least a year and a day, any profit you make on their sale will be considered long-term capital gains, and you'll pay a favorable tax rate on those gains. Meanwhile, if you sell investments in a year or less after buying them, any profits will be considered short-term capital gains, which are taxed at your ordinary income tax rate.

Here are the current rates, valid for both your 2014 and 2015 taxes.

Ordinary Income Tax Rate (Short-Term) Long-Term Capital Gains Rate
10% 0%
15% 0%
25% 15%
28% 15%
33% 15%
35% 15%
39.6% 20%

Roth IRAs and 401(k)s
There are two main types of tax-advantaged retirement accounts, and I believe Roth IRAs and Roth 401(k)s offer the best tax advantage, as they take the tax uncertainty out of investing.

When you contribute to a Roth account, your money is deposited on a post-tax basis, meaning you can't deduct contributions on your current taxes. However, all qualified withdrawals are tax-free. The big benefit here is that Roth IRA investors don't have to worry about what happens to tax rates in the future. By contributing today, you "lock in" the tax you pay on your retirement savings, which is your current income tax rate. Even if the income tax rate rises to 50% or more by the time you retire, it won't affect your savings at all.

Traditional IRAs and 401(k)s
These accounts allow you to contribute on a pre-tax basis, meaning that your contributions can potentially be deducted from the current year's taxable income.

If you have a 401(k) or similar plan at work, you can contribute up to $18,000 in 2015 on a tax-deferred basis ($24,000 if you're over 50). And with a traditional IRA, as with a Roth IRA, you can generally contribute up to $5,500 ($6,500 if you're over 50) on a tax-deferred basis, depending on your income and whether or not your employer offers a retirement plan.

The downside to traditional retirement accounts is that you'll have to pay taxes on your withdrawals in retirement at whatever your tax rate is at that point in time. However, if you would rather take the deduction on your current taxes -- particularly if you expect to be in a lower tax bracket in retirement -- they can be a great option.

Retirement savings contribution credit
If your income is below a certain level, the government will actually pay you to save for your retirement. For married couples whose adjusted gross income is less than $61,000, a credit is available ranging from 10%-50% of up to $4,000 in contributions (or $2,000 for single filers) to an IRA or employer-sponsored retirement plan. So a married can actually receive $2,000 just for saving for their future.

Here's an overview of the various credits available for the 2015 tax year:

Credit Rate

AGI Limitations
Married Filing Jointly
Head of Household All Other Filers
50% AGI not more than $36,500 AGI not more than $27,375 AGI not more than $18,250
20% $36,501-$39,500 $27,376-$29,625 $18,251-$19,750
10% $39,501-$61,000 $29,626-$45,750 $19,751-$30,500
0% More than $61,000 more than $45,750 more than $30,500

Source: IRS.

The list goes on
This is not an exhaustive list of the tax breaks you may be entitled to, but these benefits may be easyt for you to take advantage of. If you want more ideas, you can find countless resources online and in print, or, better yet, you can contact a tax professional to discuss your situation.

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