I'm not sure how this works. Do you just report on your taxes which investments you contributed to during that year, and then get a deduction?
I want to pay less taxes, and put my income in some investments at the same time. Where should I start?
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Not exactly. There are a few ways to manage your taxes with investments.
1) For most investments you get taxed on any gain in value in the investment or dividends paid by that investment. Most investments (with some exceptions for mutual funds) you don't take the tax hit until you sell the investment and realize the gain. For bonds, cds, and other cash type investments you have to pay taxes in the year they pay out the interest or dividend.
2) You can put money (up to a certain limit) in a traditional IRA and can subtract that amount from your income for tax calculation for the year you invest it. However, you are going to pay taxes on it when you take the money out at retirement. It really just delays the taxes.
3) If you put the money in a Roth IRA, you don't get a tax break now, but you don't have to pay any taxes on the money or the gains when you take it out at retirement.
4) The gains from some mutual funds can be tax exempt, but that just saves you from paying tax on the increase in value.
5) Don't fall for scams that try to use insurance policies as investments to avoid taxes. The fees are ginormous, which usually makes them a ripoff.
Probably the biggest tax-deferment available to US workers is through employee-sponsored investment plans like the 401k. If you meet the income limits, you could also use a Traditional IRA if you do not have a 401k at work. But keep in mind that you are really just deferring taxes here. The US Government will eventually get their due. :)
One way which you may find interesting is by using 529 plans, or other college investment plans, to save for your child's (or your) college expenses. Generally, contributions up to a certain amount are deductible on your state taxes, and are exempt from Federal and State taxes when used for qualifying education expenses. The state deduction can lower your taxes and help you save for college for your children, if that is a desire of yours.
Consider the individual who pays $1,000,000 in taxes. His/her income must be substantial. That is what one should aim for. Investments for the most part, do not lower ones taxes.
In one of John Grisham's novels, tax shelters are being discussed. Sorry, I do not remember which book. The discussion goes something like this:
There are a few investments which can lower your taxes. Purchase a house. Mortgage interest on your principle residence is deductible (if you itemize deductions). If you don't itemize, focus on increasing income to the point where itemizing benefits you.
In general, businesses have more deductions than individuals. Own a small business. You (or your accountant) will discover many deductions. Hint: the company should lease a car/truck, many meals are now deductible. This is not the reason to own a business.