Heads you win, tails you win. Either way, thanks to the IRS you come out ahead in the stock market.

Man what a rollercoaster ride the market has been lately. Again, my pick for fantasy stock of the year ISRG had another record breaking run. Earnings estimates were assumed to be 80 cents per share but for the 21st straight quarter, ISRG has beat estimates once again at a whopping 1.04 per share. This beats out the news about google which also had a record breaking estimate beating quarter.

Here is another reason why you should start investing in stocks…do you know how you can take advantage of tax benefits with the stock market that makes you a winner? The government has given you an opportunity to get involved with lots and lots of tax benefits.

I didn’t realize how much taxes sucked until I actually started to receive a paycheck. The tax rate for 2007 is

So how can investing save me money on taxes?

• Defer your taxes with a 401K or 403b. The way this works is that when you get paid say 35,000 dollars as your yearly income, you will pay (10% x 7825) + (15% x [31850 - 7825]) + (25% x [35000 - 31850]). This comes out to 5173.25. This is how much federal tax you pay for earning 35K in salary. If you invest 5K into your 401 or 403, you will be taxed for 30K of your salary instead of the 35K because you deferred your taxes in this retirement account. You will pay this year (10% x 7825) + (15% x [30000 - 7825]) = 4108.75. You will have saved for the time being a little over 1,000 dollars in taxes. Pretty sweet deal don’t you think?
• Sell your stocks one year after you buy them. If you are doing a plain taxable brokerage account and not a retirement account, you can save money by selling your shares no sooner than 1 year from time of purchase. The reasoning behind this is that you will pay the capital gains tax instead of income tax. If you hold a stock for less than 1 year, you pay tax on them at the rate of your income tax bracket. If you were in the 35K salary range, you will pay 25% on your gains. If you held for at least one year, you pay capital gains tax which is currently at 15%. Ultimately though, the smart thing to do is to buy solid companies and hold on to that sucker as long as you can.
• Take advantage of the tax saver’s credit. This only applies to people that make less than 26,000 dollars if you are single and 52,000 if you are married filed jointly. Remember to file IRS form 8880 when you do your taxes. This is a credit for investing up to 2000 dollars into a 401 or IRA plan. The max you can get for tax credit is 1000 dollars. This is FREE money so take advantage of this if you make less than 26,000 dollars. I’m not exactly sure but for you newly started workers that began working in july, can you qualify for tax savers credit as your resident salary for the tax year 2007 is definitely less than 26K? If so, take full advantage of this free money.

• Sell your stocks at a loss and save money on taxes. This is probably the awesomest reason why everyone should invest in stocks. If you buy a stock and you lose money on it because it decreased in value, you can sell the stock at a loss and deduct up to 3000 dollars on taxes. The best part about it is that you can carry over your losses year to year. Say you bought 100K dollars worth of martha stewart stock when it was hot stuff. She went to jail and things turned out bad and your investment went down to 80K. You are screaming your head off because you just lost 20,000 dollars. You can sell your stock and deduct 20K from your income. Well…you can deduct 3,000 every year for the next 7 years. Another way to save money on taxes here is offsetting capital gains. This basically means that if you bought google at 300 and sell it at 600 dollars and you bought 10K worth of stock, you have made 10K dollars in capital gains. You will have to pay 10K x the capital gains tax rate but you remembered you sold martha stewart and lossed 20K. The best part here is that you don’t have to pay any taxes on the 10K gains on google because you offset it with the 20K from martha stewart loss. You have 10K of losses that you can now deduct on your income 3K at a time every year. Congratulations, you are now doing your taxes like a hard working republican!
• Pay even less than capital gains tax rate if you are low income. For the 2007 tax year, if you make the 15% tax bracket in income. You will pay 15% tax rate (ordinary income) level if you sell stock held less than 1 year. If you sell stock that you held for more than 1 year, you pay 5% instead of the usual 15%. Thats a sweet 5% discount on you taxes. Say you sold your share of ISRG and made a heftly 3,000 dollars in gains. You will pay 450 dollars in taxes if you were paying 15% but because you are in the 15% income tax bracket, you will only pay 150 dollars. A savings of 300 dollars! If the investments you made pushes you up to a new tax bracket however, you still have a cushion. You will pay 5% tax up until the point where you are bumped up to 25%. So say your income was 26000 a year and you made 7000 dollars in stock sale. The 25% bracket is at 31,851 so 26K + 7K = 33K. So you pay 15% , the normal capital gains tax rate on only 1,149 dollars of your gains. The rest of it is taxed at 5%.
• lower your tax bracket with a retirement portfolio. A good way of taking advantage of all the tax breaks you can get by being in a lower tax bracket is to contribute to your 401k. This lowers your adjustable gross income and you get pushed back into a lower tax bracket.

Investing in stocks is a tricky business, and may sometimes leave you among the candidates for credit union loan. As always preferred by the creditors, cash loan earns a high interest rate to the lenders, while cheap loans balance the affordability for both the lenders and the borrowers over pre-agreed terms and conditions. These loans are not easy to avail of for everyone and people with bad credit need loan are left with hardly any other choice than going for a pay day loan.*

Bottom Line: There’s more than one way to make money in the stock market. Learn your tax law or talk to an accountant that is really good at understanding tax law. Also remember this disclaimer…you don’t necessarily pay the 25% tax because you are in tax bracket. You need to reduce the money you report by the standard deduction and all the other deductions you can take advantage of so recalculate the numbers up top with the deductions you can take advantage of and you will pay much less that the thousands of dollars that I’ve stated. Also, its a pet peeve of mine when I hear someone say “you make 100,000 dollars a year, well…not really, you have to take out like 40% of it for taxes so you only make 60K a year.” This is stupid because you can make 100,000 dollars a year and still be able to keep most of it in the bank if you know your way around tax law come tax season.

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