Ways to Increase Tax Deductions

The U.S. Internal Revenue Code offers taxpayers many types of tax deductions. Most of these deductions are itemized, meaning that you can take them only if you don't take the standard deduction. Planning your financial activities with tax consequences in mind can save you thousands of dollars in taxes, because some activities are more tax-friendly than others.

Donate Stock to Charity

If you own stock that has appreciated in value, consider donating it to a nonprofit organization qualified under Section 501(c)(3) of the Internal Revenue Code. Many nonprofit churches, schools, charities and hospitals qualify. The value of your tax deduction will equal the stock's appreciated value, not the amount you originally paid for it. In addition, you won't have to pay income or capital gains tax on the appreciation in value. On the other hand, if you own stock that has declined in value, consider selling it at a loss and donating the proceeds. This way, you can deduct the value of the donation as well as a capital loss deduction for the stock's decrease in value.

Mortgage a Home

If you purchase a home through a purchase money mortgage, meaning that the mortgage is secured by the home itself, you may deduct mortgage interest you pay as long as the value of the home does not exceed $1 million at any point during the tax year. Since the interest portion of your installment payments is likely to be greater during the fist few years of your repayment period, you might save thousands of dollars a year in taxes for a few years. You also can deduct interest paid on home refinancing loans, although the amount you can deduct is subject to stricter limitations if you use the loan proceeds for purposes other than home improvement.

Contribute to an IRA

An individual retirement arrangement, or IRA, is an investment vehicle used for retirement savings. Two types are popular -- a traditional IRA and a Roth IRA. Under a traditional IRA, you may contribute up to $5,000 per year as of 2012. This amount increases to $6,000 after you turn 50. These funds can grow tax-free, and you can deduct contributions up to the limit from your taxable income. You still have to pay income tax on distributions you take after you retire, however. Under a Roth IRA, you pay taxes on your contributions, but you can withdraw those contributions plus any earnings tax-free after you retire.

Borrow Money for Investments

The IRS allows you to deduct up to 2 percent of your adjusted gross income for investment expenses. Investment expense includes interest on loans you have taken out, as long as you use the loan proceeds for investment purposes. In effect, you are borrowing money at 0 percent interest. If your investments make a profit, you won't have to deduct loan interest from your net profit.

Photo Credits

About the Author

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.