The U.S. Internal Revenue Code includes many provisions that provide tax incentives designed to support investment's beneficial effect on the national economy. Among these incentives are tax deductions for investment losses and expenses, as well as tax-deferred savings plans. Some of these deductions apply to entrepreneurs, while others can be utilized by employees.
You incur a capital loss when you sell an investment asset, such as corporate stock or investment real estate, for less than your total cost of purchasing it. Likewise, you realize a capital gain when you sell an investment asset for more than your total cost of purchasing it. If your capital losses for the year exceed your capital gains, you have a net capital loss for the year. You can write off a maximum of $3,000 in net capital losses in any tax year. If your net capital loss exceeds $3,000, you can write off the remainder in future tax years, subject to the same $3,000 limitation.
While you can't immediately write off the full cost of purchasing real estate, if you rent out the property, you can take a depreciation deduction each year that is equal to your total purchase price divided by 27.5. You also can depreciate the value of improvements that you make to the property after you purchase it. Under some circumstances, you can take an accelerated depreciation deduction. You can deduct the cost of repairs, tax preparation, structural damage and the cost of traveling to and from rental property.
Oil and Gas Investing
Extracting oil and gas from the ground is expensive, and the IRS allows you to write off many of these expenses. For example, you can write off 100 percent of your intangible drilling costs during the year in which you incur them. Intangible drilling costs include labor costs, drilling rig time and drilling fluids. You also can depreciate the value of equipment needed for the completion and production of a well, over a seven-year period. Because oil and gas are non-renewable resources, you can also deduct a depletion allowance of 15 to 20 percent of the gross annual income derived from selling oil and gas.
Retirement plans such as IRAs and 401(k) plans offer a system by which you can deposit several thousand dollar a year into a retirement account and deduct the amount of your contribution from your taxable income. You won't be taxed on this income until you withdraw it from your account after retirement. Many employer-provided plans offer employer contributions as well. Additionally, if you invest the money in your retirement account, you won't have to pay tax on your interest or other investment returns until you withdraw the funds after retirement. This system takes advantage of the magic of compound interest -- you can reinvest the taxes you don't pay each year, earn interest on these reinvestments as well, and repeat the process until you retire.
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