10 Tax Breaks for Investors

New-markets tax credit: The new-markets tax credit is an incentive to invest in so-called "community development" corporations. These are for-profit companies that do a wide array of community work, much of it involved with helping low-income individuals save for major goals or items, such as paying for college, starting a business or funding retirement. While these entities are designed to be profitable, the profits are not likely to rival less-philanthropic enterprises, so the U.S. Department of the Treasury spikes the return by providing tax credits. Each year, investors in qualifying community- development companies get tax credits amounting to 5% to 6% of their investment. Over the course of seven years, that returns about 39% of investors' capital in the form of dollar-for-dollar reductions in the amount of tax they owe.

Low-income housing credits: The government also provides generous tax credits to those who invest in low-income housing. The credits vary based on the type of housing and whether it was built new or rehabilitated, but the projects are often designed to give investors tax breaks that exceed their total investment in the real estate, says Holthouse. Typically, the developer of a project will secure the tax credits and sell interests in the deal to investors through limited partnerships.

Passive-activity losses: If you invest in rental real estate, you also may be able to write off as much as $25,000 per year when the depreciation and other costs of owning and renting the property exceed the income earned from it. The $25,000 write-off begins to phase out for those earning more than $100,000 and is eliminated completely when earnings exceed $150,000.

Company stock in a 401(k): If you own the stock of your employer in a 401(k) or in an employee stock- ownership plan, there's a special provision that allows you to transfer your employer's stock from the plan into a taxable account without paying tax on the current value of the stock. Instead, you pay tax on your "basis" — what you paid — for the shares. Tax on any appreciation in the stock would be deferred until you actually sold the shares, and then the tax would be calculated at capital-gains rates, rather than ordinary income tax rates that usually apply to distributions from retirement plans.

To illustrate the tax savings, consider an employee who bought $100,000 in shares in his employer's company over a 30-year career. At the end of that career, these shares were worth $500,000. When he retires, he can transfer those employer shares into a brokerage account and pay tax only on the $100,000. When he eventually sells the shares he'll have to pay tax on the deferred $400,000 gain (assuming the stock maintains its value) but at capital- gains rates, not ordinary income tax rates. Assuming he's in the 28% bracket, that saves him a fortune — the difference between sharing 28% of the deferred gain with Uncle Sam and paying taxes at the 15% capital-gains rate. In this case, that would be a $52,000 benefit.

Donating appreciated stock: Now if this stockholder got really generous, he might not need to pay tax on that gain at all. He could donate the stock and take a write-off for its current market value. Naturally, he'd be out the stock, which means he gave up something of real value. But it also would eliminate the need to pay capital gains on the profit — and he'd get a write-off, too.