As you scramble to meet Uncle Sam's April 15 deadline, that sounds nuts. But the fact is, in trying to slash their tax bills, many investors end up hurting their investment results.
Here are four strategies that will boost your taxes but could still mean more money in your pocket:
· Skip tax-deductible IRAs and fund a Roth instead.
This year, many investors can choose between a tax-deductible individual retirement account and the new Roth IRA. Couples who are covered by a retirement plan at work can fully fund a tax-deductible IRA if their adjusted gross income is less than $50,000. Meanwhile, if their income is below $150,000, they are fully eligible for the Roth IRA.
Which is better? Both offer tax-deferred growth, but only the regular IRA offers an immediate tax deduction. Roth IRA contributions aren't tax-deductible, so you don't get the big initial tax savings. Still, funding a Roth IRA is often the best choice, because -- unlike with a regular IRA -- all withdrawals are tax-free.
''Most people will be better off with the Roth,'' financial planner Hope Feinglass says. Who shouldn't opt for the Roth IRA? If you expect your income-tax bracket to drop sharply from, say, 28 percent now to 15 percent when you quit the work force, you should probably stick with the tax-deductible IRA.
· Avoid variable annuities and cash-value life insurance.
Like regular and Roth IRAs, variable annuities and cash-value life insurance offer tax-deferred growth, so they appeal to those looking to shelter investment income from taxes. But these two insurance products aren't nearly as attractive as IRAs.
Consider variable annuities. As with a regular IRA, the taxable portion of any variable-annuity withdrawal is dunned as income, rather than at the lower capital-gains rate. The IRA, however, offers an upfront tax deduction to compensate for this back-end tax hit. The variable annuity doesn't.
Moreover, variable-annuity investment costs can be steep. As a result, you might be better off investing through a regular taxable account, even though it means paying taxes on your continuing investment gains.
''If somebody is going to always be in the 28 percent tax bracket, you really need at least 20 years to come out ahead with the variable annuity,'' Cincinnati financial planner David Foster figures. ''But if you're in a really high bracket now and you expect to be in a lower bracket when you withdraw, you can win very quickly.''
Similar problems afflict cash-value life insurance, which combines life insurance with an investment account. The costs involved might be justifiable, if you really need permanent life insurance or you are using the life insurance for estate-planning purposes.
But many folks will find they are better off buying lower-cost term insurance and then investing the remaining money in a regular taxable account.
''The primary purpose for buying life insurance is to get life insurance,'' Ms. Feinglass argues. ''It's not to get tax-deferred savings.''
· Ditch your munis and buy taxable bonds.
Tax-hating investors flock to municipal bonds, which kick off interest that is exempt from federal taxes and, in some cases, state and local taxes. That's typically a smart strategy, if you want to own bonds and you are in the 28 percent income-tax bracket or above.
But if you are in the 15 percent bracket, you will make more money by buying taxable corporate or government bonds and paying tax on the interest you earn. Financial planners say they often come across retired investors who bought munis when they were in a high tax bracket and still own them today, even though they have since left the work force and are now in the 15 percent bracket.
Taxable bonds sometimes also make sense for those taxed at 28 percent and higher. ''With short-term bonds, you should look at taxable bonds, no matter what your tax bracket,'' Mr. Foster advises. ''Short-term taxable rates are often much more attractive than short-term muni rates.''
· Shrink your tax-deductible mortgage interest.
As experts are quick to note, a mortgage is one of the cheapest sources of borrowing available. If you are in the 28 percent income-tax bracket and you have a 7.5 percent mortgage, the real cost of the loan is just 5.4 percent after taxes.
But it might still make sense to pay down your mortgage, even though it means more taxes. This is particularly true if you are a conservative investor. After all, if you would otherwise buy a bond that yields 5.5 percent, or 3.96 percent after taxes, you are better off making extra payments on your 7.5 percent mortgage, with its 5.4 percent after-tax cost.
Moreover, you might find all that mortgage interest isn't doing you any good, because your itemized deductions are less than the standard deduction, which is currently $6,900 for couples filing jointly and $4,150 for individuals. Indeed, deductions are itemized on less than 30 percent of tax returns.
