How To Make $500 An Hour Doing Taxes

(MoneyWatch)  While nobody likes doing taxes, you could rack up anywhere from $300 to $500 an hour for your efforts. That might get you motivated.

Consider these items:

401(k). Most people are not maximizing the tax deductions available from their 401(k) each year. In 2010, you can contribute up to $16,500, and if you're 50 or over you can go as high as $22,000. Let's say you decide to increase your contribution by $3,000 this year. It takes about 30 minutes to either complete the forms from HR or go online and revise your contribution formula. If you're in the 30% income tax bracket, that will save you $900 for the year in taxes, which is a rate of $1,800 an hour for your time. Pretty good pay.

• Not to mention the $900 you'll save every year thereafter from the increased contributions, plus all the income tax deferrals you'll get on your investment returns between now and when you retire.

Roth Accounts. With the Roth, you don't get a current deduction, but you get tax-free growth on the money forever. Let's assume you're a younger worker and qualify for a Roth IRA. It takes about an hour and a half to get the forms, fill them out, send them in and make your contribution. But if you put $5,000 into the Roth IRA at age 25 and it grows at 7.5% a year through age 65, it would be worth about $90,000. Since you contributed $5,000, that means you avoided income tax on $85,000. Assuming a 30% tax bracket, that saves you about $25,500 in taxes. Not bad for an hour and a half of work. Now, there are some time value of money items to consider in this example, but you're basically well compensated for your efforts.

• The same analysis applies if you have a Roth 401(k) feature available at work.

Flexible Spending Accounts. If you have an FSA at work, with about two hours of effort, you could easily save $500 or more. First, you have to fill out the form that you got from HR to contribute to the FSA, and that takes about 15 minutes. Then, remember to run all your out-of-pocket medical costs through the FSA and submit your receipts. Let's say that takes another hour and a half for the year. Well, if you contribute $1,500 to the FSA, and are in the 30% bracket, that's about $450 of savings, or $225 an hour for your efforts.

Charitable Contributions. Unless you're really organized, you probably aren't sure how much you contributed to charity last year. But, if you spend an hour going through your check book and credit card statements, you'll probably discover a number of contributions you made for the year that you didn't remember. If you found $500 of contributions, and you're in the 30% tax bracket, you'd save $150 in taxes for your efforts.

Tax Loss Harvesting. While people often do this at the end of the year, you can do tax loss harvesting at any time (see my previous post). If you have capital losses but no capital gains, you can still offset $3,000 of ordinary income with losses from your taxable investments. It will probably take about an hour to look through your holdings, decide what to sell and place the trades. But if you're in the 30% income tax bracket, it'll save you $900 of taxes for an hour's worth of work.

• And if you have capital gains that you can offset with losses, then you can save even more. Assume you had $10,000 of gains that you could partially offset with $5,000 of capital losses. With the combined federal and state tax rate for capital gains, you're probably paying 20%; so you would save 20% of $5,000 in taxes, or $1,000.

SEP Account. If you happen to have self employment income, in addition to your regular wages, you may be able to do a SEP IRA contribution on top of whatever you contribute to your 401(k) at work. The SEP contribution is roughly equal to 20% of whatever you earned in self-employment income. Assume you earned $15,000, that means you could contribute about $3,000 to the SEP, which again would save you about $900 in taxes if you're in the 30% bracket.

• You could also consider a solo 401(k), which could provide a deduction of up to $16,500 (or $22,000 if 50 or over), if you have at least that much in self employment earnings. It probably takes three hours to get a solo 401(k) organized, but it could save you $5,000 or more in taxes. Wow, that's about $1,600 an hour.

There are lots of ways to save taxes if you're diligent. It's not much fun (I have a tax degree and don't even like doing it), but the pay is pretty good.

Bottom line. If I asked you whether you want to do some taxes this weekend, you'd probably say no. But if I asked you whether you'd be willing to do them for $500 an hour, I bet you'd say yes.

As with all tax matters, consult your individual tax advisor prior to making any tax decisions.

Learn More: Want to learn about a new way to manage your personal finances and prepare for retirement, consider my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com