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The Inside Secrets To Personal Tax Shelters
Everybody wants to keep as much of the money they earn as possible.
Those people in the higher income brackets are forever looking for a way to protect their
money from the income tax collectors.
Thus, the idea of personal tax shelter. The thing is, how can you tell
which ones are the good ones, and which ones are the bad ones. - tax shelters can
certainly "keep your money out of the hands of the IRS" - but some of them can
cost you dearly as well. Generally, all real estate purchases have
definite tax advantage. In even the simplest kind of transaction such as buying a better
home for your family, you'll be able to deduct from your gross income the amount you pay
in mortgage interest and property taxes.
If you rent out your old house, or buy a house as a rental property,
you'll be allowed to deduct all your expenses from the rent you receive. You can also
deduct the depreciation on the house, based on the cost or on the market value at the time
the house was converted to a rental property, whichever is lower.
You also have the option to compute your depreciation over 15-years,
which would probably give you a tax loss even though the property is producing a cash
income for you. Remember though, you cannot claim a depreciation on the value of the land,
only for the cost of the house.
Until 1981, you could not deduct losses on a property rented to
relatives - however that rule has been repealed and now makes family tax savings available
in certain situations when you rent to relatives. Be sure to check with your local IRS
Office for complete details.
So-called Clifford Trusts are tax shelters that shift the gross income
of a company or family bread-winner to other family members in lower tax brackets. An
income-producing property is transferred to a trust which must be set up to last 10 years
and a day. The beneficiary receives the income during this period, and then the property
reverts back to the grantor.
This type of trust is often used to accumulate money for children, who
can use it for higher education or for a start in a career or business of their own. You
should bear in mind when setting up such a trust however, that parents have a legal duty
to support their minor children and thus, a trust cannot be set up to be used for that
purpose.
Equipment Leasing Programs are another common income-sheltering method.
Most of these programs can be combined with a trust. Here’s how they work: The owner
of a business sets up a trust for a family member. Business property or equipment is
transferred to the trust, and then leased back to the business. The trust gets the income,
and the business gets a deduction for the rental fees it pays.
From another angle, the trust could buy equipment for lease to the
business and get deductions for interest and other expenses involved. Investment tax
credit can also sometimes be claimed in non-net-lease situations.
Making interest-free loans is another method of sheltering one's
income. Say you lend several thousand dollars to a son or daughter who invests the money.
The borrower gets the income, and you eventually get your money back. If you're in the 50%
tax bracket and the borrower is in the 25% bracket, your tax savings can be considerable.
Investing in Municipal Bonds are very definitely a means of sheltering
your income. Income from these bonds is tax free, but it's generally lower than from other
types of investments. Municipal Bonds pay at a fixed rate of interest. Relative to other
kinds of investments you could make, you'll lose on Municipals if interest rates go up,
and win only if the interest rates on other investments go down.
By now, everyone knows about IRA's and Keogh plans for the
self-employed. You put money into a personal retirement trust and pay no taxes on it until
you actually withdraw from it. Some companies give their employees a chance to set up
their own retirement accounts, thereby deferring part of their gross incomes until after
they retire.
However, deferring income until after one retires is no longer as
attractive as it used to be, particularly if your tax rate is not expected to change after
retirement. If you don't anticipate a lower tax bracket after you retire, it's generally
better to take all your income now and invest it in high yield growth funds that will mean
more money for you in your retirement years.
There are innumerable ways and methods to shelter your gross income
from the tax collectors, all of them legal. The important thing is to check them out with
your tax preparer and decide which would be best for you.
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