Tax shelters

Tax shelters

Host : OK. So it sounds like you've got a good understanding of the tax code. Can you recommend any good tax shelters?

David : Well I'd like to, but it isn't like the good old days. One of my mentors used to work for an investment bank in the 1970s.

Back then there were loopholes so large you could drive a truck through them. And since the top marginal rate was 70 percent, he said his bank made tons of money peddling tax shelters to wealthier clients. But changes in the law have eliminated most of those old shelters and the incentives for them.

Host : So are there any shelters left?

David : Yes. Some of these were created by Congress specifically to encourage people to do certain things. As an example there's a low-income housing credit which could be called a tax shelter.

With this credit, financial sales people who call themselves advisors sell securities in housing units to high income folks like doctors. You're supposedly getting a tax break while at the same time getting a good investment in real estate.

But there's two problems with this. The first is the salesperson takes a high commission. If you're paying a high commission, it's doubtful you have a good investment.

The second problem is if the housing unit you invested in doesn't meet many stiff requirements, you'll lose all the tax credits you claimed in previous years. This also can get you in plenty of trouble with the IRS.

Host : So is there a better way to cut your taxes?

David : Yes. If you want a tax break, and are interested in helping others with low-income housing, just make a deductible donation to a charity like Habitat for Humanity. Some of the best tax strategies like this are perfectly legal, simple and don't require an advisor.

However, even the IRS makes giving money to charity difficult. You have to be a little careful because the IRS limits the amount you can deduct if you give a large amount to a charity.

Host : Are there any other strategies like this?

David : Sure. There are plenty like the home mortgage deduction. Most folks already know about this, but there are others which are just as big that most people have never heard about. I cover some of them in my audio program on income taxes, and I'd like to talk later about some of the simpler, bigger breaks that arose from the 1997 tax act.

Host : Isn't investing through a retirement account like an IRA or a 401(k) a good way to reduce your taxes?

David : Right. I cover all kinds of retirement accounts including IRAs, 401(k)s, 403(b)s, Keoghs, SIMPLEs, SEPs and others in my audio program on retirement planning. These are different plans for different people, but they all are extremely beneficial.

My program on retirement planning also covers the most powerful concept in all finance -- the time value of money. If you truly understand this idea, you can ignore 90 percent of the noise that passes for news in the financial press.