Financial Planning for April 1999
In the Age of No Tax Shelters They Still Exist
According to Mr. Laurence Foster, CPA/PFS, many opportunities still remain for taxpayers even though the exotic tax shelters of years past have been abolished by Congress.
Legal tax shelters allow you to avoid paying tax on income you receive and defer paying tax on that income until a later year. Tax shelters also let you take tax deductions for ordinary expenses that you would incur even if they weren't deductible. You can make an investment that provides both economic gains and tax deductions at the same time.
The biggest tax shelter for most families is home ownership. When you sell a home that you've lived in for at least two years, up to $500,000 of the gain can be taken totally tax free on a joint return, or $250,000 for a single return.
If you rent out your home or a vacation home for no more than 14 days during one year, the rental income you receive is totally tax free.
Home-office deduction rules were liberalized starting in 1999. They can let you claim depreciation deductions for a part of your home that is used as an office and also business deductions for normal home-ownership expenses, such as utilities, insurance and maintenance, that are attributable to the office. Ask your CPA for the rules involving home-office deductions.
You can rent out part of your home for income and tax-shelter benefits under the "rental real estate" rules discussed above. You can even rent part of your house to members of your own family, provided they pay a fair rent.
Many companies allow employees to defer the receipt of some current-year salary (plus interest) into a later year when the employees may be in a lower tax bracket, such as after retirement.
Of course, first make full use of qualified retirement accounts, such as 401(K) plans. If a 401(K) provides an employer match, it is "free money."
Hold cash in a tax-exempt money fund, rather than in a taxable bank account. Invest in "tax-efficient" mutual funds, such as index funds, which do little trading, instead of high turnover funds that generate capital gains that may be distributed to investors. Also, plan to hold investments with gains for more than one year to receive the 20% long-term capital gains tax rate on them.
Check with your CPA to find out more on these and other legal tax shelters. Other means such as charitable donations, gambling losses, rental real estate and flexible spending accounts can saver you big money on taxes but you have to use them.