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Wealth: top tax shelters for 1991.

WEALTH Top tax shelters for 1991

The tax bills of 1986 and 1990 made it more and more difficult to shelter income and avoid higher taxes. But there are four tax shelters that still offer excellent protection.


A single-family home is still the best tax shelter and property taxes are still fully deductible, and the new 15-year, fixed-rate home mortgages can substantially reduce your interest cost. And your home is more than a tax shelter; it's also one of the best long-term investments you'll ever make. Good investments require wisdom and patience - the wisdom to find the investment and the patience to leave the money alone and let it increase in value. A home fits that description perfectly, assuming you've selected a home in a good neighborhood. And now is an excellent time to buy a home or second home. The Fed is easing monetary policy to counter a recession, and mortgage rates are falling. As a result, real estate in most areas should begin to appreciate this year.



Thanks to the tax-deferred benefits of IRAs and other pension plans, the money you contribute grows 50 percent faster. True, you eventually have to pay taxes on your pension funds, but only on the amount that you withdraw, and at the prevailing tax rate, which could be lower in your retirement years than it is now.

Many Americans have stopped contributing to their IRA accounts because they can't deduct the contribution. Even if you are no longer eligible for the deduction, keep funding these accounts. Assume that you and your spouse deposit $4,000 a year into a savings account for the next 20 years. The money earns 12 percent interest each year and every year you pay taxes on income and capital gains in a 28 percent bracket. At the end of 20 years, you'd have $213,000. If you deposit that same money in an IRA, you'll have $323,000 at the end of 20 years, because you didn't have to pay taxes on the annual income. If your child and his spouse started depositing $4,000 at 10 percent at age 25, by the time they reached 65 they'd have an astonishing $2,114,000 in an IRA. When you start withdrawing, you will pay taxes - but only on what you withdraw each year, and only at your tax rate at that time. You'll still come out way ahead, because what you didn't pay in taxes for years had so long to grow. Ask your CPA or tax attorney what pension plans you're eligible for, set up every possible account, fund them fully every year on Jan. 2 (if you wait until April 15, you miss the chance to save taxes on several months worth of interest and capital gains), then make sure you or a professional manages the money properly.


Annuities provide investors with the same tax-deferred benefits described above. You may select an annuity that offers a fixed return from the underwriter, which should be a large, financially sound insurance company. Or you may purchase a variable-rate annuity, which allows you to select various investment options (usually mutual funds) to increase your return above the fixed rate. Many people select a fixed annuity because the net result is guaranteed by an insurance company and therefore has virtually no downside risk. (Annuities were discussed in more detail in this column in the Oct. 1990 issue.)


In 1990, Congress extended the tax credit for low-income housing, providing strong investment incentive to solve this pressing social problem. You can buy units in a limited partnership to develop such housing and receive a tax credit of up to $7,000 per year each year for 10 years. If you invest $50,000 over 10 years, you can save about $70,000 in taxes. The $7,000 annual tax credit is limited: one each to a tax return. However, there is no limit on the number of units corporations can purchase. Before 1990, investors earning over $250,000 annually couldn't purchase these investments, but now anyone can buy them, regardless of income. Everyone paying $7,000 or more in taxes should consider this investment. Remember, this is a tax credit, not a tax write-off. Over the life of the investment, you always save more in taxes than you invest. There are public and private programs for investing in government housing; both types are very popular. It's important to choose a well-managed program; for more information, call your broker.


If you've been thinking of buying a summer home, this is the time. Prices tend to drop because sellers don't want to carry mortgages and other expenses through the off-season. Fewer buyers are competing for properties, and an early winter purchase gives you time to get ready for the season.

A second home generates tax breaks in addition to long-term appreciation potential, and it can be a good form of retirement planning if you want to move there later. Location is even more important than with other kinds of real estate. A vacation home should be near the action - beach, lake, marina or whatever. If it's on a lake, find out what the water-quality readings are. Make sure it can be insured against risks such as hurricane damage and beach erosion. Investigate the surrounding area, too, including zoning laws. And since vacation-home mortgages are harder to get and costlier than for a principal residence, cash is king. The bigger your down payment, the stronger your bargaining position to get a favorable mortgage rate from the bank.

Don Rowe publishes the Wall Street Digest and Mutual Fund Advisor from his Sarasota offices at One Sarasota Tower, Sarasota FL 34236. He welcomes letters from readers.
COPYRIGHT 1991 Clubhouse Publishing, Inc.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Rowe, Donald H.
Publication:Sarasota Magazine
Date:Feb 1, 1991
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