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relatives - however that rule has been repealed and now makes family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. Her'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.
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