Finding The Advantages To Legitimate Tax Shelters
To be able to benefit from tax shelters, we first have to understand what they are
. Tax shelters have been defined as gimmicks or money loopholes in the past.
However, this is not completely true. If you understand the way they work and the fact that they were created by the Congress to serve our economical and social goals, you will be able to see the benefits that others are blind to.
A tax shelter is in fact an investment which is created to reduce or completely avoid paying income taxes. This is not illegal, as it is our right by law to have these tax deductions if we claim them.
While these tax shelters can work in your favor, there are also abusive shelters. The primary difference here is the shelter's financial benefit.
Legitimate revenues, such as retirement accounts and side businesses, usually generate income. Abusive shelters are simply a way to keep money from being taxed.
This crosses into the realm of illegal. If you avoid these dangerous traps, you can legitimately make your way into the world of money breaks.
One great shelter that has quickly become the most popular is real estate. This is because investing in real estate lends leverage, cash flow, equity buildup, and an inflation hedge.
If you purchase a property and it appreciates in value, you are allowed a paper deduction for depreciation. If you are smart, you can purchase your property with your down payment alone, and your renter's money can cover your mortgage interest, taxes, and operating expenses.
Even if your property does lose money, there is still a possibility of coming out ahead if you play your cards right. If you are in the 28% tax bracket, a $5,000 paper deduction for depreciation creates a real cash tax savings of $1,400.
You can then use this tax-generated cash for any operating expense deficit. As you can see, if you pay down your mortgage, you are building equity.
Once your mortgage is paid off, you have income from residents, while your investment historically has appreciated in value. Unfortunately, you must buy the kind of property that will appreciate in value to begin with.
The key is to watch the real estate market, and buy when the time is right. Watch for crashes, as this could really take a toll on you.
Another tax shelter is oil and gas investments. This investment tends to be a little bit riskier, and less stable.
When you invest in oil and gas, you are allowed to deduct as a current expense your investments in capital expenditures known as intangible drilling and developing costs. Basically all of the cost of drilling and making a well are deductible in the year incurred.
Under normal circumstances, you wouldn't be allowed to deduct these expenses until the product from your well was actually extracted, or the well was abandoned. Thus, with these investments, you can use either cost depletion or percentage depletion.
A tricky tax shelter to manage can also be in cattle. Cattle feeding and breeding can offer tax breaks by accelerating the deductions and the potential exchange of ordinary deductions for capital giants.
While this can produce great dividends, these programs can also be dramatically affected by the ever-changing market price of cattle. You have to be very careful when entering these investments.
A good idea would be to start your own side business. If you use the income from your primary job to fund your secondary business, you will reduce your taxable income.
As long as you can prove to the IRS that you are attempting a legitimate profit with your business, you can write off lots of business expenses, including equipment, and supply costs. This way, you are benefiting in more than one way.
If your employer provides benefits including health coverage, life insurance, and education benefits, you can reduce your taxable income by using these opportunities. You will be contributing part of your income to your benefits, and only after this are your tax withholdings calculated.
As you can see, there are many ways to avoid falling prey to losing too much money to taxes.
As long as you research these shelters to make sure they are both legitimate and legal, you can save yourself from money while investing in worthwhile ventures.
by: Jack Landry
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