Tax Shelters for the Unwealthy

Tax shelters are not only for the rich.

Jan 11, 2014 at 9:00PM

Hearing about tax shelters used by the rich can get many of us steamed. One technique recently in the news is the "Walton grantor retained annuity trust," or GRAT, which, according to a recent report in The Washington Post, may have diverted more than $100 billion from IRS coffers since 2000. The same report noted:

Goldman Sachs disclosed in a 2004 filing that 84 of the firm's current and former partners used GRATs. [CEO Lloyd] Blankfein has transferred more than $50 million to family members with little or no gift tax due, according to calculations based on his SEC filings.

See? Maddening. Don't feel entirely left out, though. There are plenty of ways to limit your own tax liability, even if your net worth is measured in five or six figures instead of in millions or billions. Tax shelters are not only for the rich. Following are a few examples.

Consider a Roth IRA
A traditional IRA offers its own kind of tax-advantage, sheltering part of your income from Uncle Sam -- for a while. It reduces your current taxable income and grows in the IRA until you withdraw funds in retirement, at which time you're taxed on them. Better still for many folks is the Roth IRA, which accepts post-tax dollars, but ultimately lets you withdraw your money in retirement tax-free.

That's right. Invest thousands over the years and if they grow into an account worth hundreds of thousands, you'll be able to withdraw all that in retirement without giving Uncle Sam a penny. That's potentially a powerful kind of tax shelter.

Buy a house
Next up, your house. It can be both a physical shelter for you and your loved ones, and also a tax shelter. Those who follow the rules can exclude up to $250,000 in gains from taxation -- up to $500,000 for couples. In other words, if you and your other half buy a home for $150,000 and many years later sell it for $550,000, representing a $400,000 gain, you can bypass paying taxes on that gain. If the corresponding tax rate at the time is even just 15%, you'll be saving $60,000! This handy tax shelter is available to most Americans.

Look at municipal bonds
Bonds may not be exciting, but the tax treatment of municipal bonds certainly is, as most of them will pay you interest on which you don't have to pay taxes. Proceed with caution, of course, since not all municipal bonds are high quality, and bonds are capable of performing poorly, just like stocks. Used sensibly, municipal bonds can act as a tax shelter for small investors (and large ones as well).

Buy and sell securities strategically
You can also create your own kind of tax shelters by timing your holding and selling of securities carefully. It's never smart to only consider taxes when you consider buying or selling a security, but it can be worth taking taxes into account. For example, if you sell a stock after owning it for 11 months and net a profit, that's a short-term capital gain, taxable at your income-tax rate, which might be 25% or more. If you hang on and don't sell until you've held it for more than a year, then it's a long-term gain, taxable at 15% for many of us. Presto -- you'll have parked some of that gain in a tax shelter.

Meanwhile, if you're sure that capital-gains tax rates are going to rise significantly in the near future, you might sell some of your big winners to pay a lower rate on those gains. (You can always buy them back after 31 days pass, in order to avoid the dreaded "wash sale.") Just be sure to assess your big tax picture, because creating a huge capital gain in a single year can sock you with a bigger-than-usual tax bill.

When it comes to your tax bill, you're not powerless. Make smart decisions and you can fork over less to Uncle Sam.

While you're minimizing your taxes, maximize your Social Security
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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns no stock in any company mentioned in this article. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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