Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, April 23, 1990                   TAG: 9004220009
SECTION: BUSINESS                    PAGE: A5   EDITION: METRO 
SOURCE: Mag Poff
DATELINE:                                 LENGTH: Medium

TAKE SHELTER FROM THE TAX BITE ANY WAY YOU CAN

Whether you're in the 15 percent or 28 percent bracket, said investment adviser J. Gregory Tinaglia, you should take advantage of any strategy to reduce the bite.

Andrew Hudick, a fee-only financial planner with Elliott & Associates, said other considerations are more important than income level in sheltering money from taxation.

Taxpayers should determine their goals and review options to help them achieve the results, Hudick said.

Taxes are certainly a big part of the final decision, he said, but so are the types of investments. Neither decision should be made independently of the other.

Tinaglia, of Investment Management Corp., had the same assessment.

Tax strategy must be one that's prudent from the standpoint of risk, he said. It makes no sense to try to save on taxes if you lose your principal in a bad investment.

Hudick pointed out that the words tax shelter - often used in a sales pitch - cover two different types of investment.

One, he said, is the tax deferral.

The investment product in that case removes income from current taxes, allowing earnings to accumulate faster. The tax, however, is due at a future date.

Examples, he said, are most real-estate limited partnerships and equipment-leasing partnerships that use depreciation deductions. When the program is completed, a tax is due on most of the sales proceeds.

The second kind of shelter is tax elimination, Hudick said.

Examples of this type, he said, are municipal-bond investments or the tax credits from the partnerships.

"Everyone should use some form of tax-deferral technique," Hudick said. The most universal method is periodic contributions to a retirement plan.

Every taxpayer should sign up for a payroll deduction plan, such as a 401(k) or a 403(b), or contribute to an IRA or Keogh plan.

Hudick said the Social Security system and a company pension plan will not be sufficient to fund a high-income retirement.

People in the 28 percent tax bracket are candidates to consider municipal bonds as an alternative to CDs, Hudick said.

He said couples with taxable income over $32,450 and singles with $19,450 should look into municipal bonds for a portion of their fixed-income portfolio.

Tinaglia said IRAs are good investments even for people who can no longer claim a deduction for their annual contributions. Over the long term, he said, the major benefit of an IRA is tax deferral for the earnings, not the deduction.

Although most people don't consider them sheltered investments, Tinaglia said stocks and stock mutual funds offer tax advantages.

If you invest in stocks with good growth potential and low dividends, he said, the appreciation won't be taxed until the time of sale. This strategy is for people who invest for the long term so that the capital gain accumulates in a shelter over time.

Pension plans, Tinaglia said, are "a fantastic tax shelter."

People who have a 401(k) plan at work, he said, should definitely contribute to it. The minimum should be the share that the employer matches.

These plans, he said, allow you to pay the government less while getting a raise from the employer.

Municipal bonds and bond funds eliminate taxes on the earnings, he pointed out.

Tinaglia said many investors still hold passive partnerships, purchased prior to 1986, that have lost all but 10 percent of their tax shelter.

Such people, he said, should consider partnerships in fully leased real estate that produces income. The otherwise-unused passive losses can be used to offset this type of income.

The insurance industry also offers tax-deferred products, Tinaglia said. Examples, he said, are cash-value and variable-life insurance policies and annuities.

He said real-estate investment trusts trade like closed-end mutual funds.

If these trusts lose money, he said, up to $3,000 of it can be written off against income. If there's a gain, taxes are deferred as is the case with stocks.

Other tax shelters, Tinaglia said, are rehabilitation of historic buildings and actively managed rental property.