As long as there’s an income tax, people will be looking for ways to reduce the amount they owe. Tax shelters—a term that refers to investments offering benefits and deductions designed to reduce taxes—are one method for achieving that goal.
While high-profile court cases and the resulting negative publicity give tax shelters a bad name, there’s nothing wrong with seeking legitimate means to minimize your taxable income. The trouble comes from “abusive” shelters making not-so-legitimate promises of tax benefits.
How to tell the good from the bad?
Here’s one generalization: Abusive shelters tend to promise to help you avoid taxes permanently. Legitimate or “good” shelters can usually only defer income and taxes to a future date. For example, legitimate tax-deferred investments include Individual Retirement Accounts, Keoghs for the self-employed and deferred annuities.
Another caution sign: Do the claims defy logic? For instance, would you believe you can give up your “United States citizenship”, but retain or reclaim your “American citizenship”, thereby relinquishing your duty to pay taxes to the US government? That was the assertion of one abusive tax shelter (United States v. Cooper, KTC 2003-419 (D. Colo. 2003)).
A third tip-off: The scheme is aggressively marketed through seminars, telephone conference calls, and the Internet—all methods that prevent you from checking the veracity or credentials of the promoters. In addition, a hefty fee is required before the “secret” will be revealed to you.
The complexity of the tax code and the resulting frustration when dealing with the overwhelming rules and regulations may tempt you to search for investments with tax-saving features. But before you exchange your money for a promise, step back and assess whether it’s nothing more than a con. If in doubt, check with a trusted advisor.