Financial Planning Strategies, Don Leander, CFP - Tax-Advantaged Investments : Article: Tax-Advantaged Investments

How Can I Benefit from Tax-Advantaged Investments?

For many people, tax-advantaged investing is an excellent way to reduce their taxes. And while many of the traditional tax-advantaged strategies have been eliminated, there are still alternatives left that can help you reduce your taxes. Some are described below.

Real Estate Partnerships

Two of the most common types of real estate partnerships are low-income housing and historic rehabilitation. The federal government grants tax credits to those who construct or rehabilitate low-income housing or who invest in the rehabilitation or preservation of historic structures.

Participating in a real estate partnership has many advantages. Besides being considered socially responsible investments, these partnerships may provide opportunities for tax-advantaged income and long-term capital appreciation.

The tax credits generated by these partnerships can be used to offset your income tax liability on a dollar-for-dollar basis. This can make them much more valuable than tax deductions, which help reduce your taxable income, not the tax you pay. These credits are subject to certain limitations, and the rehabilitation tax credit begins to phase out for taxpayers with adjusted gross incomes (AGI) greater than $200,000 and is completely phased out when AGI reaches $250,000.

Oil and Gas Partnerships

Energy partnerships can provide shelter through tax deductions taken at the partnership level. These include deductions for intangible drilling costs, depreciation, and depletion.

The deductions may be limited; check with a tax advisor to see whether you could benefit from oil and gas partnerships.

Suitability

There are risks associated with investing in partnerships. Key among these is that they are long-term investments with an indefinite holding period with no, or very limited, liquidity. There is typically no current market for the units/shares, and a future market may or may not be available. If a market becomes available, it may result in a deep discount from the original price. At redemption, the investor may receive back less than the original investment. The investment sponsor is responsible for carrying out the business plan, and thus the success or failure of the venture is dependent on the investment sponsor. There are no assurances that the stated investment objectives will be reached. This type of investment is considered speculative. You want to ensure that the investment is not disproportionate in relation to your overall portfolio and that it is consistent with your investment objectives and overall financial situation. In order to invest, you will need to meet specific income and net worth suitability standards, which vary by state.

These standards, along with the risks and other information concerning the partnership, are set forth in the prospectus which can be obtained from your financial professional. Please consider the investment objectives, risks, charges, and expenses carefully before investing. Be sure to read the prospectus carefully before deciding whether to invest.

The alternative minimum tax is another concern. Make sure to consult an advisor to evaluate your exposure to the AMT.

As long as they are suitable for your situation, these tax-advantaged investing strategies can be one way to help reduce your income tax liability. A financial professional can help you determine whether such investments would be an appropriate strategy for you.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.

Required Disclosure: Don Leander is primarily a fee-only financial adviser (dba: Financial Planning Strategies) and a registered investment advisory firm, and is not employed by any brokerage firm. Schwab Institutional is the primary brokerage recommended to provide client statements, online services, and securities transaction clearing. Don is also a licensed insurance agent, and when requested, will work for clients as an independent agent recommending various kinds of insurance or annuities, when appropriate, which can result in commission compensation. A copy of Don Leander's disclouure brochure (Form ADV Part II) is available upon request. Don Leander is available to work with a limited number of clients in all 50 states, but primarily focuses on clients in the states of Colorado and Texas.