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Common stocks can furnish you some tax shelter

If a nearly year-old bull market isn't enough of an excuse to buy common stocks, maybe the idea of using those stocks as a tax shelter is. When they hear about tax shelters, most people think of oil and gas programs, real estate developments, and equipment leasing, not stocks. But with higher salaries and dual-career families pushing more people closer to the 50 percent tax bracket, the search for legitimate ways to ease the tax bite is getting more active.

Common stocks, however, contain many of the same tax advantages as the other tax shelters, writes William O. H. Freund Jr. in a recent issue of Investor News , published by Prescott, Ball & Turben, a Cleveland brokerage. Mr. Freund is a financial planner with the firm. Tax-related pluses include tax-free or tax-deferred income, conversion of ordinary income to capital gains, tax-deductible losses, and ''income splitting,'' by which tax liability is transferred from a high-bracket taxpayer to a lower-bracket person.

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''I don't think too many people have thought of (stocks) as tax shelters before,'' Mr. Freund said in an interview. But recognizing the tax shelter aspects of stocks, he says, is consistent with the more responsible view of tax shelters, a view that was reinforced by last year's tax law.

''You have to look at the economic aspects of an investment first,'' Mr. Freund contends. ''Unless it pays out more than you put in - apart from any tax savings - it really isn't a good investment.''

After taking the stock investment's quality into account, then, Mr. Freund lists some ways it can save taxes, too:

* Each taxpayer is entitled to $100 of tax-free dividend income, or $200 on a joint return. This is equivalent to $333 of fully taxable interest in the 40 percent bracket.

For investors in some public utilities, there may be an even larger exemption. The 1981 tax act permits each taxpayer to deduct up to $750 ($1,500 on a joint return) in dividends in the years 1982 through 1985. But to qualify for this deduction, the investor must notify the utility to reinvest the dividends in additional shares, making the dividends automatically tax-exempt. If the new shares are held for more than a year, the profit will be treated as long-term capital gains and taxed at a lower rate.

* Unlike simple interest-paying investments, stocks offer both dividends and appreciation in value. As Mr. Freund explains it, a company divides each year's earnings into two parts. One part is paid to shareholders as a dividend and the rest goes back as retained earnings. These are reinvested in the company to build equity, or book value, much as equity is built up in real estate investments.

In the long run, then, the major part of the return on investment is not taxable cash dividends, but tax-deferred and compounded equity buildup. It is not until the sale of the stock, when, presumably, a profit is made, that a taxable event occurs. Then, as long as the stock has been held more than 12 months, it is counted as a long-term capital gain and the profit qualifies for a 60 percent tax-free exclusion.

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If the stock has to be sold at a loss, those losses can be deducted against other income, such as salary, dividends, and interest. But there is a $3,000 annual limit for these deductions against non-gain income.

* Another way to get some tax sheltering out of your stocks, Mr. Freund says, is through income splitting. Many people invest in stocks as a way to build up college education funds. When the time comes to pay college tuition, they sell the stock. Instead of this, Mr. Freund suggests making a gift of the stock to the child and letting him or her sell it. The child is credited with your original cost and your holding period, which qualifies him for the 60 percent exemption; but the tax on the remaining 40 percent is paid at his lower bracket.

The law permits a taxpayer to give up to $10,000 a year to anyone he chooses. Only sums larger than that are subject to gift tax. And if a husband and wife combine this tax break, they can give up to $20,000 a year.

Some financial planners warn, however, that outright gifts can cause problems. So you may want to discuss other options with a planner, tax accountant, or lawyer. Options might include custodial accounts, special trusts for minors, Clifford Trusts, and interest-free loans.

* Finally, Mr. Freund suggests another way to make a tax-free gift to your child, through a technique called a ''bargain sale.'' Say you buy 100 shares of common stock at $15 a share and in a few weeks it reaches $20. You can have your broker tranfer the stock to your child, using the original $15 cost as a basis, which gives you no loss or gain. The child then sells it at $20. Although the $ 500 is fully taxable as a short-term gain, the child is likely to be in a lower tax bracket. The gain represents the bargain element of the transaction and qualifies for the annual $10,000 tax exclusion for gifts.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.m

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