Common stocks find growing popularity as tax shelters
With tax shelters under pressure from the Internal Revenue Service, lower inflation, and the possibility of tax reform, some investors are finding shelter in an unexpected place: the stock market. Common stocks share many of the same characteristics with investments that are more often thought of as tax shelters, says William O. H. Freund, vice-president and financial planner with Prescott, Ball & Turben, a Cleveland brokerage.
For both stocks and traditional tax shelters, income can be either tax free or tax deferred, ordinary income can be converted to long-term capital gains where the tax bite is lower, and any losses become tax deductible. Also, common stocks can be used for income-splitting, where tax liability is transferred from a high-bracket person to someone in a lower bracket.
``Tax shelters have come under greater scrutiny from the tax department,'' Mr. Freund says of investments like oil and gas programs, real estate, equipment leasing, and movies. ``But they also have to face up to greater scrutiny from investors. As the top tax rates have dropped from 70 to 50 and maybe to 35 percent, it takes the tax benefit out of these investments.''
Many of the tax shelters that were created when the top personal tax rate was 70 percent ``often had very little in the way of economics,'' he adds. Since the top rate was dropped to 50 percent in 1982, shelters relying heavily on tax writeoffs have either disappeared or have become more investment-oriented rather than tax-oriented.
In so doing, Mr. Freund says, they have come to look more like common stocks and more investors are applying the same standards to them as they would to stocks. Unless an investment pays out more than you put in -- apart from any tax benefits -- it isn't a good investment, he argues.