Where to get help to see if a tax shelter can help you
Fair Haven, N.J.
Robert Stanger & Co.'s hot line has gone cold. Mr. Stanger, who analyzes tax shelters from his offices here, maintains the hot line for subscribers who want to check out potential tax shelters. From November to late December, it is constantly busy. After Dec. 31, the line stops ringing.
But it shouldn't. Now is the time to consider tax shelters - not on Dec. 31, when promoters dust off old shelters that relieve you of your money and provide themselves with enough income to keep going until Dec. 31 of the next year.
There is little doubt that legitimate tax shelters can have a major effect on your tax situation. According to Mr. Stanger, however, you should not consider one unless you have a relatively high income. ''Generally speaking,'' he said in an interview, ''a tax shelter should not reduce your income below $45,000 to $50 ,000 per year for a joint return.''
At this income level, a couple's marginal tax bracket (the rate at which their last dollar earned is taxed) would be 38 percent. Since most tax shelters are priced to produce a reasonable return for investors in at least this tax bracket, it doesn't pay to buy one if your joint income is lower.
But as Mr. Stanger illustrates in his book, ''Tax Shelters, The Bottom Line'' (Fair Haven, N.J., Robert A. Stanger & Co., $32.50), if you have a relatively high income, a good tax shelter can quickly increase your net worth as well as your disposable income. For example, suppose you have an income of $100,000 a year and personal deductions of $15,000 annually and exemptions worth $5,000. Your taxable income (in 1982) is $80,000 and your tax bill is $31,318.
With an income of $100,000 and a tax bill of $31,318, you then have disposable income of $68,682. But assume you have personal expenses of $54,000. Thus, you have $14,682 left for investment.
Now, add to the equation an oil and gas tax shelter which cost $25,000. In the first year of the oil and gas program, you can deduct 85 percent of the cost , or $21,250. Thus, your personal balance sheet changes rather dramatically. You still have $100,000 income. But deducting the oil and gas expenses, plus the same personal deductions and your exemptions, gives you taxable income of $58, 750 (vs. $80,000 before the shelter). Your new tax bill is $20,693, or $10,625 less.
Thus, with an income of $100,000 and a tax bill of $20,693, you have disposable income of $79,307. Your personal expenses remain at $54,000 but you have available for investment $25,307. As Stanger notes in his book, ''That's 72 percent more money working for you with the oil and gas investment than without it.'' And this is not counting any return from the oil and gas wells.
Although Mr. Stanger still likes well-designed and -executed oil and gas shelters, he recommends that an investor who expects to have a continuing high stream of income begin with a leveraged real estate shelter. Preferably, the investment will be in apartments, as opposed to commercial real estate, in areas of the country that are growing.
Even if inflation remains at 5 percent a year for the next several years, he believes an investor will triple his investment in 7 to 10 years when the general partner tries to sell the investments purchased by the limited partners.
There are other advantages to real estate, he notes. When buying it, an investor is buying an asset. When buying an oil and drilling program, he's buying expenses - with the possibility of hitting oil and gas. In buying real estate, Stanger comments, ''the results are pretty predictable. Real estate is not subject to rapid change.'' Unlike an oil and gas shelter, where a big oil strike can quickly increase the value of your investment by 500 to 600 percent, real estate appreciates more slowly. But it does appreciate, and more people are familiar with housing than with oil wells.
This is not to say Mr. Stanger is opposed to investing in oil and gas tax shelters. In fact, with drilling costs down dramatically, he thinks this is a good time for an investor to put money in a good drilling program. Even prospects of declining oil prices don't discourage him. To attract investors, promoters of legitimate oil and gas tax shelters have increased investors' return. Currently, oil and gas reserves can be purchased to return 20 to 25 percent annually to the partnership, compared with 15 percent last year. Even if the price of oil drops to $20 a barrel, some programs would continue to return 10 to 15 percent a year. Thus, if the prices just remain steady, the returns - if oil is found - can be handsome.
In buying a tax shelter, an individual must also decide whether to buy a public one (one that has been registered with the Securities and Exchange Commission) or a private offering, made to a small, select group of investors.
The advantage of a public offering is that it discloses all fees and expenses. These can be hefty and can have a significant effect on the final return. Public offerings are also usually larger and more diversified, spreading the risks. Investors usually have to pay for the program in one swipe, however.
A private shelter can often be paid for over a number of years, thus aiding an individual's cash flow, helping him to afford it. But with private shelters it is usually more difficult to gauge expenses and fees. ''Things are not what they seem in private deals,'' Mr. Stanger warns. He says that in private deals it's important to know the ''philosophy of the people you are dealing with.''
It is also important to know how successful the parties have been in the past. For most public and many private oil and gas deals, it's possible to check the general partner's record by asking your stockbroker to show you a copy of the Stanger Drilling Fund Yearbook. With real estate, it's more difficult. But many brokers have the Stanger Register, which provides program comparisons, or the Stanger Report, also a guide to tax shelter investing. If neither is available, ask for verification of the general partner's record.
People who do decide on a tax shelter should make sure it's legal. In the past, some felt that it paid to cheat: The penalty was only the tax due, plus 6 percent interest. Under the Tax Equity and Fiscal Responsibility Act of 1982, however, the Internal Revenue Service can now charge interest based on the prime interest rate. Currently, it is charging 16 percent, compounded daily from the date of the filing. In addition, the IRS can impose a nondeductible penalty of up to 30 percent on what it considers a ''substantial understatement'' of income tax.
Even more important, the IRS will now be looking at the total-gross-income figure an individual reports instead of adjusted gross income. The effect of this is likely to be simple: The possibility of being audited increases substantially.
For example, under the old system, if a person had total gross income of $200 ,000 last year, he could shelter $180,000 of it and as far as the IRS computer was concerned his adjusted gross income was only $20,000. The likelihood of being audited with only a $20,000 gross income are quite small. But, as Stanley Jensen, an assistant to Henry W. Bloch, the president of H & R Block notes, with a $200,000 income, the chance of being audited is substantially increased, since the IRS computers are geared toward auditing such returns.