          
          
          
                                Investments
          
          
          46) The biggest mistake made by stock market and mutual
          fund investors is not to "earmark" the shares sold. 
          When shares are purchased over a period of time, they
          are purchased at different prices.  At the time some
          shares are sold, you can control which shares are
          considered to have been sold.  The choice will not
          affect the amount of money received on the sale, since
          the shares are all being sold at the same price.  But
          it can affect your tax bill, and thus the amount of
          money you end up with.  Suppose you bought 10 shares at
          $10 each and later bought 10 more shares at $15 each. 
          Now the stock is at $20 and you want to sell 10 shares. 
          If you write your broker a letter stating that the
          second 10 shares are to be sold, your gain will be $5
          per share.  But if you do not designate which shares
          are sold, the IRS will treat it as though the first
          shares purchased were the first ones sold.  So your
          gain will be $10 per share.  This makes a sizable
          difference in your tax burden.
               Mutual fund shares also can be earmarked in
          writing when they are sold.  But the results are a
          little different if you do not earmark the shares. 
          Instead of the first-in, first-out method, you use an
          averaging method to determine the basis of your shares. 
          You add up the cash you've invested plus dividend
          reinvestments, and divide that by the number of shares
          you owned before the sale.  The result is the basis for
          each share sold.  By using this method, you lose the
          ability to influence the amount of your gain or loss
          for tax purposes.
          
          47) You can earn interest and dividends tax free.  Many
          taxpayers with high investment income can control
          whether or not they pay taxes on that income.  One of
          the few interest deductions left after 1990 is the
          deduction for investment interest expense to the extent
          of net investment income.  Suppose you have investment
          income, such as interest and dividends, of $10,000 for
          the year.  This is included in Schedule B and added to
          your gross income.  If you itemize deductions and paid
          $10,000 of investment interest, the investment interest
          expense deduction offsets the investment income.  This
          means that if you can generate investment interest
          expenses, you can shelter the investment income from
          taxation.  The deduction for investment interest also
          is not subject to the new itemized deduction reduction. 
          Any investment expense that you cannot deduct because
          the interest expense for the year exceeds net
          investment income can be carried forward to future
          years.
               Net investment income is investment income minus
          directly connected noninterest expenses, such as
          investment counsel fees, accounting expenses,
          insurance, subscriptions, and legal expenses. 
          Investment income includes interest, dividends,
          royalties, rents from net lease property, and amounts
          recaptured as ordinary income.  Investment interest
          includes interest incurred to purchase or carry
          investment property, other than tax exempt bonds and
          insurance policies.  Margin account interest is the
          usual source of investment interest expenses.  Interest
          on rental properties that qualify as passive activities
          does not count as investment interest.  But in most
          cases interest on debt incurred to purchase undeveloped
          real estate counts as investment interest and shields
          investment income.  Another approach: Instead of buying
          a consumer item such as a car with debt and purchasing
          stocks for full price, pay cash for the car and buy the
          stocks on margin.  You should consider factors other
          than taxes, but when only taxes are considered you come
          out ahead with this strategy.
               Capital gains used to be included in net
          investment income.  But the 1993 tax law eliminated
          that in most cases.  You can, however, elect to include
          capital gains in your net investment income if you
          agree that your net long term capital gains will be
          taxed at your regular income tax rate instead of having
          a 28% cap.  This can be an advantage if your regular
          tax bracket is 28% or 31% anyway.  It can also be an
          advantage if your investment interest is high enough to
          shelter most of the capital gains from tax.
               Remember that any unused investment expense can be
          carried forward to future years.  So if you expect a
          lot of interest and dividend income in the future, it
          might be better to take the 28% rate against your
          capital gains and let the investment interest expense
          carry forward to shelter the other investment income.
          
          48) Upgrade your insurance policy and get favored tax
          treatment.  New insurance policies provide investment
          and tax benefits that are far superior to older whole
          life insurance policies.  Some policyholders are afraid
          that if they cash in their old policies they will have
          to pay taxes on the accumulated earnings of the cash
          value.  That's not true.  The tax code allows you to
          exchange insurance policies tax free.  You can exchange
          life insurance for life insurance, an endowment
          contract for another endowment or annuity contract, and
          an annuity for another annuity.  All these exchanges
          are tax free whether or not the policies are with the
          same company.  Many insurance companies have programs
          that allow you to trade in the policy of a different
          insurer when you take out a new policy.  A recent Tax
          Court case makes the exchange even easier.  The
          taxpayer's old insurer refused to transfer the cash
          value of her old annuity to the new insurance company
          selected by the taxpayer.  Instead, the old insurer
          issued a check to the taxpayer, and the check was
          immediately reinvested in the new annuity.  The IRS
          claimed that there was income when the check was
          received because the taxpayer was not bound to reinvest
          it.  The Tax Court disagreed.  It said that the
          tax-free exchange provision is to be broadly
          interpreted.  You can cash in your old policy and use
          the proceeds to buy a new policy immediately.  (Green,
          85 TC No. 59 (1985).
               The IRS ruled that the tax-free exchange of
          insurance policies applies when you exchange an U.S.
          annuity for a foreign annuity.  There is no requirement
          that either or both of the insurance policies exchange
          be issued by insurers doing business in the United
          States (Letter Ruling 9319024).
          
          49) Not all foreign accounts have to be reported to the
          IRS.  When your foreign bank accounts do not exceed
          $10,000 at any time during the year, you do not have to
          report them.  In addition, a reportable account is any
          foreign financial account over which you have signatory
          authority.  A bank account and a brokerage account are
          considered reportable accounts.  But the Swiss GoldPlan
          account has been designed so that it is a precious
          metals purchase-and-storage account that does not have
          to be reported.  You can protect your privacy by
          purchasing and storing gold abroad.  SwissPlus is a
          very flexible annuity that is both tax-deferred and
          non-reportable, and cannot be seized by creditors. 
          (Information on both GoldPlan and SwissPlus can be
          obtained from JML Investment Counsellors, Dept. 212,
          Germaniastrasse 55, 8033 Zurich, Switzerland.  They can
          also arrange tax-free exchanges as described in idea
          #48.)  
          
          50) Are you sitting on bonds that have appreciated
          substantially?  Many investors are sitting on gains
          after the bull market of the last few years.  There's a
          cute trick you can use if the bonds are currently
          selling at a premium over their face values.  Sell your
          bonds and take the gain.  Then you can buy the same
          bonds back.  You bought these bonds at a premium, and
          the tax law allows you to amortize a premium over the
          life of the bond.  So you get a tax deduction to offset
          the interest earned on the bonds.  The closer a bond is
          to maturity, the higher the deduction will be.
          
          51) You can deduct the loss on a bad stock investment,
          without taking yourself out of the market.  Normally
          you cannot sell a stock, take the loss, then buy the
          stock back.  The "wash sale" rules prevent you from
          taking the loss if the stock is purchased within 30
          days of the sale.  But the wash sale rules don't apply
          if you sell the stock and contribute the cash to your
          IRA.  If you still like the stock, you can have the IRA
          repurchase it.
          
          52) You may have purchased bullion coin investments in
          the 1970s and 1980s at prices substantially higher than
          today's levels.  For instance, gold is now trading in
          the $400 per ounce range, less than half of its
          historic high of more than $800 per ounce.  Silver is
          also trading much lower than its previous peaks.  These
          low prices in tangible assets may not last for long.
               Because stock "wash sale" rules do not apply to
          coins, International Financial Consultants (IFC) has
          developed a program that enables you to take advantage
          of today's low prices to reduce your tax burden by
          taking losses on your coin investments to offset
          current ordinary income, or to shelter gains that you
          have realized on your other investments.   Investors
          owning bullion coins that have declined in value can
          sell those coins to IFC, thereby creating a deductible
          loss, and will have the option, but not the obligation,
          to buy the same coins back from IFC, or can buy other,
          materially different coins or metals from IFC. 
               Provided that the transaction meets the criteria
          set forth in the laws and regulations, any loss
          resulting from your sale or exchange can be deducted up
          to $3,000 of ordinary income, or can be deducted
          against capital gains on other investments, with the
          ability to carry unused losses forward to future years. 
          This deduction will be available even if you exercise
          your option to repurchase the coins from IFC.  Contact
          International Financial Consultants Inc., Suite 400A,
          1700 Rockville Pike, Rockville MD 20852.  (More
          information on IFC is at idea #79).
          
          53) Buying into new passive investments also avoids the
          passive loss limit.  Instead of buying new tax shelters
          in the future, you buy into new passive activities. 
          But remember that passive activities are different from
          investments or portfolio income.  You want to buy into
          partnerships or directly into businesses.  Parking lots
          are frequently mentioned as good for the purpose
          because they produce high, reliable income and there is
          no question that they will be passive activities. 
          Other passive investments, such as real estate income
          partnerships, have higher risk and even under the best
          assumptions will not produce much more income than the
          money market.
               A sideline real estate investment still reduces
          taxes for most taxpayers.  The passive loss limitation
          does not apply to the first $25,000 of losses each year
          from real estate investments in which the investor
          actively participates.  This means that the
          professional or salaried employee with one or two
          rental properties on the side can shelter a lot of
          income from taxes.  The rental activity should be
          arranged so that there is no question of your
          participation being active.  This means you should
          collect rents and arrange for repairs to be done.  If
          you have reliable properties and tenants this shouldn't
          cause too many headaches.  But the $25,000 loss
          allowance is reduced for investors with over $100,000
          of other adjusted gross income.  The loss is eliminated
          at $150,000 of adjusted gross income.  If your income
          is beyond that, you are subject to the regular passive
          loss rules.
          
          54) Oil and gas investments come through recent tax
          changes relatively untouched.  Intangible drilling
          costs are still deductible as before, except for costs
          related to foreign properties and those incurred by
          integrated oil producers.  The percentage depletion
          also is still intact except it is not allowed to offset
          lease bonuses, advance royalties, or any other amount
          payable without regard to production.  In other words,
          you don't take the percentage depletion deduction until
          you actually start to receive income from the property. 
          Oil and gas investors also get an exemption from the
          passive loss limitation.  But the investor must have a
          "working interest" in the business and the form of
          ownership must not limit the investor's personal
          liability for the project.  IRS regulations will later
          flesh out the definition of working interest, and it
          remains to be seen how active an investor must be
          before taking the oil and gas writeoffs against
          non-passive income.  In short, oil and gas investments
          generally retain the rules in effect before tax reform. 
          One rule worth recalling is that a cash investment in a
          drilling program is deductible in the year made only if
          the money is spent within that year and the first two
          and a half months of the next year.  Investors should
          be able to find tax reduction opportunities in oil and
          gas.  The question is whether these opportunities are
          worth the economic risk. 
          
          
          
