Tax shelters are like ice bergs…
… because the 10% on top is glistening and gleaming and looks wonderful, and 90% of it that is hidden is filled with unknown dangers. The history of tax shelters in the United States has at best, been dubious, and at worst disastrous.
The biggest problem with a tax shelter is that it is intrinsically self-destructive. For a tax shelter to work it has to be a reportable item on one’s tax return: in the form of a credit, a reduction, a set off, etc. As such, it is easily quantifiable by the IRS. As soon as any tax shelter really become popular, and starts to cut into the revenue collected by the IRS, they act to destroy it. In virtually every case, except for the venerable and sacrosanct home mortgage interest deduction, Congress agrees with the IRS that the tax shelter in question is an abuse and must be wiped out.
This wouldn’t be so bad, except that tax laws are often changed retroactive to the beginning of the current session of Congress, which could be as long ago as two years previously. This means that the taxpayer will have made a whole series of decisions based upon a law that was changed well after he made those decisions. As such those who participate in tax shelters become very easy targets for the tax collectors. I still remember when people invested in minks as a tax shelter…
To be very specific, and perhaps very contrarian, let me name names: the Ross IRA is the biggest con job since the invention of paper money! If anyone really believes that a future Congress strapped for cash is going to honor the “no-tax on withdrawal” promises made by a Congress from years before, then there is some riverfront property in the Amazon forest that I’d like to talk to you about (or alternatively a well-known bridge in Brooklyn).
There are two ways to protect oneself, first, never use a tax shelter; and second, move one’s investments beyond the reach of the domestic taxman.
Photo credit: Smithsonian Institution via Visual Hunt / No known copyright restrictions
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