Mystery Investment

[travelover]

I had lunch with a friend today and we got to talking about investments. He has a good pension and SS, but says that he uses a financial adviser that charges 2.5% and invests in something that rather than throwing off earnings, throws off tax credits. He said that last year, for instance, he only owed $8 in taxes on his total income. I didn't press him on any details, but I'm wondering what the heck he may be into and if it is possibly illegal (unbeknownst to him).

What do you think he is involved with?

 

[clifp]

There are plenty of energy related investments which pass on various solar, wind, or even oil depletion credits. Also some film projects can generate tax credits, although I think these are more at the state or local level than federal.

 

[Patrick]

Low income housing partnerships?

 

[arebelspy]

I had lunch with a friend today and we got to talking about investments. He has a good pension and SS, but says that he uses a financial adviser that charges 2.5% and invests in something that rather than throwing off earnings, throws off tax credits. He said that last year, for instance, he only owed $8 in taxes on his total income. I didn't press him on any details, but I'm wondering what the heck he may be into and if it is possibly illegal (unbeknownst to him).

What do you think he is involved with?

Alright... But how much did he have invested, and how much did it reduce his tax burden?

If he has a million dollars and pays 2.5% to knock his taxes from $1008 to $8 and save 1K, it's prolly not that good.

Without numbers, his $8 in taxes paid is useless info.

 

[travelover]

..........Without numbers, his $8 in taxes paid is useless info.

I have no idea how much he has invested. I just thought the whole idea seemed pretty strange.

 

[glippy]

Maybe it throws off losses. Way to stick it to the tax man ;-)

 

[ERD50]

Alright... But how much did he have invested, and how much did it reduce his tax burden?

If he has a million dollars and pays 2.5% to knock his taxes from $1008 to $8 and save 1K, it's prolly not that good.

Without numbers, his $8 in taxes paid is useless info.

+1

When I do my taxes, I need to click through page after page of tax advantaged [-]payoffs to special interest campaign supporters[/-] investments. Could be any one of them.

I'd also be willing to bet that your friend thinks this is a screaming good deal, and he has never run the numbers himself.

-ERD50

 

[calmloki]

Some years ago it was possible to buy Oregon energy tax credits from, say, a church that installed updated insulation. They couldn't use the tax credit, but could sell the credit at a discount to someone who did pay taxes. So if the church installed $10,000 worth of insulation and was due a tax credit from the state of say $4000 they could sell the credit to good ol' calmloki for $2880 and calmloki could write $800/year off against his Oregon state taxes over the next 5 years.

Don't remember the exact percentages and the program has been made less attractive if not killed, but it could be the same sort of thing.

 

[nun]

.. but says that he uses a financial adviser that charges 2.5% and invests in something that rather than throwing off earnings, throws off tax credits.

You lost me a "charges 2.5%" it's a bad deal whatever it is.

 

[travelover]

Thanks for the replies. While I wouldn't mettle in his investment philosophy, I do feel a moral obligation to say something if I felt that he was about to get into IRS trouble. It sounds like this may be off the wall and not a very good investment, but it is probably legitimate in terms of tax law.

His personality is such that he comes to some peculiar decisions, but is very independent and self sufficient.

 

[Gone4Good]

It sounds like this may be off the wall and not a very good investment, but it is probably legitimate in terms of tax law.

It's impossible to know. These things run from 'gray area' past 'way out on a limb' to 'clear cut tax evasion.' He could be anywhere in that mix.

As a general rule, anything that generates tax losses or credits must have a legitimate business purpose. The IRS doesn't view 'reducing taxes' in and of itself as a legitimate business purpose.

 

[LOL!]

Just remember that investment expenses and advisor fees are deductible if you itemize and they exceed 2% of your AGI. So he can pay less taxes if he pays his advisor more fees. One has to wonder if it would be cheaper to pay the IRS than it would be to pay the advisor.

Lots of folks don't have to pay any income taxes. And retirees often fit in that category. They don't have to do anything special. I know that when I am in the 0% tax bracket, I will be converting my 401(k) assets to a Roth IRA while paying no tax on them. I paid no taxes to put that income in my 401(k) and I will pay no tax or very little tax to put convert that money to a Roth IRA and will pay no tax to withdraw that money from the Roth IRA.

 

[brett]

I think that caution is always recommended. In our neck of the woods there have been plenty of Ponzi schemes that have left investers with nothing and fraudulent tax dodges that have subsequently been overturned by the tax authorites. The focus seems to be on people who are preparing for retirement-particulary through affinity groups.

Of course, there are many legitimate flow through opportunities as well.