'Tax shelters': you don't have to be a millionaire

All of us consider income taxes too high. Perhaps you have wondered how you could use a tax shelter to avoid paying more taxes, like the rich with their oil drilling and real estate ventures.

Well, small "tax shelters" are available to almost everybody. They involve gaining benefits that are not considered income and, thus, incur no taxes. For example:

Suppose you are paying about $3 each month for bank service charges. For the you could keep at least $250 in your checking account and avoid the $3-a-month service charge. That is a minimum -- not an average. (NOW accounts that pay interest, usually with a much higher minimum to avoid service charges, are a different case.)

When you keep the $250 minimum balance, you could consider the $3 a month you did not pay as nontaxable income. That is, your $250 "earns" $3 a month, or $36 a year. On a simple interest basis, the $36 amounts to a yield of 14 percent. But it is better than that, because the $36 avoided is not income and is, therefore, not subject to tax.

If you allowed the balance to vary between 0 and $250, you would have had to earn $52.94 if your marginal tax rate was 32 percent and still have $36 left to pay the service charges. Thus, your $36 in after-tax benefits actually yields the equivalent of a 23 percent taxable return. A small shelter, to be sure, but the concept can be expanded. More:

* You know, of course, that in addition to avoiding bank service charges with a minimum balance, you can also get free checks. By avoiding paying $4 or $5 for pads of gaily printed check blanks, you can get plain-jane checks free simply by asking your bank.

* Stockpiling staple goods avoids higher prices later, and the difference is a tax-sheltered cash benefit. Suppose you buy a case of paper kitchen towels at later the price may be $28 a case. The $8 difference represents a saving to you of 28.6 percent, or the $4 represents a saving of 14.3 percent. In either case the saving represents a benefit as real as extra cash in your pocket, and it is tax-free. While the paper towels were in storage, their increasing value represented a yield just as much as interest on money in a savings account. The big difference, however, is that the towels' gain in value generates no tax liability.

* Investing in a more efficient flame retention burner for a home oil furnace offers another example. Instead of thinking about the savings in fuel oil, consider the investment of about $600 strictly as an alternative to certificates of deposit. The new burner will likely reduce oil consumption 25 percent. If you burned $1,000 of oil over the previous winter, the new burner would save you little over two seasons. Or consider the savings as yield from the investment. Thus, $250 on an investment of $600 amounts to a yield of 42 percent each year -- far more than the same $600 would earn in CDs or a money-market mutual fund. Further, the $250 is tax-sheltered income equivalent. As the price of home heating oil continues to escalate, the yield on the original $600 investment grows.

Any number of similar investments to avoid costs yield benefits that are equivalent to tax-sheltered income. Only your imagination will limit the opportunities for setting up your own small-scale "tax shelters " completely out of reach of the IRS forever.