Tax shelters still exist and can save you money

The downside is there are never any guarantees you will hit oil or gas. These deductions lose their shine when there is no income to offset them. You can minimize your risk by investing in development or combination programs rather than in wildcatting, as exploratory drilling is known.

Keep in mind, however, that as you reduce your risk, you also reduce your potential investment profit. Wildcatting produces the greatest returns, but it also has the lowest probability of success.

Equipment leasing: Structure correctly

With equipment leasing, your shelter comes from accelerated deductions and the use of the power of leverage in structuring the program.

In the early years, you can actually deduct more than the cash you put into the deal. However, in the later years, you may have what is known as "phantom income."

This occurs when your taxable income is greater than your actual cash inflow. By taking the deductions in the earlier years, there are fewer deductions available in the later years. While the amount of interest you pay on your investment loan is reduced, the payment itself is not. You are now paying principal, which is not deductible.

Nevertheless, structured correctly, an equipment leasing shelter gives you the opportunity to get an interest-free loan from the IRS by paying less in taxes today and making it up tomorrow.

Make sure economic reality and a profit objective drive your investments. Don't simply look for the availability of tax deductions. If you are just looking for a deduction, send me a check. I will be happy to send you a receipt for a tax consultation that would clearly be allowed. However, even in the top 35% tax bracket, you would still be out of pocket 65% of what you paid me! But I can live with that.

Video: Unlock your hidden tax breaks

Cattle shelters not for novices

Cattle feeding and breeding shelters also offer tax savings by accelerating the deductions and the potential exchange of ordinary deductions for capital gains. However, the economics of these programs can be seriously affected by the cyclical market price of cattle. These deals are not for the unsophisticated.

Certain shelters should be avoided completely. These include art reproduction shelters and noncash gift shelters. Both of these are frauds that will almost guarantee you an unhappy audit by the Internal Revenue Service. Single-premium life insurance and tax straddles have legislatively lost their tax shelter elements and no longer provide the tax savings opportunities of the past. While they might make sense on an economic basis, using them as a tax shelter won't work.

Updated Nov. 24, 2009

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