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Sunday, September 10, 2000 Google Search: section 29 Page: 5 Ted reduces his quarterly tax payments accordingly, and places his saved income in a money market instrument that earns 5% interest. (In order to simplify the calculation, we'll assume his cash savings are realized all at one time in the middle of the year rather than spread out over the entire year.) In 1996, Ted saves $6,000 in income through the tax credit. 1996 savings: $6,000 In 1997, Ted has $6,000 in saved income from 1996, $600 of interest on those savings, plus $6,180 in saved income from this year's tax credit. 1997 savings: $6,000 + $600 + $6,180 = $12,480 In 1998, Ted now has $12,480 in savings from prior years, $624 of interest earned on those savings over the last year, plus $6,365 in newly saved income from this year's tax credit. 1998 savings: $12,480 + $624 + $6,365 = $19,469 Continuing this process to the end of the Section 29 tax credit program, we get the following history of Ted's tax credit savings. 1996 ... $6,000 1997 ... $12,480 1998 ... $19,469 1999 ... $26,999 2000 ... $35,102 2001 ... $43,814 2002 ... $53,168 Ted realizes a stable annual return of 13.4% on his original investment of $25,000. contents Buy/Sell Info... Tax Credits are a Dollar-for-Dollar Reduction of Your Tax Bill contents Buy/Sell Info... TAX DUE TAX CREDIT _________ Check to IRS $20,000 ($7,000) _________ $13,000 Hedging a Tax Credit Investment This section identifies two sources of risk in a section 29 tax credit investment and suggests how these risks can be reduced and/or eliminated. Risk #1: Petroleum Prices Exceed the Phase-Out Reference Price If the average annual price of crude oil falls into the defined phase-out range during the tax year, then the tax credit is reduced proportionately. Each year, the phase-out range is upwardly adjusted to reflect inflation. In 1994, the phase-out range of the Section 29 Credit was $45/barrel to $57/barrel. Therefore, it is unlikely that the price of oil will go into the phase-out range over the next seven years. Even though the risk of losing the credit is minimal, the investor may want to hedge the position. This can be accomplished http://www.google.com/search?q=section+29&hl=en& safe=offPDF Image | Section 29 Tax Credits
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