Small savers offered a 6-month certificate for tax shelter

"Small" savers with $10,000 or less to set aside have a new way to protect their interest from taxes, thanks to recent changes in the US Tax Code. Simply put, the "shelder" provides a way for banks to defer paying interest earnings to the customer until 1981. That means the taxes on the interest don't have to be paid until 1982.

The Tax Code changes permit each taxpayer to exclude Jan. 1, 1981. For a joint return, the exclusion doubles to $400.

Taxes now are required on all bank interest earnings.

To help depositors take advantage of the Tax Code change, banking institutions are offering what is in effect a "sheltered" six-month $10,000 money-market certificate.

With the certificate, according to a spokesman for Perpetual Savings & Loan, Washington, the tax bill is deferred until 1982. Moreover, if you are a small saver, you might even be able to exclude most of the tax due on the interest the certificate earns.

At First Federal Savings & Loan Association in Annapolis, Md., the new certificate is called "Sheltered Income Money Market Certificate." First Federal is actively promoting it in Baltimore-area newspapers. If the saver takes out a First Federal money-market certificate after July 3 and request a "sheltered income option," the certificate will not mature until 1981. Any tax due on the earnings, however, will not have to be paid until 1982.

Under a conventional money certificate at First Federal, interest earnings would have to be posted monthly, which means a portion of the earnings would be chargeable to 1980 taxes. That tax would in turn have to be paid in 1981.

At Perpetual Federal, the Washington Area's largest S&L, the interest earnings on a six-month certifcate are "paid" quarterly. That is, the institution pro-rates out a portion of the total interest payment in two 3-month segments. But the institution considers the total amount to be paid out over a six-month period -- and hence, for a certificate taken out after July 3, that would mean a "payout" in 1981, when the new $200 exclusion goes into effect.

The current rate on $10,000 six-month certificates is running at around 8.597 percent. That would mean interest earnings of $428.67.

With a $400 exclusion (on a joint account), only $28.67 would be subject to taxes, beginning in 1981. The tax would be due in 1982 for most taxpapers.

Banking officials note that if the saver elects to post interest payments to a passbook account on a monthly basis -- which some certificate holders do to maximize current income -- then any money posted in the current calendar year would be subject to 1980 taxes.

The reason, they point out, is that passbook accounts are compounded on a current basis, with the interest earnings posted to the passbook account also earning interest. To escape the current tax, the interest would have to be posted in 1981.

According to banking officials here, the so- called "sheltered" concept is starting to catch on with a number of savings associations around the United States, although they are identified by different names.

For the S&Ls, they are an attempt to keep certificate money from "fleeing" to moneymarket mutual funds and other investment opportunities at a time when the rate on six- month issues has been falling.