With today’s market fluctuations, it is more important than ever to adhere to a long-term strategy. This strategy must be based on personal goals, circumstances, and risk tolerance. If investors understand this basic investment advice, they will be in a better position to ride out re-occurring market volatility.

This article focuses on investors who, for whatever reason, need a big deduction on this year’s income taxes.

The biggest obstacle for many to overcome is the desire to do something hasty about falling investments just because it might feel better than doing nothing at all. Many investors sell when the market is low because of fear it will go lower, while others keep their investment after it has a medium or substantial growth hoping it will just go higher. 

For those who plan their long-term objectives with an adviser, these objectives are managed considering market volatility.

With the constant change of government leaders, it can be difficult to keep up with tax rules and the impact they can have on our investments. There are changes in capital gains tax, dividend taxes and estate tax.

Currently, there are proposed changes to the tax law that eliminate itemized deductions for the interest paid on a home. In mapping out their financial future, investors will need to keep these variables in mind as well when choosing investment options. 

Don’t forget that tax strategy and investment strategy go hand in hand. 

Those investors looking for dividends but maybe less-taxable dividends may want to look into dividends from natural gas. These dividends usually are modest. The safest way to invest in natural gas would be in Limited Partnerships (LPs).

Be aware there may be qualifications to participate in these types of investments. The benefit is that investors participate as part owners and can take advantage of a portion of the tax benefits passed on to owners.

Investors usually need to be listed as a general partner to do so but many of these investments will move investors to a limited partner status after the tax benefits are lost.

Let’s dissect a typical natural gas partnership. In this example, the partnership consists of raising $20 million to drill 25 wells in a proven area.

This approach mitigates the risk by diversifying into 25 different wells. If all the wells are all drilled and expensed in the first year, then your total investment would have been an expense with little tangible capital left on the books.

In other words, there is no asset except the natural gas, which has not yet been pulled out of the ground. All the drilling equipment is leased from drilling companies, including labor, etc. This is called Intangible Drilling Cost or IDC. 

In extreme circumstances, the gas company participates with its capital in the LP but does not normally need the IDCs and passes those on to the general partners for their tax benefit. With this approach, the general partner investor could actually see a 100 percent tax write off on their investment the first year.

The plan would then be to receive royalties from the wells in future years.

Some Natural Gas LPs also have the gas company participating. In this example, the gas company markets and sells the gas to the end consumer (prisons, schools, and other large-end users). They are sold future prices, which can be higher than the present price.

These consumers are on strict budgets and cannot go over because of gas market price fluctuations. 

Investors familiar with annuities and annuity payments may recognize that a natural gas LP can be similar to an annuity. A lump sum of money is invested and a monthly income stream is expected for a period of time until the funds are exhausted. 

There are two benefits to this approach. First, investors get a huge tax break in the year they invest. Second, they participate as a partner and benefit from the depletion and depreciation expenses all while receiving monthly royalty checks.

The big question I always ask is: Do you think taxes will stay the same, go up, or go down in the future?

With that in mind, choose investments wisely, not only for now but for the future. Consider, too, the type of investment and how taxes are paid on it, now and in the future.

Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial goals.