(FORTUNE Magazine) – NOW THAT the grand old days of tax shelters are over, what has taken their place -- sort of -- is an array of tactics best described as tax-advantaged investing. Since tax reform, most investments have to make it on their own rather than as wards of the Internal Revenue Service. The new strategy is more subtle than the old, a matter of hitting singles and doubles rather than home runs. Says Martin M. Shenkman, a New York City tax attorney: ''The idea is to structure your investments to create deductions that minimize taxes, while at the same time leaving a positive cash flow.'' A tax-wise portfolio these days will be short on limited partnerships entered into for tax reasons alone, and long on stodgy old standbys like tax- free municipal bonds and 401(k) accounts. It will also be set up to extract the full tax advantages of other investments, from your home to your insurance policies. Diversification is as important here as it is with any other kind of investing. For instance, too heavy a commitment to a retirement plan that extracts a heavy penalty for early withdrawal may deny you the flexibility to plunge when an exceptionally good opportunity crops up. Too many tax-free bonds could leave you vulnerable to a spike in interest rates. Here's a rundown of the best tax-advantaged investments: BONDS Most municipal bonds survived the Tax Reform Act of 1986 with their tax-free status intact. They also seem to have weathered a recent unfavorable ruling by the Supreme Court that asserted -- in principle -- the federal government's right to tax them. Few observers expect that Congress will dare to exercise that right, at least anytime soon. As might be expected of one of the few remaining tax-sheltered investments, municipal bonds have surged in popularity. Unfortunately, the supply has dwindled. Because the tax act sharply curtailed tax exemptions for so-called private purpose municipals, localities can no longer issue tax-exempt bonds to finance such things as stadiums, convention centers, and pollution control devices for aging smokestack industries. Several major New York investment banks -- including the biggest muni dealer, Salomon Brothers -- shut down their municipal bond departments. The volume of new issues dropped by a third in 1987. Naturally, in such a supply-and-demand situation, yields on municipals have plunged. Municipal bonds with long maturities have been affected less than others. High-quality, long-term municipals can yield as much as 8%; for someone in the 28% bracket, that's the equivalent of 11% on Treasury bonds. By comparison, long-term Treasuries are yielding only 9%, or less than 7% after taxes. But for shorter maturities, these days taxable instruments are often the better buy. A look at the numbers shows why. The Strong Money Market Fund, a typical taxable fund, recently yielded 7.97%. Assuming a 28% tax rate, that would equal 5.74% after taxes. By contrast, Strong's tax-free money market fund recently yielded only 5.27%. (People in high-tax states like New York and California must factor in the additional impact of their local levies, which make tax-free funds more attractive.) To David A. Berenson, national director of tax policy and practice for Ernst & Whinney, buying Treasury bonds is the best tax-advantaged investment strategy today, mainly because tax rates are so low. In addition, Treasuries held to maturity are risk free, while other investments, including municipal bonds, are subject to default or downgrading. Write-offs of losses on other investments are worth less than they used to be, given the low tax rates. Particularly risky among municipals are issues from electric utilities tied up in regulatory problems. If you don't need income from the investment along the way, tax-free zero- coupon bonds are a good choice for meeting a predictable financial need in the future, such as college bills or your own retirement. Zeros pay no interest, so you don't have to decide what to do with interest checks every six months or so. You buy zeros at a big enough discount to redemption value so that the effective yield is comparable with other types of bond yields. There are two potential problems: Tax-free zeros are in short supply, and their market value varies wildly as interest rates change. Selling a zero before its time could produce a substantial loss.

TRADITIONAL TAX SHELTERS The only old-style tax shelters left are oil and gas partnerships, and even those aren't what they used to be. Thanks to the persuasiveness of petroleum industry lobbyists, unlimited losses generated by these shelters can still be deducted against income from any source, just as always. Usually such losses amount to two or more times the original investment. The catch is that you must take what the tax code defines as a ''working interest,'' or general partner role, in the deal, which could make you as liable as the general partner for accidents at the well site or for financial shenanigans by others. Potential investors should have deep pockets -- some states impose minimum net worth requirements -- and a high tolerance for risk. The Tax Reform Act of 1986 allows a few other types of shelters, including partnerships for creating new low-income housing and for rehabilitating old buildings. These hardly resemble the wide-open shelters of yore, however, because they're hung about with a daunting string of restrictions. For instance, only investors with adjusted gross incomes of less than $150,000 are eligible for tax credits from the low-income housing deal. (For the rehab shelter, your income must be less than $250,000.) Those tax credits -- dollar-for-dollar reductions in the tax you owe -- can amount to 20% of your investment in a rehab project, starting as soon as the building is occupied. Low-income housing credits range as high as 9%, up to an annual maximum of $7,000, every year for ten years. To qualify, in both cases, the projects must be completed according to a thicket of specifications, and investors must hang on to their stakes for 15 years. So the shelters are highly illiquid. Still, for the socially conscious or those in whom the hatred of taxes burns especially bright, these investments can be worthwhile. Typically & several projects are packaged into limited partnerships and sold through syndicators or brokerage houses. ''Look at any of these partnerships the way you would buy a suit. Each one is different,'' advises Margaret C. Starner, vice president for financial planning at Raymond James, a regional brokerage in Coral Gables, Florida. Also, check the record of the company offering the partnership. In low-income housing Starner recommends the Gateway partnership offered by her own firm as well as partnerships sold by Shearson Lehman Hutton. One caveat: Unless Congress extends the low-income housing legislation, all projects under way but not occupied by the end of 1989 will be ineligible for special tax status. Another real estate-related survivor of the Tax Reform Act involves rental properties. If your adjusted gross income is less than $100,000 a year, you may deduct against ordinary income up to $25,000 a year in losses created by rental operations. That $25,000 write-off can include depreciation and interest payments on the property. It phases out as your income climbs above $100,000 and disappears entirely if you earn more than $150,000. To qualify, you must own at least 10% of the rental property and be actively involved in its management. That means, for example, helping make decisions and interviewing prospective renters. Beyond these strategies, dealing with tax shelters or shelterlike investments will get less rewarding as the deductions phase out over the next two years (see preceding story). The sweetest-sounding solution to this problem is a PIG, or passive income generator. These partnerships are specifically designed to throw off a steady stream of income against which passive losses from existing shelters may be deducted. Unfortunately, the IRS has disqualified on technical grounds many would-be PIGs cobbled together by syndicators. Don't buy a PIG in a poke. If your broker offers one, make sure it will withstand IRS examination. The successors to traditional tax shelters are limited partnerships designed not to create large immediate losses, but to generate positive cash flow while minimizing an investor's tax burden one way or another. According to Starner, partnerships have two main tax-related advantages. First, profits are not taxed twice as they are when a publicly held company distributes its (after-tax) earnings in the form of (taxable) dividends. Second, depreciation and other expenses can be deducted from the partnership's ; earnings, in effect deferring taxes until the business is sold and the partnership dissolves. The key factor in a post-reform partnership is the record of the syndicator. (For a guide to appraising limited partnerships, see the following story.)

RETIREMENT PLANS Most investors should contribute to one of the three tax-favored retirement plans. Pretax money goes into these accounts and compounds tax-free until you withdraw it -- a bona fide good deal. Company-sponsored 401(k) plans are the vehicle of choice for most employees these days, while Keogh plans remain the route for those with self-employment income. If your company doesn't sponsor a 401(k) or pension plan, you are probably eligible to make tax-deductible contributions to an individual retirement account. Also eligible are single people whose adjusted gross income is less than $25,000 and married couples filing jointly with an adjusted income of less than $40,000. The Tax Reform Act of 1986 allows anyone above those income levels to make nondeductible IRA contributions of up to $2,000 a year. Given the prevailing low tax rates, this might seem like a good idea, but beware: The bookkeeping is a tangle. You must be able to show the IRS upon withdrawal -- years from now -- which portion of your account's mingled contributions and earnings has been taxed already and which has not. What's more, given this year's low tax rates, stashing money in retirement plans may not make sense. Jonathan Kenter, an associate specializing in retirement plans at the New York City law firm of Shea & Gould, argues that it may not pay if you're within a few years of retirement. Suppose you are age 57 and your company sponsors a 401(k) to which you make the maximum allowable 1988 contribution of $7,313. After three years of compounding at, say, 7%, your stake would be worth $8,959. At that point, having passed the threshold age of 59 1/2, you could withdraw it without having to pay a 10% penalty. Assuming the current 28% tax rate, you would have $6,450 left. Alternatively, you could take that $7,313, pay your 28% tax on it this year, and invest the resulting $5,265 at, say, 5.5% in tax-free municipals. After three years you would have $6,183. The 401(k) option would seem preferable. But what if Congress increases income taxes from their current low levels, as most observers believe it inevitably will? If your new tax bracket is 31% or higher, you would be worse off using the 401(k) option than paying taxes on the money now. ''The longer your contributions sit in your account earning tax-deferred interest, the better off you are,'' notes Kenter. ''But if you're older, you may be taking a chance that taxes will stay low.'' Kenter figures rates have to rise no more than about nine percentage points in ten years to justify paying the 28% tax on your savings now and investing what's left. Looking 15 years ahead, Kenter calculates that your tax bracket would have to climb 14 percentage points before the benefit of deferring taxes disappears. That is still less than the 50% top bracket of three years ago. Here again, high state and local taxes can make the retirement plan option more attractive. TWO OTHER considerations may also favor going with a 401(k) or a similar tax-deferred plan. First, many companies match part or all of your contribution, a bonus that tax consequences can rarely cancel out. Second, you may be tempted to spend the savings you intended to invest outside a plan, so be sure to assess your self-discipline realistically. If you have passed the age-59 1/2 threshold and withdraw money from your retirement funds to take advantage of this year's low rates, be aware that distributions of more than $150,000 a year trigger a 15% penalty unless you claim a special exemption on your 1988 return. To qualify for the exemption, your plan must have been worth more than $562,500 on August 1, 1986. If you are younger than 59 1/2, withdrawing money from an IRA and paying the 10% penalty plus taxes would seem unwise no matter what your bracket, unless it's an emergency. In that case, the IRS sometimes grants an exemption.

INSURANCE Squirreling away cash in a single-premium deferred annuity is much like contributing to a nondeductible IRA, without as many bookkeeping headaches. Your cash grows tax-free until withdrawal, and you can usually transfer it from one type of account to another -- say, from bonds to growth stocks. Withdrawals before age 59 1/2 trigger a 10% penalty. BORROWING Mortgage interest on your first and second residences remains fully deductible, so long as the combined loans do not exceed $1.1 million. If your mortgage is paid off or nearly so, you may want to consider taking out a home equity loan. The Revenue Act of 1987 allows you to deduct from ordinary income the interest paid on a home equity loan that is for $100,000 or less. Interest on investment loans, such as margin accounts at brokerage / houses, is still deductible, but less liberally. Formerly you could deduct $10,000 a year in interest from such loans, plus additional interest equal to your investment income. The new tax code is phasing out that $10,000 base; this year it is down to $4,000. By 1991 you may deduct only interest equal to your investment income for that year. Tapping such accounts for noninvestment purposes should be done judiciously. The temptation is real, since you have already posted collateral and the funds are available almost instantly. But remember, the IRS demands detailed paperwork proving how funds from a margin account are actually used. Make sure that if you borrow for investments the money comes from your margin account. If you use such funds to pay for a new car and later must borrow from the bank to pay for some stock, you could be squandering a deduction.