Tax Shelter
A tax shelter is a financial arrangement or investment that helps reduce an individual or business's taxable income, lowering the overall tax liability. Tax shelters can be legal, such as retirement accounts or real estate investments that offer deductions and deferrals, or illegal when designed to evade taxes through fraudulent means. Legal tax shelters are commonly used to defer taxes or protect income from being fully taxed in the current period.
Example
Contributing to a 401(k) retirement plan is a form of tax shelter, as contributions are tax-deferred, reducing taxable income during the contribution year.
Key points
• A strategy or investment used to reduce taxable income and lower tax liability.
• Can be legal, such as retirement accounts, or illegal if used for tax evasion.
• Helps defer or minimize taxes on certain income or gains.
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