Tax Shelter

AAA

DEFINITION of 'Tax Shelter'

A legal method of minimizing or decreasing an investor's taxable income and, therefore, his or her tax liability. Tax shelters can range from investments or investment accounts that provide favorable tax treatment, to activities or transactions that lower taxable income. The most common type of tax shelter is an employer-sponsored 401(k) plan.

INVESTOPEDIA EXPLAINS 'Tax Shelter'

Tax authorities watch tax shelters carefully. If an investment is made for the sole purpose of avoiding or evading taxes, you could be forced to pay additional taxes and penalties. Tax minimization (also referred to as tax avoidance) is a perfectly legal way to minimize taxable income and lower taxes payable. Do not confuse this with tax evasion, the illegal avoidance of taxes through misrepresentation or similar means.

RELATED TERMS
  1. Double Irish With A Dutch Sandwich

    A tax avoidance technique employed by certain large corporations, ...
  2. Income Shifting

    A strategy of moving a person's income from a high income bracket ...
  3. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  4. Employer-Sponsored Plan

    A type of benefit plan that an employer offers for the benefit ...
  5. Tax Avoidance

    The use of legal methods to modify an individual's financial ...
  6. Offshore Portfolio Investment Strategy ...

    A tax shelter product designed to create large, seemingly real ...
RELATED FAQS
  1. What was the Mahonia company and why did it become the subject of a lawsuit?

    In 1992, J.P.Morgan went into the energy trading business by creating a venture company called Mahonia Limited. At least, ... Read Full Answer >>
  2. What are the best free online calculators for calculating my taxable income?

    Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>
  3. In what instances does overhead qualify for certain tax allowances?

    Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>
  4. How are write-offs recorded on my tax return?

    The way your write-offs are recorded on your tax return varies depending on whether you are filing a personal or business ... Read Full Answer >>
  5. What is the difference between comprehensive income and gross income?

    Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
  6. What are some good free online calculators for AGI (adjusted gross income)?

    Both CNNMoney.com and Bankrate.com offer free online calculators for figuring adjusted gross income, or AGI. Calculations ... Read Full Answer >>
Related Articles
  1. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  2. Taxes

    Surviving The IRS Audit

    Keeping thorough records and knowing the penalties make this experience easier than you'd expect.
  3. Taxes

    Safe Tax Planning For High-Net-Worth Filers

    Planning is essential for the affluent seeking tax breaks. Get to know the legal strategies for saving more.
  4. Mutual Funds & ETFs

    Activist Hedge Funds: Follow The Trail To Profit

    Learn to profit by following the lead of some of Wall Street's most ruthless investors.
  5. Options & Futures

    Cut Your Tax Bill With Permanent Life Insurance

    Learn how to lower your income tax and avoid estate tax - all while building wealth.
  6. Taxes

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  7. Investing Basics

    Understanding the Capital Gains Tax

    A capital gains tax is imposed on the profits realized when an investor or corporation sells an asset for a higher price than its purchase price.
  8. Retirement

    How to Convert a Roth IRA to a Traditional IRA

    If the technicalities of converting a Roth IRA to a traditional IRA seem dauntingly complex, here are a few simple tips to guide you through the process.
  9. Retirement

    5 Reasons to Convert a Roth To a Traditional IRA

    Here's a quintet of cases when the traditional IRA trumps the Roth version.
  10. Personal Finance

    Get Your House In Order By Choosing a Financial Advisor

    As the old saying goes, people don't plan to fail, they just fail to plan.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!