What is a 'Tax Shelter'

A tax shelter is 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.

BREAKING DOWN '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. Offshore Portfolio Investment Strategy ...

    A tax shelter product designed to create large, seemingly real ...
  2. Abusive Tax Shelter

    An investment scheme that claims to reduce income tax without ...
  3. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  4. Tax Base

    The assessed value of a set of assets, investments or income ...
  5. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  6. Income Tax Payable

    A type of account in the current liabilities section of a company's ...
Related Articles
  1. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  2. Taxes

    Minimizing the Amount of Income Tax You Owe

    The amount of income you receive and tax deductions and credits you take impact how much you'll owe.
  3. Taxes

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  4. Taxes

    Minimize Taxes With Asset Location

    Learn how to maximize your investment returns with this tax-minimization strategy.
  5. Taxes

    Preparing for Potential Tax Policy Changes

    Here is a comprehensive guide to tax planning in an environment where policies could dramatically change under new leadership in Washington.
  6. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  7. Managing Wealth

    What is the Effective Tax Rate?

    The effective tax rate is the average rate at which an individual or corporation is taxed per year.
  8. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  9. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  10. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
RELATED FAQS
  1. What assets are taxable and what assets are not taxable?

    Adjust your taxable income by understanding what assets the IRS taxes. Learn about legal strategies to lower tax liability ... Read Answer >>
  2. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Dumping

    In international trade, the export by a country or company of a product at a price that is lower in the foreign market than ...
  2. Tender Offer

    An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the ...
  3. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  4. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  5. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center