tax shelter

noun

Updated on: 26 Jul 2017

Definition of tax shelter

: a strategy, investment, or tax code provision that reduces tax liability

tax–sheltered

play \ˈtaks-ˌshel-tərd\ adjective

See tax shelter defined for English-language learners

First Known Use of tax shelter

1952

Financial Definition of TAX SHELTER

tax shelter

noun

What It Is

A tax shelter is a means of minimizing one's tax liability. Tax shelters can be both legal and illegal.

How It Works

The most widely used tax shelter in the United States is the 401(k) employer sponsored plan. It is generally available to an employee to both reduce the amount of taxes paid on his income as well as to save for his future retirement.

The Internal Revenue Service (IRS) investment vehicles such as 401(k)s and IRAs as legal tax avoidance mechanisms.

Limited partnerships are also considered legal tax shelters. They can avoid taxes because the business -- for example mining companies --require several years and heavy capital investment before a real income is realized. Taxes are levied as soon as the company starts to make income.

[InvestingAnswers Feature: The Most Important Tax Changes to Know Before Filing Your Tax Return]

Why It Matters

While retirement plans and limited partnerships are legal, many investment vehicles are illegal. A series of tax laws have been implemented to put a stop to abusive tax shelters.

The IRS will attach a fee if one places money into an "abusive" shelter. Abusive shelters are those that "exist primarily to reduce taxes unreasonably for tax avoidance or evasion... A legitimate investment produces income or capital appreciation and involves a risk of loss proportionate to the investment."

Illegal tax shelters include offshore companies which beguile the tax system.

More information on tax shelters may be found at the IRS website.

[InvestingAnswers Feature: How to Avoid an IRS Audit]

Source: Investing Answers

TAX SHELTER Defined for English Language Learners

tax shelter

noun

Definition of tax shelter for English Language Learners

: a way of investing money that reduces the amount of tax that has to be paid

Law Dictionary

tax shelter

noun

Legal Definition of tax shelter

: an entity (as a partnership) or investment plan or arrangement whose principal purpose is the avoidance or evasion of income tax; also : an interest offered or purchased on the premise that it will provide favorable tax consequences