What is a tax shelter?

A tax shelter is best defined as a financial arrangement that effectively reduces taxable income or defers tax obligations, enabling individuals or businesses to minimize their overall tax liability. Tax shelters come in various forms, such as contributions to retirement accounts, certain types of investments, or specific financial instruments that allow for deductions or credits.

The key aspect of a tax shelter is its ability to defer or lower the amount of income subject to tax, thus providing a tax advantage. These arrangements capitalize on existing tax laws that incentivize certain behaviors, like saving for retirement or investing in specific sectors.

Choosing a tax shelter usually involves strategic financial planning, guiding taxpayers toward investments or expenses that offer favorable tax treatment, ultimately aiming to enhance financial outcomes by reducing the burden imposed by tax liabilities.