A tax shelter is a strategy or financial arrangement to reduce the tax liability. The main feature of such strategies is that they are permitted by the law (Josephson, 2017). Normally, the way to avail tax shelter is in the form of investment. Main examples are home equity loans where the individual gets relief from capital gain up to an amount of $250,000 if the seller is unmarried. For married couple, the exemption is given up to the capital gain of $500,000. Next is the retirement plan where the contribution to such schemes is deducted from the total income of the assessee, further the income generating from such investment is also tax-free. Another tax shelter option is college savings plan.
In the USA there is one popular 529 college savings plan. These plans are managed by the States and the academic institutions. These plans allow contribution for the educational purpose of the children. The earnings accruing from these investments are not subject to any Federal tax provided the expenses are made for qualified educational expenses.
However, there must be kept in view that tax shelters should be claimed legally and for genuine purposes. Any non-genuine attempt will not amount to a tax shelter; rather it will be termed as tax evasion, which is a punishable act by the tax authorities.
Josephson, A. (2017, March 22). What Is a Tax Shelter? Retrieved July 12, 2017, from SmartAsset: https://smartasset.com/taxes/what-is-a-tax-shelter