Tax Shelter

A tax shelter is a legal means of lowering or deferring a taxpayer's taxable income, and by extension the amount of tax owed. Taxpayers in a high tax bracket are most likely to make use of a tax shelter or tax shelters. A tax shelter is often an investment, such as an IRA, 401(k) plan, municipal bond, or life insurance. Other types of tax shelters include the depletion allowances for resource extraction and exploration. Depreciation of equipment, real estate, or other assets can also be used as a tax shelter. Even when owned real estate generates income, it can function as a tax shelter if losses from interest payment on debt and depreciation exceed income. However, the tax reform bill that Congress passed in 1986 placed limitations on the extent to which taxpayers could use passive losses of this kind as a tax shelter; it stipulated that passive losses could only be deducted from passive income. A tax shelter is not the same as tax evasion, which entails misrepresenting one's income.