What is a Tax Shelter?
A tax shelter is a legal method taxpayers can use to reduce tax liabilities. Tax shelters are used to describe some of the tax advantages of real estate investment, such as deductions for depreciation, interest, and taxes, which may offset the investor’s other ordinary income to reduce overall tax payment.
arrangement for legally decreasing your taxable income. Tax shelters are usually specialized accounts, such as a 401(k), which lowers the amount of tax you’re required to pay on any money you earn. Investors often utilize tax shelters as an investment strategy to offset losses or minimize their tax liabilities.
A tax shelter is an investment with tax deductions and tax benefits of greater value than the investment itself. The specifics of what constitutes a tax shelter depends on the local tax authority and varies between countries. Rental real estate, natural resource prospecting, film production, and alternate energy sources are examples of common tax shelters. A tax shelter may be geared towards individuals or corporations. At the corporate level, taking advantage of a tax shelter requires expert knowledge of the tax code. Even professional accounting firms, however, don’t always get it right. Following the US bear market of 2000-2002, regulators uncovered the widespread abuse of tax shelters. Arthur Anderson, a major accounting firm at the time, was disbanded for its role in helping companies such as Enron and Worldcom evade taxation. Executives at such firms found themselves in criminal court facing lengthy jail sentences. While tax shelters have a reputation for skirting the law, govern
Although it sounds like a specific place, a tax shelter is any investment strategy that enables you to legally decrease or avoid taxation. Actual tax shelter investments sometimes require a large investment with a degree of risk. The goal of many shelters is to create offsetting losses to other taxable income. In order to take advantage of tax sheltering, you will need to be able to differentiate between two types of taxable income. Passive activity income is derived from a trade or business activity in which you didn’t “materially participate” during the tax year. You are deemed to have “materially participated” by qualifying under one of seven IRS tests, each of which requires actual, substantial involvement in the business activity (for example, you spent at least 100 hours during the year in the activity, and nobody else spent any more time than you did.) Generally, you can only deduct passive activity losses from passive activity income. A tax credit is a dollar-for-dollar reducti
Tax shelters are defined in the Income Tax Act. In very general terms, a tax shelter includes either a gifting arrangement or the acquisition of property, where it is represented to the purchaser or donor that the tax benefits and deductions arising from the arrangement or acquisition will equal or exceed the net costs of entering into the arrangement or the property. Also, a gifting arrangement where the donor incurs a limited recourse debt related to the gift will be a tax shelter. Generally a limited recourse debt is one where the borrower is not at risk for the repayment.
