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Simple English definitions for legal terms
Tax shelter
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A quick definition of Tax shelter:
A tax shelter is a way to legally reduce or delay the amount of money you have to pay in taxes. It's like a special secret hiding place for your money that the government can't touch. Some tax shelters are not allowed anymore, but others are still okay to use.
A more thorough explanation:
Definition: A tax shelter is a financial strategy or investment plan that is designed to reduce or defer an individual's taxable income. Some tax shelters have been made illegal by law or invalidated by courts, while others remain legal or even encouraged by law.
- Retirement accounts, such as 401(k)s and IRAs, are a common type of tax shelter. Contributions made to these accounts are tax-deductible, which means they reduce your taxable income for the year. Additionally, any earnings on the investments in the account are tax-deferred until you withdraw the money in retirement.
- Real estate investments can also be a tax shelter. Rental properties can generate income that is offset by expenses such as mortgage interest, property taxes, and repairs. These expenses can be deducted from your taxable income, reducing the amount of taxes you owe.
These examples illustrate how tax shelters work by reducing or deferring taxable income. By taking advantage of tax deductions and deferrals, individuals can lower their tax bills and keep more of their money.