Legal And Financial Questions: Which Tax Shelters Are Legal?

Learn how to reduce taxable income or defer taxes owed to the IRS with financial investment plans known as tax shelters, and find out which common ones are legal and how you can protect yourself from tax evasion.

Even though the term "tax shelters" makes them sound like buildings you can go to get in out of the weather, they are actually financial investment plans. Technically, a tax shelter is actually an investment. You can make this investment in order to either defer or reduce the amount of taxes that you owe the Internal Revenue Service (IRS). This type of shelter often generates financial losses which counterbalance taxable income.

There are also other tax shelters that don't require a financial investment. This type involves taking steps so you can defer, reduce, or eliminate taxes that you would otherwise owe the IRS. The steps involved usually create additional deductions that you wouldn't ordinarily be entitled to.

Using a tax shelter can be a perfectly legal step to reduce the taxes you owe the IRS. On the other hand, failing to file a tax return or failing to report taxes is known as "tax evasion". This violates the laws of the United States, and, of course, are strictly illegal.

There are many legal tax shelters you can take advantage of, and some of the most common ones include the following:

1. Home Ownership...

Can give you plenty of tax shelters and benefits beginning at the time you buy your house. And, the benefits don't stop until you sell your home. You can deduct all or part of any mortgage interest, points, equity loan interest, home improvement loan interest, property taxes, et cetera.

2. Home Business Offices...

Are also full of legal tax deductions that you can benefit from. You must use a part of your home only for your business, though, and the same part cannot be lived in. You can usually deduct part of your house insurance, depreciation, et cetera.

3. Moving Costs...

Or at least a portion of them can also be legally deducted from your taxes as long as you meet certain requirements. You must be moving in order to accept a new job; you must move within a year of beginning your new job; your new job must be at least a fifty mile distance from your previous address. Check with the Internal Revenue Service's website for additional requirements and details.

4. Getting a Divorce...

Can lead to a miscellaneous deduction on your income tax form. Just make sure that you attorney gives you an itemized bill when he or she is finished with the proceedings. You can't deduct all of your divorce, but you'll probably be able to claim part of the costs. Examples of deductions include the costs of tax planning and the costs of holding onto property.

5. Going Abroad...

Can also reap plenty of legal tax shelters for you. You can reduce your taxable income for a calendar year by putting some of your money into a short or a long - term investment overseas. "Offshore" investments, as they are called, are numerous, and you must be extra careful when you are considering investing in one of them. Some examples of the legal offshore tax shelters include offshore vacation homes, offshore life insurance, variable annuities, deductions for funding an offshore business, foreign earned income exclusions, export sales exclusion, expatriation, and more.

Check with your accountant or a tax official to make sure that the offshore tax shelter you are considering investing in is legal according to the rules and regulations of the IRS.

In fact, you should check the validity of any tax shelter or deduction before you attempt to take it by calling your local Internal Revenue Service office, or visiting the IRS online at They offer advice, forms and publications that can help you further determine legal opportunities. Lowering your income tax liability by using illegal means, or committing tax evasion is punishable in the United States by fines, as well as by imprisonment.

© High Speed Ventures 2011