There are five categories of tax shelters that benefit many individual U.S. taxpayers and account for most of the tax savings available to us. Four of those categories of tax shelters are potentially on the chopping block this month with Congressional tax reform discussions.
This post is simply a brief overview of the five categories of tax shelters that we know and love. Listing the categories may help serve as a basis of understanding the coverage of tax reform proposals that will soon follow.
- Real estate – Tax deductions for mortgage interest and property taxes and the ability to deduct depreciation expense on commercial properties are significant wealth builders for many of us. These deductions will be limited in the future if industry lobbyists are unsuccessful in their defense.
- Employee benefits – Our tax-free health benefits and retirement savings have been fundamental to personal finance. We expect these to be limited under tax reform.
- International transactions – Foreign income, electronic currency and offshore accounts are already under scrutiny of IRS. The screws will tighten further. Each year a growing number of taxpayers denounce their US citizenship in order to avoid taxes.
- Nonprofit entities – Charities and tax-exempt organizations have always been the favorite tax shelter vehicles of the wealthy. Their use might be limited under tax reform.
- Life insurance – The tax-free buildup and transfer of wealth within life insurance is the only category of tax shelter not under pressure during this round of tax reform.
Each of us might benefit by considering how these tax-reducing strategies fit into our own tax calculation and how these might be affected by tax reform proposals.