Five types of tax shelters

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.

  1. Tax free and tax-advantaged investments – Some investments like those in designated empowerment zones offer tax advantages; others like qualified small business stock are completely free from tax. Real estate is often a key component of tax planning. 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.
  2. Tax-free and tax-advantaged employee benefits – Our tax-free health benefits and retirement savings have been fundamental to personal finance. Maximizing the potential under these arrangements can significantly lower income taxes..
  3. 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.
  4. Nonprofit entities – Charities and tax-exempt organizations have always been the favorite tax shelter vehicles of the wealthy.
  5. Life insurance – The tax-free buildup and transfer of wealth within life insurance is a safe and proven way to shelter assets from taxes not only from one generation to another but also, by using tax-free policy loans, a way of generating tax-free cash within the owner’s own lifetime.

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.


One response to “Five types of tax shelters”

  1. […] TAX PLANNING: I see the strongest tax saving and planning opportunities available through employee benefit plans and qualified small business stock investments. I will […]

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