The Differences Between Tax Havens and Tax Shelters

Many people think of the terms “tax havens” and “tax shelters” as interchangeable. However, while these two things are definitely similar, they re not one and the same.   

First of all, it’s important to understand what each of these things does. What they do is actually quite similar, hence the confusion. Both tax havens and tax shelters are used to legally decrease the amount of income tax people with high net worth have to pay.

How exactly they operate and what they do, however, is where they differ.

Tax Havens

Tax havens are places where the tax laws tend to be lenient. This could be a whole country, a state, or even just a little area. No matter where a tax haven is located, it typically has very low income tax or no income tax, which attracts many to open up offshore banking accounts and trusts in these areas or to form international business corporations linked to the tax haven f their choice.

As mentioned, tax havens are all over the place. However, some of the most popular and commonly used include the Cayman Islands, Switzerland, The British Virgin Islands, and Bermuda, all of which offer privacy and protection to taxpayers.

Tax Shelters

Tax shelters, unlike tax havens, aren’t really a “place.” They are more of a method, a way to legally reduce your income taxes. A good accountant can help you find various tax shelters that could work for you, like new investment strategies.

A lot of the tax shelters that people enjoy are simply about timing- filing taxes at the right time and taking advantage of windows of opportunity. Others are tried and true, like 401(k)s and IRAs or government mutual funds or municipal bonds.

The best way to learn about tax shelters that could work for you is to speak with your financial advisor. This is also a good way to learn about tax havens and other money saving options for the tax year!