Understanding Tax Shelters

Most people are unclear on what exactly “tax shelters” are, even if they have heard the term tossed around before. To put it simply, tax shelters are places where you can put your money to protect it from the IRS, and yes, they are legal...at least when they’re taken advantage of in the right way.  

While you might think tax shelters are something fancy, the kind of thing that only rich people bother with, that’s not true. In fact, if you have a 401(k) or even home equity, then you have a tax shelter of your own. And, chances are, there are more you can and should be taking advantage of as well.

Deductions

One of the more common types of tax shelters comes in the form of deductions, which allow you to basically not pay taxes on items that you have deducted. There are actually all kinds of things that can be legally deducted, such as charitable donations, medical expenses past a certain amount, student loan interest, and more. Make sure that your accountant and/or tax adviser is helping you to get all of the deductions for which you qualify.

Home Equity

We mentioned earlier that home equity can be a type of tax shelter, and that’s certainly true. Should you decide to sell your home, the IRS will deduct as much as $500,000 (for married couples; single people only get a $250,000 deduction) of your profits from capital gains taxes, meaning you get to enjoy a large chunk of the profit- maybe even all of it- without paying taxes.

Your Child’s College Fund

Finally, if you’ve done the responsible thing as a parent and have stashed money aside for your child or children’s future education...or even for your own education, you can avoid paying taxes on that money by stashing it via the 529 college savings plan.

As you can see, there are all kinds of tax shelters to take advantage of where you can, so start finding smart ways to save money, such as the options discussed here, today!