The term “tax shelter” usually conjures up ideas or illegal activity. Like images of extremely wealthy individuals shipping their money overseas to hidden bank accounts, never to be discovered by U.S. tax officials. Not all tax shelters are shady. In fact,some tax shelters are perfectly legal and you might be missing out on them. The fact is these strategies can help reduce your taxes and save you money.
Common Legal Tax Shelters
The term tax shelter simply refers to any method to lower your taxable income, meaning you pay less in taxes. So what tax shelters could you be missing out on? Let’s take a look a several common ways to legally “shelter” your income from the IRS.
Take Advantage of Workplace Benefits–
there are a few workplace benefits that can help you save on taxes. Any company that offers health and disability insurance usually deducts the cost to you before you get paid, which saves you on taxes. Furthermore, some employers reimburse workers for certain job-related expenses, which is also nontaxable.
this is one of the most obvious tax shelters available to just about everyone. You save money for retirement that comes out of your paycheck before taxes. It lowers your tax bill every paycheck and in most cases it grows substantially over time. Plus, many employers also contribute to employees’ retirement accounts, which is essentially free money.
Owning a Home–
when you own real estate you have a great opportunity to use it as a tax shelter. It cuts your taxes when you buy it; every year you own it after that, and even when you sell it. You get to deduct mortgage interest and property taxes. And, you might be able to deduct some of the interest you pay on a home equity loan or line of credit from that equityif you take such a loan. But keep in mind that itemizing deductions is much different now under the Tax Cut and Jobs Act, so this “shelter” might not be as beneficial as it used to be.
Medical Savings Accounts–
medical savings accounts, or flexible spending accounts are a great way to save on your health care expenses. But not only that, they help you save on taxes. You get to put pre-tax earnings into these accounts and then use them for medical expenses, thus reducing your tax bill.
Starting a Business–
when you start or own a business you have many opportunities to save on your taxes. For starters, you can convert a portion of your personal expenses into allowable business deductions, if you’re trying to make a profit from your business. Good examples of reasonableexpenses you could deduct include your computer and your phone. Additionally, if you run your business out of your home, you might be able to deduct a portion of your home expenses, based on the size of your home and how much of it is dedicated to your business.
Not every kind of tax shelter is illegal. So make sure you are taking advantage of these simple, and very legal,“tax-sheltering” strategies that can save you big at tax time.