What is a Tax Shelter?
A tax shelter is a means of minimizing one's tax liability. Tax shelters can be both legal and illegal.
How Does a Tax Shelter Work?
The most widely used tax shelter in the United States is the 401(k) employer sponsored plan. It is generally available to an employee to both reduce the amount of taxes paid on his income as well as to save for his future retirement.
Limited partnerships are also considered legal tax shelters. They can avoid taxes because the business -- for example mining companies --require several years and heavy capital investment before a real income is realized. Taxes are levied as soon as the company starts to make income.
Why Does a Tax Shelter Matter?
Illegal tax shelters include offshore companies which beguile the tax system.
More information on tax shelters may be found at the IRS website.