TurboTax / Tax Calculators & Tips / All Tax Guides / General Tax Tips / Running for the (Tax) Shelter

Running for the (Tax) Shelter

Updated for Tax Year 2015


Look to the home front to protect your assets. The only "surefire" tax shelters remaining are deductions such as your mortgage and donations to charity.

Once upon a time, in an era of prosperity, wealthy Americans could hide some of their assets in complicated, ingenious financial structures called tax shelters, which enabled them to avoid paying taxes on major portions of their income.

Some devices for hiding wealth, such as overseas accounts, still exist. Most domestic tax shelters, however, have been shut down by Congress, the Internal Revenue Service and the courts. A few basic, legitimate devices to lower your tax bill still exist. Some – a mortgage, for example – are much closer to home than the intricate schemes of a few decades ago.

“By and large, really anytime you get a deduction or credit, it is sheltering you from some tax,” said Jerome Borison, an associate professor at the University of Denver’s Sturm College of Law.

You don’t have to risk fines or – as in the most extreme cases – jail time to keep a bit more of your hard-earned income, said Barbara Weltman, author of “J.K. Lasser’s 1001 Deductions and Tax Breaks 2015.” You must take care, however, to avoid the “too good to be true” deals.

"By and large, really anytime you get a deduction or credit it is sheltering you from some tax."

- Jerome Borison, associate professor, University of Denver’s Sturm College of Law

The bad old days of tax shelters

Borison described one scheme involving paintings. It could return $35,000 in tax savings on a $10,000 investment. Another involved Italian B-movies. In both cases and in many others like them the investors had no plan to make any money on the project other than the tax savings, which could be enormous.

Then came the Tax Reform Act, and that market collapsed – at least from a legal point of view.

“Even sophisticated taxpayers today are pretty much in a mine field if they try to follow the advice of these promoters who come up with these tremendously clever (schemes),” Borison said. The promotions may be clever, he said, but they usually don’t work.

“The courts have taken a pretty hard line over the last 10 or 15 years when it comes to tax shelters,” he continued. The people involved often have to pay interest and penalties, he said, and the courts are “not kind” about working out settlements.

In addition to teaching tax law at Sturm, Borison does outside tax work, often for people involved in risky schemes. He said there is usually little he can do to help them.

“These clients have had very little luck in being able to support the deductions they take on their return,” he said.

Wealthy people still sometimes shelter money by depositing it in offshore banks in places such as the Cayman Islands and Switzerland, which have lax tax laws, Borison said.

Legitimate tax shelters

Though not “tax shelters” in the strictest sense, many tax deductions can save you substantial money on your taxes, by decreasing the amount of your income that is taxable.

The first example noted by Borison and Weltman is the home mortgage, which Weltman called the “No. 1 tax shelter.” You may deduct the mortgage interest and property taxes. If you sell the home, there are no taxes on profits of up to $250,000 -- or even as much as $500,000 for couples filing jointly -- as long as you meet certain conditions, Weltman said.

Among other legitimate shelters are charitable donations; 529 savings plans for college costs, which usually are deductible at the state level; and certain state and local municipal bonds, some of which are deductible on both state and federal taxes.

Additionally, “any kind of retirement plan is basically a tax shelter,” Borison said, although some only defer taxes while earning interest until you withdraw the money.

Weltman added business ownership to the list of potential tax shelters. If you operate a business, she said, many otherwise personal expenses may become deductible business expenses.

“For example," she said, "if the business operates from a home, a portion of personal costs of the household, including utilities, insurance, etc., becomes a business deduction. Medical coverage becomes an above-the-line deduction rather than an itemized cost.”

Above-the-line deductions are valuable because they don’t phase in or out at certain levels or have other limitations.

What makes these types of tax shelters different, Borison said, is they serve a purpose other than simply as tax savings. Home ownership offers a residence and, at least until the collapse in real estate prices, offered a good investment. Charitable donations, retirement funds and college savings plans help on the tax return, but they have other obvious benefits.

Red flags for problematic tax shelters

Taxpayers looking for a break must avoid seemingly lucrative investment strategies, notes Jerome Borison, who teaches tax law at the University of Denver's Sturm College of Law. A poor deal will offer deductions larger than the investment, require confidentiality agreements, or involve investments outside the United States. Any plan intended to simply save money on taxes while serving no other purpose should also raise a red flag.

Borison recommends that you seek your own professional opinion regarding a questionable investment plan.

“People should be aware that just because an attorney or an accountant (representing the investment product) has given a very lengthy legal option that it is OK doesn’t mean it’s OK.”

For a list of tax scams -- including tax shelters -- author Barbara Weltman recommends the Internal Revenue Service’s “Dirty Dozen” web page at irs.gov.

Get every deduction you deserve

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

For only $54.99$34.99*
Start for Free

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

* Important Offer Details and Disclosures
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Actual prices are determined at the time of print or efile and are subject to change without notice. Special discount offers may not be valid for mobile in-app purchases.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal efile of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Prices subject to change without notice.
  • TurboTax Mobile: Actual prices are determined at the time of print or efile and are subject to change without notice. Come back here before you file to confirm that the price has not changed, especially if it's been a while since you downloaded this app.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app features and content. TurboTax mobile app devices supported include Android 4.1 and above, iOS 8 on iPhone 4s and above, and iPad 2.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $34.99 Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • About our TurboTax Product Experts: Customer service and product support (phone or chat) vary by time of year. Phone support not included with Free Edition.
  • About our credentialed tax experts: Live tax advice service is available for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Click here for full terms and conditions. Not available for TurboTax Business customers.
  • Get up to 10% on top of your federal refund: Amazon.com Gift Card offer is for federal refunds only. Limits apply ($2000 per e-card, maximum $10,000 per customer). Offer available only for TurboTax Online (except Federal Free Edition) or CD/download versions sold and shipped, or downloaded directly from Intuit or Amazon. Except as required by law, Amazon.com Gift Cards cannot be canceled, transferred for value or redeemed for cash.

    Amazon.com is not a sponsor of this promotion. Except as required by law, Amazon.com Gift Cards ('GCs') cannot be transferred for value or redeemed for cash. GCs may be used only for purchases of eligible goods at Amazon.com or certain of its affiliated websites. For complete terms and conditions, see www.amazon.com/gc-legal. GCs are issued by ACI Gift Cards, Inc., a Washington corporation. All Amazon ®, ™ & © are IP of Amazon.com or its affiliates. No expiration date or service fees.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2013 TurboTax products.
  • 4.8 out of 5 stars: Average based on customer ratings on TurboTax.com for TurboTax Online and CD/download products tax year 2014, as of January 2015.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • TurboTax CD/Download priority phone support: Priority phone support for TurboTax CD/Download Premier and Home & Business is accessible exclusively via the TurboTax.com Help Center.
  • Benefit Assist: After you file, TurboTax automatically shows you a full list of government benefits you may qualify for, like Food Stamps or reduced phone & utilities. Plus, we help you apply, saving you time and making it easier than ever to get more money! Estimate based on calculation of Benefit Assist users from tax year 2013 and published reports of average benefit and savings amounts from federal and state programs. Actual amounts and qualifications based on your individual situation; some individuals will not qualify. Feature may not be available for all customers.
  • Simplified State Experience: New, simplified state tax preparation available for most filers.
  • Eligibility for $25 cash back for returning Deluxe customers: Customers who have completed their 2013 taxes in TurboTax Deluxe (CD or download), and have completed their 2014 taxes in either TurboTax Premier or TurboTax Home & Business (CD or download), and apply here before 11:59PM PDT April 20, 2015, are eligible for $25 back. 2014 TurboTax Advantage users are ineligible for this offer. Terms and conditions are subject to change without notice.
  • $0 Upgrade Offer: Valid for customers who filed their 2013 taxes with TurboTax Deluxe (CD or download), completed prior year data transfer this year, and encounter an upgrade to either 2014 TurboTax Premier or 2014 TurboTax Home & Business (CD or download). Valid February 6, 2015 through April 20, 2015. TurboTax Advantage users are ineligible for this offer. This offer may not be combined with our $25 cash back offer. Terms and conditions are subject to change without notice.