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


OVERVIEW

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*
Start for Free

Looking for more information?

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.


Security is built into everything we do
Here's how
* Important Offer Details and Disclosures
  • Filing Deadline: IRS filing deadline for tax year 2015 is April 18, 2016 (except for residents of Massachusetts or Maine, where the IRS filing deadline for tax year 2015 is April 19, 2016).
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Free 1040EZ/A + Free State offer only available with TurboTax Federal Free Edition; Offer may change or end at any time without notice. Actual prices are determined at the time of print or e-file and are subject to change without notice. Savings and price comparisons based on anticipated price increase expected 3/18/16. 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 e-file 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. Savings and price comparison based on anticipated price increase expected 3/18/16. Prices subject to change without notice.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app.
  • 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 $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except the TurboTax Home & Business/QuickBooks Self-Employed bundle offers.
  • About our TurboTax Product Experts: Customer service and product support vary by time of year.
  • About our credentialed tax experts: Live tax advice service is available via phone 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. Not available for TurboTax Business customers.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2014 TurboTax products.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.