How to Use Tax Shelters to Save Money

Learn the top 5 legal tax shelters that can help you reduce your taxes and save money.

Laura Adams, MBA
4-minute read
Episode #194

Tax shelters have gotten a bad rap. Some are illegal—like offshore companies and bank accounts that hide money from Uncle Sam—but there are plenty of tax shelters for us law-abiding citizens, too. A tax shelter is simply a way to reduce your taxable income so you pay less tax, no matter how much or how little money you make. In this article I’ll point out some common, legal ways to reduce your taxes and save more money..

Buy Now

As an Amazon Associate and a Bookshop.org Affiliate, QDT earns from qualifying purchases.

Tax Shelter #1: Real Estate

Not only is real estate a real shelter, but it’s a powerful tax shelter, too. I mentioned some of the valuable tax benefits of homeownership in last week’s article, Should You Rent or Buy a Home?. When you buy real estate you cut your taxes the year you buy it, every year you own it, and even on the back end when you sell it. Mortgage points paid on a loan, mortgage interest, private mortgage insurance, and property taxes are typical tax deductions for homeowners. If you tap into your home’s equity with a loan or a line of credit, you may also be able to deduct some of the interest you pay on that debt, too.

If you decide to sell your main home—and have lived there for at least two years—you get to keep up to $250,000 of capital gains or profit on the sale tax-free. If you’re married and file a joint tax return, you can avoid taxes on up to $500,000 as a couple. Additionally, the costs for selling a home, such as real estate commissions, advertising, and title insurance, get deducted from your capital gain.

Tax Shelter #2: Retirement Accounts

A second way to shelter your money from taxes is a retirement account, like an IRA or a workplace 401(k). If you’re self-employed, you have options too, like setting up a SEP, a SIMPLE, or a Solo 401(k) plan. Not only do all of these retirement accounts help you accumulate a nest egg, but they also let you keep more of your hard-earned money by cutting your tax bill. What’s not to love about that?

When you invest pre-tax money in a “traditional” workplace retirement account, your taxes don’t go to the government; instead, they stay in the account to grow until the funds are withdrawn. Contributions you make to a traditional IRA (with after-tax income) generally qualify for an immediate deduction on your tax return. Another route is to contribute to a Roth account where you pay taxes on contributions upfront but get to take tax-free withdrawals later on.

Tax Shelter #3: Workplace Benefits

The third tax shelters for your money are workplace benefits, like health and disability insurance. The cost for employer-provided benefits is typically deducted from your paycheck before payroll taxes are calculated and withheld. That’s money you make that never gets taxed! Also, don’t forget that when your company reimburses you for things like education expenses or a monthly car allowance, that’s typically non-taxable income, too.  

Tax Shelter #4: Medical Spending Accounts

Whether you want to be the next Mark Zuckerberg or just want to do a little computer work on the side, having a business is an excellent way to shelter more of your money from taxes.

Some employers offer a Flexible Spending Arrangement (FSA) to help you pay for the costs of medical expenses. You and your employer can make contributions that are tax-free as long as the funds are spent on qualified medical expenses by a certain annual deadline.

You may also have the option to participate in a Health Savings Account (HSA) if your employer offers a high-deductible health plan or if you purchase one directly from a private insurer. An HSA is similar to an FSA, except that there’s no “use-it-or-lose-it” deadline. Both of these accounts are fantastic ways to shelter out-of-pocket money that you spend on medical expenses from taxes.

Tax Shelter #5: A Business

Whether you want to be the next Mark Zuckerberg or just want to do a little computer work on the side, having a business is an excellent way to shelter more of your money from taxes. For instance, if you start building Web sites on the side, some reasonable business expenses might include the cost of a computer, office furniture, and accounting software. As long as you’re really attempting to make a profit from your business, you can turn some of your personal expenses into allowable business deductions. You don’t have to make a profit, but you do have to be seeking a profit in order to be considered a legitimate business.

If you operate your business from a home office, that entitles you to even more money-saving tax deductions. You’re allowed to deduct a certain amount of household expenses, such as maintenance, insurance, and utilities, based on the size of your office as a percentage of your home. And by the way, home office deduction aren’t just for homeowners—tenants can also claim them.

These five tax shelters—real estate, retirement accounts, workplace benefits, medical spending accounts, and businesses—are some of the most common and easy ways to keep more money in your pocket. With all these legal options, who needs an offshore account?

Get More Money Girl

Come on over to the Money Girl Facebook page, where I post money tips, news, resources, and other stuff I'm doing. You can submit questions on Facebook, on Twitter at twitter.com/lauraadams or by e-mail at money@quickanddirtytips.com. Also sign up for the free weekly newsletter for exclusive content that you won’t find here or on the podcast.

The podcast edition of this article was sponsored by Go To Meeting. Use Go To Meeting to hold your meetings over the Internet and to give presentations, product demos, and training sessions right from your PC. For a free, 45-day trial, visit GoToMeeting.com click the try it free button and enter the code “podcast.”

More Resources:
IRS Publication 936, Home Mortgage Interest Deduction
IRS Publication 523, Selling Your Home
IRS Publication 969,Health Savings Accounts
Individual Retirement Arrangements
IRS Publication 560, Retirement Plans for Small Businesses
IRS Publication 535, Business Expenses

Image courtesy of Shutterstock

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.