Tax Shelter Law and Legal Definition

A tax shelter is a vehicle to reduce current tax liability by offsetting income from one source with losses from another source. Traditional tax shelters have included investments in real estate, oil and gas, equipment leasing, and cattle feeding and breeding programs.

The IRS allows some tax shelters, but will not allow a shelter which is "abusive." An abusive shelter generally offers inflated tax savings which are disproportionately greater than your actual investment placed at risk. Typically, you invest money to generate income. However, an abusive tax shelter generates little or no income, and exists solely to reduce taxes unreasonably for tax avoidance or evasion. In comparison, a legitimate tax shelter often produces income and involves a risk of loss proportionate to the expected tax benefit.