What is a tax shelter?

A tax shelter is accurately defined as a financial arrangement that reduces or postpones taxes. Tax shelters are strategies that individuals or businesses can use to lower their taxable income or defer tax liabilities to a future date, allowing for potential tax savings. These arrangements often involve investments or business activities designed specifically to maximize tax benefits, such as certain retirement accounts, real estate investments, or specific deductions and credits available in the tax code.

The essence of a tax shelter lies in its capacity to provide a legal means of minimizing tax liability through careful planning and investment. This can help taxpayers manage their overall financial responsibilities more efficiently, contributing to long-term wealth accumulation given the right strategies.

In contrast, other options do not correctly define tax shelters, as they focus on increasing taxable income, adding tax liability, or serving as support programs for low-income families, which do not relate to the mechanism of tax shelters.