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What does a shelter plan include?

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Quick Answer

A shelter plan includes any legal means of reducing a taxpayer's taxable income and tax liability, according to Investopedia. Types of shelter plans include investments that provide favorable tax treatment or lower the taxable income. An employee sponsored 401(k) plan is the most common type of shelter plan.

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Full Answer

By using a 401(k) plan, the taxpayer defers taxes on income to a later year, explains New York Life Insurance Company. Usually, the holder pays taxes on income he shelters through the plan after he retires. In most cases, the deferment is several decades, and the government taxes the income at a lower rate.

Capital gains taxes are generally lower than taxes on short-term investments, notes New York Life. Qualifying for capital gains tax rates generally requires the investor maintaining his interest in a piece of real estate, stock or bond for over a year. The use of this type of strategy is a form of tax shelter.

Taxpayers have the potential of decreasing their taxable income by increasing their itemized deductions, advises New York Life. Options to increase deductions include increasing charitable giving or documenting deductible expenses for housing, medical care and employment. The amount of this shelter depends on the tax bracket. As of 2015, if a taxpayer in the 28-percent tax bracket lowers his income through deductions by $1,000, he saves $280 in income tax.

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