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Definition : TAX SHELTER , noun
The legal method of minimizing or decreasing an individual's taxable income, and therefore their tax liability. Although it sounds like a specific place, a tax shelter is any investment strategy that enables you to legally decrease or avoid taxation. The goal of many shelters is to create offsetting losses to other taxable income.
In order to take advantage of tax sheltering, you will need to be able to differentiate between two types of taxable income. Passive activity income is derived from a trade or business activity in which you didn't "materially participate" during the tax year. You are deemed to have "materially participated" by qualifying under one of seven IRS tests, each of which requires actual, substantial involvement in the business activity (for example, you spent at least 100 hours during the year in the activity, and nobody else spent any more time than you did.) Generally, you can only deduct passive activity losses from passive activity income. 
Active income, on the other hand, is income from wages, tips, salaries, commissions, and a trade or business in which you materially participate. So, what other methods can you use to legally reduce taxes? Here are some of the most common:
an investment or purchase the law wishes to encourage—buying a hybrid car, for example. A tax credit is a dollar-for-dollar reduction on the tax you owe. For example, a tax credit of $1,000 reduces the amount of tax you owe by $1,000. This is not the same as a tax deduction, which simply reduces taxable income. The value of the deduction, therefore, depends on your tax bracket. In a 28 percent tax bracket, a $1,000 deduction reduces your taxes by only $280. Dollar for dollar, a tax credit is worth more than a tax deduction. By legally reducing your tax liability, you have more capital available for spending or investing.
What is it with celebrities and the IRS?
Seems like every time we turn around, another boldface name has run
into trouble with the taxman.
Most recently, Kirstie Alley was hit with a $41,395 bill, including interest and fees, for back taxes on her $1.73 million Florida mansion, but Al Pacino, Snoop Dogg and Forest Whitaker have also recently been in hot water with Uncle Sam. Below are a few glamor shots of some celebrities that have been convicted and spent time in prison for tax evasion. |
There’s good news and bad news for million dollar earners in 2012, with their state and local income tax bills down markedly in New York and Oregon, but up in Washington D.C., Maryland and California, where voters on Nov. 6 approved a tax hike retroactive to Jan. 1. (Elsewhere, inflation adjustments mean tiny decreases.)
We asked Wolter Kluwer’s CCH division to calculate the tax bill for a married couple with $1 million in salary, two children and $110,000 in itemized deductions, living in the largest city in each state. Here are the 10 highest bills. 
There's no reason to pay more tax than is legally required, but
there’s also no reason
to make yourself a target for an Internal Revenue Service audit or to get your return flagged by the IRS' computers, which match billions of documents each year. So consider what situations might make you more likely to invite government scrutiny at tax time. 
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Sophia Loren
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Martha Stewart
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Chuck Berry
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Lauryn Hill
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From sport greats like Darryl Strawberry and Boris Becker, to movie stars Arnold Schwarzeneggar and Stephen Baldwin, famed photographer Annie Leibovitz, singers Ronald Isley and Toni Braxtonand, even the Hollywood Madam herself Heidi Fleiss, the IRS doesn't discriminate or do they? Click Here for more on the subject.
Additional targets of the IRS have been “Joe The Plumber”, Tom Daschel, Pamela Anderson, Duane “Dog” Champman, Sinbad, Joe “Girls Gone Wild” Francis, Ja Rule, Beanie, Sigel, Fat Joe, Young Buck, M.C. Hammer, Method Man, Faith Evans, Dionne Warwick, Chris Tucker, Nas, and assorted others. Even the super rich such as Marc Rich, Steve Moskowitz and Johnson & Johnson heir Seward Johnston, Jr. have been shown no mercy by the Internal Revenue Service.
Additional targets of the IRS have been “Joe The Plumber”, Tom Daschel, Pamela Anderson, Duane “Dog” Champman, Sinbad, Joe “Girls Gone Wild” Francis, Ja Rule, Beanie, Sigel, Fat Joe, Young Buck, M.C. Hammer, Method Man, Faith Evans, Dionne Warwick, Chris Tucker, Nas, and assorted others. Even the super rich such as Marc Rich, Steve Moskowitz and Johnson & Johnson heir Seward Johnston, Jr. have been shown no mercy by the Internal Revenue Service.
