Many people mix up tax shelters with tax havens. When they hear the term tax shelter, what usually jumps to mind is something shady, or maybe the British Virgin Islands or some far off kingdom in the middle of Europe.  But, in reality, it doesn’t actually have to be anything exotic like that at all.  Really, a tax shelter is, quite simply, just a program that the government recognizes, in which anyone can participate in, to receive some special tax benefits and enable some personal tax deductions.

An example of one is when you donate to a recognized charity, you get a deduction – and that’s one of the most effective ways of retaining your money and avoiding paying taxes on that amount donated. Even better than that would be to set up your life so that a lot of your personal expenses can be seen by the IRS to be recognized tax deductions.

This, surprisingly, is not too complicated to achieve – you just need to become the owner of a business.

Now before you say “I don’t want to be bothered with all that effort”, let me explain what I really mean. You don’t need to go and get yourself incorporated or anything like that, you just need to declare on the appropriate forms that you have a home business, as an individual private proprietor.

If you do this, then right away, a lot of what you spend can then become a tax deduction. The IRS does know that such a thing is possible, and is legal as well. So, to prevent everyone from doing this too easily, they have a couple of simple rules that need to be followed.  These rules are not too difficult to adhere to and practically anyone can follow them without much difficulty.

The rules only say that it has to be clearly obvious that you’re doing it for profit, even if, in actual fact, you may never have a hope of making one. You may still have your day job, you don’t have to give that up.

There are many ‘businesses’ out there that run purely for the benefit they provide of being a tax shelter for their owner and could possibly not have made a profit in many years and yet still, if the rules have been followed, have the IRS’ blessing.

When the IRS scrutinizes what exactly you are running to see if it is a real business, they will make some subjective assessments….

1. Whatever it is you do, they will check to see if you do it regularly.
2. Do you have any kind of expertise in that particular area of what you claim to do?
3. Do you actually tend to your business on a regular basis, or is it just something that’s only on paper?
4. Can you prove that you actually keep books for it?

You could be completely and thoroughly bad at how you run your business, that doesn’t really matter. The most important thing is that you look like you believe you’re running one in the hope of a profit. It is extremely important to follow the IRS’ rules and do not try to abuse the system.

So maybe you are wondering how to get this thing going? Well first off you’ll need to get your receipt books and business forms printed and ready. Whenever you spend anything, it must be properly accounted for.  It is always best to seek the advice of an accountant to learn exactly what is allowable as a deduction.

There are all kinds of hobbies that can fit in with this kind of plan particularly well. If you like to carpentry as a hobby and make things out of wood, then you could say you were hoping one day to get a paying customer, and attend some craft shows or flea markets and make some sales.  Then you would be able to route some of your household expenses through your carpentry ‘business’. Other examples would be sewing or quilting, drawing and painting pictures, just about anything that is creative.  Find something that you are fairly good at and take action and start your own tax shelter!

If the law allows it, why not?  Just remember to follow all the legal rules, be honest, and, as I said before, don’t try to abuse this opportunity.

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