When it’s time to settle with Uncle Sam, don’t overlook IRS-approved tax shelters that might lower your bill to the government. A good and legal tax shelter is a way for a taxpayer to protect income against taxation. This way, you can keep more earnings without resorting to a Swiss bank account, overseas legal tax havens or tax-dodger schemes.
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There are many ways to reduce your tax burden, but it’s obviously important to make sure you aren’t illegally evading taxes. Here are seven of the best tax shelters you can use to reduce your tax burden.
1. Retirement Account
A 401(k) or other types of tax-deferred retirement accounts, like an individual retirement account (IRA), allow you to save money on taxes now by deferring to pay taxes in retirement when your income and tax bracket are likely lower.
The projected 2026 IRA contribution limit is $7,500 for those under 50 and $8,600 for those age 50 and older (including the $1,100 catch-up contribution). These limits are an increase from the 2025 limits and are subject to inflation adjustments, so the final amounts will be announced later. Here are some types of retirement accounts to consider:
- 401(k) and 403(b) plans: Employer-sponsored plans allow you to contribute pre-tax dollars, which lowers your taxable income for the year. This way, your money grows tax-deferred, and you do not pay taxes on it until you withdraw it in retirement.
- Traditional IRA: Offers tax-deductible contributions, which reduce your taxable income in the present.
- Roth IRA: Contributions are made with after-tax dollars, so they do not lower your current taxable income. However, all qualified withdrawals in retirement are completely tax-free.
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2. Real Estate
Purchasing real estate is another way to set up a tax shelter because you can claim several deductions that renters cannot, although you’ll have to itemize deductions to take advantage of them. The IRS allows you to deduct qualified expenses related to owning a home, including taxes, home mortgage interest and mortgage insurance premiums.
You can also deduct the sales tax you paid on your home, such as for a manufactured or modular home, or for building materials for new construction. However, that could have consequences later because it reduces your cost basis, which is used to calculate depreciation and capital gains. Consult with a tax professional before you take this deduction.
3. Capital Gains
If you earn a significant profit from selling your home, you can protect it from being taxed if you meet certain requirements. You need to pass an IRS ownership and use test and report the income reported to you on Form 1099-S, Proceeds From Real Estate Transactions.
Use Schedule D (Form 1040) to report the capital gain and Form 8949 to report the sale of your home. Single homeowners are allowed to exclude up to $250,000 of capital gains from their incomes, and married couples filing jointly can exclude $500,000.
4. Health Savings Account
One easy way to reduce your tax liability is to open an HSA and set aside an estimated amount each year for medical expenses. If you have a high-deductible health plan, you can contribute pre-tax money to an HSA and these funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. You must have a high-deductible health plan to open an HSA.
With an HSA, you can use the nontaxable funds to cover out-of-pocket medical and health expenses for the year. For 2026, the maximum HSA contribution limits are $4,400 for self-only coverage and $8,750 for family coverage. Individuals who are age 55 and older can make an additional $1,000 catch-up contribution.
5. A Business
As a business owner, you can deduct a variety of qualified expenses used to maintain the operation of your business. The IRS defines an allowable expense as being “both ordinary and necessary,” and not used to figure the cost of goods sold, capital expenses and personal expenses.
Some of the business expenses you can deduct include employees’ pay, retirement plans, interest and insurance. For small business owners, you can also deduct the cost of your car and your home if used for your business.
6. Child Tax Credit
Don’t overlook the tax advantages of being a parent. Your children could help you protect some of your hard-earned dollars. If the children are under age 17 at the end of the year and qualify as your dependents, you might qualify for the child tax credit.
For tax year 2025, the maximum credit is $2,200 per qualifying child. The credit is partially refundable, meaning eligible low- and moderate-income families may receive a refund even if their tax bill is zero. Based on recent legislation, the child tax credit for the 2026 tax year still has a maximum value of $2,200 per qualifying child, so it will not increase. This is a permanent change established by the One Big Beautiful Bill Act (OBBBA), signed in July 2025.
7. College Savings Plan
You can enroll in a college savings account, otherwise known as a 529 plan. A 529 plan is provided by a state or educational institution that allows for several tax benefits. For example, account earnings aren’t federally taxed when used for qualified educational expenses. Also, all qualified withdrawals aren’t subject to federal taxes, so it’s beneficial to plan for the future.
Taylor Bell, Sabah Karimi and Daria Uhlig contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: 7 Legal Tax Shelters To Protect Your Money
