What is the purpose of a tax shelter?

The purpose of a tax shelter is to minimize taxable income. Tax shelters are financial strategies or investments that allow individuals or entities to reduce their taxable income, thereby lowering the amount of tax they owe to the government. This is typically accomplished through various means, such as investing in certain types of accounts or using expenses that can be deducted from taxable income.

By minimizing taxable income, taxpayers can take advantage of lower tax brackets or deductions that further decrease their overall tax liability. For instance, contributions to specific retirement accounts, like IRAs or 401(k)s, are common forms of tax shelters that allow for tax-free growth on the investment until funds are withdrawn.

The other choices do not align with the fundamental purpose of tax shelters. Increasing taxable income would go against the aim of reducing taxes, while providing immediate cash flow is more related to liquidity than tax strategies. Enhancing investment returns, while a benefit of certain investments, is not the primary goal of a tax shelter, which focuses specifically on income taxation. Thus, the intent and functionality of a tax shelter center around minimizing taxable income effectively.