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The term "tax shelter" refers to a strategy employed by individuals or entities to reduce their taxable income, thereby lowering their overall tax liability. This concept is vital in accounting as it involves the use of certain deductions, credits, and exemptions provided by tax laws to minimize the amount of income that is subject to taxation. By utilizing tax shelters, taxpayers can effectively manage their cash flow and enhance their financial planning.

Tax shelters can take many forms, including investments in retirement accounts, certain types of real estate investments, and more specialized vehicles like limited partnerships or other financial instruments designed for this purpose. The key characteristic of a tax shelter is its legal basis; these strategies operate within the framework of tax law, allowing taxpayers to reduce their obligations without evading taxes. Understanding this concept is crucial for accountants and financial professionals in providing guidance to clients on legitimate tax minimization strategies.