Hi @Corey!

Tax shelters are different methods of reducing taxable income. This will help reduce your payment for taxes including the tax collecting entities from the state and federal governments. The methods vary depending on the local and international tax laws.
There are different types of tax shelters, these are:
*Flow-through shares/limited partnerships: there are some companies that several years before they can earn an income. The U.S. government allows the exploration costs of the company, (in case of oil drilling companies) to be distributed to shareholders as tax deductions. Investors are given near instant savings; potential massive gains if the company discovers oil.
*To reduce the burden of the government-funded pensions systems, the government allows individuals to invest their own pensions.

The above tax shelters are developed by the government to promote desirable behavior, to help improve the economy which can help generate more income. Basically, a tax shelter is any organized program where many people, whatever status in their life are will enjoy the benefit of having reduced taxes.

Source:
http://en.wikipedia.org/wiki/Tax_shelter

From what I understand, a tax shelter is an investment that is worth more after taxes than it is before the investment. There are two types of tax shelters: legitimate and illegitimate. Examples of legitimate tax shelters include Roth IRAs, 401k retirement funds, pension plans, charitable donations and business expense write-offs. A major benefit of setting up a tax shelter: when you contribute to a tax shelter, you reduce your taxable income.

Tax shelters are closely scrutinized by the IRS because in some cases, these legit tax shelters may be misused to avoid paying taxes - i.e. the legit tax shelter becomes illegitimate. These are the "bad" cases you read about almost daily online or in the newspapers. But again, from what I understand the main benefit of setting up a tax shelter is to reduce (or possibly offset) taxable income.

A tax shelter is an investment strategy that helps you to legally decrease your taxable income. The reason many set up tax shelters is to create losses in one way to offset other taxable income. Some ways people do this is by lowering their current taxable income, lowers the tax rate of certain income, increase their itemized deductions and defer income to years when they expect a lower tax bracket. Tax shelters can include real estate investment, pension plans, 401k’s, IRA’s, setting up their own business, municipal bonds, employer sponsored health coverage, employer sponsored life insurance and employer funded education.