Tax Shield

AAA

DEFINITION of 'Tax Shield'

A reduction in taxable income for an individual or corporation achieved through claiming allowable deductions such as mortgage interest, medical expenses, charitable donations, amortization and depreciation. These deductions reduce taxpayers' taxable income for a given year or defer income taxes into future years.

Tax shields vary from country to country, and their benefits will depend on the taxpayer's overall tax rate and cash flows for the given tax year.

INVESTOPEDIA EXPLAINS 'Tax Shield'

For example, because interest on debt is a tax-deductible expense, taking on debt can act as a tax shield. Tax-efficient investing strategies are a cornerstone of investing for high-net-worth individuals and corporations, whose annual tax bills can be very high. The ability to use a home mortgage as a tax shield is a major benefit for many middle-class people whose homes are a major component of their net worth.

Find out how tax shields can affect a company's balance sheet; read What is the formula for calculating weighted average cost of capital (WACC)?

RELATED TERMS
  1. Marital Deduction

    A tax deduction that allows an individual to transfer some assets ...
  2. Income Tax

    A tax that governments impose on financial income generated by ...
  3. Tax Shelter

    A legal method of minimizing or decreasing an investor's taxable ...
  4. Deduction

    Any item or expenditure subtracted from gross income to reduce ...
  5. Child Tax Credit

    A credit given to taxpayers for each dependent child that is ...
  6. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  2. Savings

    Saver's Tax Credit: A Retirement Savings Incentive

    Here's another reason to put money toward your retirement nest egg.
  3. Taxes

    Tax-Efficient Wealth Transfer

    Taxpayers with large taxable estates were required to take steps to reduce them before 2011.
  4. Taxes

    IRA Contributions: Deductions and Tax Credits

    We outline the incentives and help you take full advantage of the benefits.
  5. Retirement

    Get A Step Up With Credit Shelter Trusts

    Don't let unexpected taxes eat away at your inheritance or burden your heirs.
  6. Taxes

    Which Is Better? Tax Preparer Or Tax Software

    Every taxpayer – and every year – is different, so here are four factors to help you decide whether a tax pro or software is best for you.
  7. Taxes

    7 Commonly Overlooked Tax Deductions

    Don't pay more taxes than you have to because you've missed taking legitimate tax deductions. Here are just a few you may have overlooked.
  8. Taxes

    Taxes: H&R Block Vs. TurboTax Vs. Jackson Hewitt

    There are more and more tax services to help ease the pain of filing income taxes. Here's our take on three of the biggest.
  9. Mutual Funds & ETFs

    4 Tax-Free Muni Bond ETFs to Consider

    Tax free municipal bond ETFs are an excellent way to build wealth slowly. Here are 4 you should consider.
  10. Taxes

    The Best Free Tax-Prep Software For April 15, 2015

    Filing state taxes online costs money, but many platforms let you file simple federal returns free. Some support more complex filings; others import data.

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center