Tax Shield

Loading the player...

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.

BREAKING DOWN '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. Net Worth

    The amount by which assets exceed liabilities. Net worth is a ...
  2. Marital Deduction

    A tax deduction that allows an individual to transfer some assets ...
  3. Deduction

    Any item or expenditure subtracted from gross income to reduce ...
  4. Tax Shelter

    A legal method of minimizing or decreasing an investor's taxable ...
  5. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  6. Standard Deduction

    A base amount of income that is not subject to tax and that can ...
Related Articles
  1. Taxes

    What's a Tax Shield?

    A tax shield is a deduction, credit or other means used to reduce the amount of taxes an individual or business owes to the government.
  2. Retirement

    Tax Tips For The Individual Investor

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

    Saver's Tax Credit: A Retirement Savings Incentive

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

    Tax-Efficient Wealth Transfer

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

    IRA Contributions: Deductions and Tax Credits

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

    Get A Step Up With Credit Shelter Trusts

    Don't let unexpected taxes eat away at your inheritance or burden your heirs.
  7. 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.
  8. Taxes

    Confused About Estimated Tax Deadlines for 2016?

    If you run a business or have investment income, pay attention to this year's estimated tax deadlines. Here are the details, and what's new for 2016.
  9. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
  10. Personal Finance

    University Donations: Which Schools Got the Most

    A closer look at the staggering $40.3 billion donated to colleges and universities in 2015.
RELATED FAQS
  1. What is the formula for calculating weighted average cost of capital (WACC) in Excel?

    When analyzing different financing options, companies need to look at how much it will cost to fund operations. There are ... Read Full Answer >>
  2. When should my tax refund arrive?

    More than 90% of income-tax refunds arrive in less than three weeks, according to the Internal Revenue Service (IRS). However, ... Read Full Answer >>
  3. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  4. Are Flexible Spending Account (FSA) items tax deductible?

    Flexible Spending Accounts (FSAs) are employer-sponsored, tax-favored savings plans expressly for the future reimbursement ... Read Full Answer >>
  5. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  6. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center