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. Child Tax Credit

    A credit given to taxpayers for each dependent child that is ...
  2. Income Tax

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

    Any item or expenditure subtracted from gross income to reduce ...
  4. Marital Deduction

    A tax deduction that allows an individual to transfer some assets ...
  5. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  6. Tax Shelter

    A legal method of minimizing or decreasing an investor's taxable ...
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. Year-end tax tips
    Taxes

    7 Ways To Minimize Your 2014 Taxes By December 31

    The year's not quite over yet. See whether taking any of these steps would leave you owing less in 2014 taxes, come April.
  7. Taxes

    What's the difference between cost of goods sold (COGS) and cost of sales?

    Explore the difference between the cost of goods sold and cost of sales listed on an income statement, and what types of companies use one over the other.
  8. Top fund-raising strategies for nonprofit organizations
    Taxes

    Top Fund-Raising Strategies For Nonprofits

    Top fund-raising strategies for nonprofit organizations
  9. The marginal tax rate is based on a progressive tax system.
    Personal Finance

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  10. Taxes

    What are examples of cost of goods sold (COGS) for businesses that sell through eBay or Etsy?

    Read how online retailers that operate through eBay or Etsy can list certain expenses as cost of goods sold and even claim a tax deduction for these costs.

You May Also Like

Hot Definitions
  1. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  2. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  3. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  4. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply ...
Trading Center