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. Deduction

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

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

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

    A legal method of minimizing or decreasing an investor's taxable ...
  5. Net Worth

    The amount by which assets exceed liabilities. Net worth is a ...
  6. Standard Deduction

    A base amount of income that is not subject to tax and that can ...
Related Articles
  1. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  2. Saver's Tax Credit: A Retirement Savings ...
    Savings

    Saver's Tax Credit: A Retirement Savings ...

  3. Tax-Efficient Wealth Transfer
    Taxes

    Tax-Efficient Wealth Transfer

  4. IRA Contributions: Deductions and Tax ...
    Taxes

    IRA Contributions: Deductions and Tax ...

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center