Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tax Avoidance

What it is:

Tax avoidance is the legal act of minimizing one's taxes. It is not the same as tax evasion.

How it works (Example):

Practically every taxpayer engages in tax avoidance at some point in order to minimize his or her tax bill. For example, taxpayers who contribute to Individual Retirement Accounts (IRAs) before the April 15 tax deadline are engaging in tax avoidance because those contributions are deductible and thus lower their tax bills. Similarly, charitable contributions are tax-deductible and thus another way that taxpayers can lower their tax bills.

Why it Matters:

Tax avoidance is legal. Tax evasion is not.

Related Terms View All
  • Taking the Street
    Let's say John Doe has a Gordon Gekko complex and wants to make some money by...
  • Value Averaging
    Let's assume John Doe has $5,000 in his new-car account. He wants that to grow to $10,000...
  • Junior Capital Pool (JCP)
    Let's say Company XYZ has a new design for widgets. It has not produced anything beyond a...
  • Enrolled Agent (EA)
    To become an EA, a person has to pass a three-part comprehensive IRS test of individual...
  • Qualified Distribution
    A qualified distribution must meet two main requirements. First, it must occur at least...