Taxes Tax Planning What Is a Tax Shield? Tax Shields Explained By Joshua Wiesenfeld Joshua Wiesenfeld Joshua Wiesenfeld is a financial investigator, certified public accountant (CPA), and certified fraud examiner (CFE) with almost a decade of experience. He writes about taxes and investing and has been published in the Journal of Accountancy and Fraud Magazine. Joshua has a master's of public administration in forensic accounting from John Jay College. learn about our editorial policies Updated on January 31, 2022 Reviewed by David Kindness Reviewed by David Kindness David Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes. learn about our financial review board Fact checked by Kiran Aditham Fact checked by Kiran Aditham Kiran Aditham has over 15 years of journalism experience and is an expert on small business and careers. As a senior editor he ensures editorial integrity through fact checking and sourcing and reinforces our mission to provide the most informative, accessible content to job seekers and small business owners. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Definition and Examples of a Tax Shield How Tax Shields Work Tax Shield vs. Tax Evasion Definition A tax shield is a term used to describe methods for reducing or deferring tax liabilities through legal means. Photo: Pekic / Getty Images Definition and Examples of a Tax Shield A tax shield refers to a legal and allowable method a business or individual might employ to minimize their tax liability to the U.S. government. Properly employed, tax shields are used as part of an overall strategy to minimize taxable income. Some examples of tax shields include, but are not limited to: Medical expensesCharitable incomeMortgage expensesDepreciation and amortization All of these examples enable taxpayers to take deductions on their earnings. This then lowers their taxable income and “shields” them from additional taxes. Note Only allowable deductions qualify as tax shields. Using illegal methods to avoid tax payment is known as tax evasion. How Tax Shields Work As the name suggests, tax shields protect taxpayers from paying taxes on their full income. The IRS allows businesses and individuals to deduct certain qualified expenses, thereby lowering their taxable income and their ultimate tax liability. This tax-efficient investment method is used particularly by high-net-worth individuals and corporations that face steep tax rates. Tax shields do not only benefit the wealthy, however. Many middle-class homeowners opt to deduct their mortgage expenses, thus shielding some of their income from taxes. Another example is a business may decide to take on a mortgage of a building rather than lease the space because mortgage interest is deductible, thus serving as a tax shield. Many individuals who carry student loan debt deduct student debt interest expenses too in order to lower their taxable income. A tax shield is often not recommended for lower-income families. Taxpayers who wish to benefit from tax shields must itemize their expenses, and itemizing is not always in the best interest of the taxpayer. It only benefits you to itemize when the total of all of your deductions exceeds the standard deduction for your filing status. Otherwise, you would be paying taxes on more income than you should be. Note As of the 2021 tax year (the return you'll file in 2022), the standard deduction is $12,550 for single taxpayers and for those who are married but filing separate returns. For head of households, meanwhile, the standard deduction is $18,800. And if you’re married and filing jointly, or if you’re a qualifying widow with a dependent, the amount is $25,100. The value of a tax shield is calculated as follows: Tax Shield = Deduction Amount x Tax Rate Let’s look at the example of an owner of a fleet of trucks whose equipment depreciated over the tax year. Depreciation is a deductible expense, and a portion of the depreciated amount can therefore lessen the owner’s overall tax burden. Assuming depreciation totaled $20,000 and a tax rate of 10%, the truck owner can subtract $2,000 from his total taxable income. The fleet owner can then subtract the $2,000 from his income, thereby “shielding” his business from taxes on that amount. Tax Shield vs. Tax Evasion A tax shield is a fully legal strategy that taxpayers can use to reduce their tax burden and should not be confused with tax evasion. Tax evasion, also known as tax fraud, is the illegal and intentional failure to pay the full tax balance owed to the U.S. government. Tax evaders tend to conceal their income and/or underreport their income on their tax returns. Common methods of tax evasion include deliberately underreporting or omitting income, overstating the number of deductions, keeping two sets of financial records, false accounting entries, and claiming personal expenses as business expenses. Conversely, the legal use of tax shields and other strategies to minimize tax payments is known as tax avoidance. Key Takeaways A tax shield refers to deductions taxpayers can take to lower their taxable income.Examples of tax shields include deductions for charitable contributions, mortgage deductions, medical expenses, and depreciation.Tax shields are favored by wealthy individuals and corporations, but middle-class individuals can benefit from tax shields as well.Tax shields are legal and should not be confused with illegal failures to pay taxes, known as tax evasion. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "IRS provides tax inflation adjustments for tax year 2021." Accessed Jan. 31, 2022. IRS. "Types of Fraudulent Activities - General Fraud." Accessed Jan. 31, 2022.