What is Tax Avoidance?

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

Tax Avoidance 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 Tax Avoidance Matters

Tax avoidance is important because it is a necessary method for managing the omnipresent business inevitability of taxes.

It is also paramount to keep in mind: tax avoidance is legal; tax evasion is not.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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