What is a Tax Shield?
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What is a Tax Shield?
You may have heard the term “tax shield” once or twice, especially during tax season, but what does it mean? In this blog, we will explain what a tax shield is and how it can be used to improve your tax savings.
Understanding the Definition of a Tax Shield
Taxpayers can save money on their income taxes by taking advantage of tax shields. These shields allow for fewer taxes to be paid, and individuals and corporations alike can reap the financial benefits of understanding the deductions hey are eligible for. This, in turn, helps to lessen the overall tax burden.
Forms of Tax Protection
Tax shields are a type of protection from tax liabilities. There are several varieties of these shields, each with its advantages and disadvantages. These include the use of deductions, exemptions, tax credits, and capital gains.
Deductions are a way to reduce the amount of taxable income, while exemptions are a way to exclude certain items from being taxed. Tax credits are a way to reduce the amount of taxes due, and capital gains are a way to reduce the amount of taxes paid on investment gains.
Getting started with tax shields isn’t always easy, but there are plenty to choose from that can help reduce the amount of taxes owed. Here are four of the most popular tax shields that you may be able to utilize or may already be taking advantage of.
Types of Tax Shields:
Medical Expenses
If you itemize your deductions, you can take a medical expense deduction. This tax shield applies to any out-of-pocket medical costs that exceed 7.5% of your adjusted gross income.
Charitable Donations
Donating to charitable organizations is another great way to not only help others but also help yourself. Generally, cash donations can be deducted up to 60% of your Adjusted Gross Income (AGI), while asset donations are deductible at a rate of 30%. Furthermore, any capital gains taxes incurred on an asset that is donated are eligible for a 20% deduction.
Interest Payments
Homeowners and student loan borrowers may be able to benefit from a tax shield through the interest paid on their mortgages and student loans. To be eligible for a deduction of the interest from your taxes, you need to itemize your deductions. If you obtained a mortgage before December 17, 2017, you can deduct up to $1,000,000 in interest. For mortgages taken out after that date, the deduction amount is limited to $750,000.
Regardless of your filing status, you can still deduct student loan interest, up to a limit of $2,500. This applies even if you don’t itemize deductions.
Depreciation
Depreciation can be explained as the reduction in the worth of an asset over some time. The most common depreciative assets include your house and your vehicle. Unfortunately, you can only claim a depreciation deduction if your asset is being used for business purposes. It can also be challenging to calculate, so it’s recommended that you consult a tax professional if you plan on claiming a tax deduction in this area.
How to Take Advantage of Tax Shields
Tax-reducing strategies, such as tax shields, can help to lower one’s overall tax burden and potentially create a refund. However, taking advantage of such measures often requires itemizing deductions – an option that has become less appealing as a result of the Tax Cuts and Jobs Act of 2017. This is because it increased the standard deduction for taxpayers. As a result, it is important to do your research and consult with a tax expert before itemizing deductions because itemizing won’t give you as big a return if your deductions don’t exceed your standard deduction.
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