A tax benefit is an allowable deduction on a tax return intended to reduce a taxpayer's burden while typically supporting certain types of commercial activity. A tax benefit allows some type of adjustment benefiting a taxpayer's tax liability. Tax benefits provide an advantage to the taxpayer while typically benefiting another entity. An example of a tax benefit is an energy tax credit; taxpayers can qualify for certain tax credits for installing energy efficient systems in their homes, which benefits the environment while reducing the demand for fuel. Quite often tax benefits may be only available for a certain time period or tax year.
An attempt to minimize tax liability when given many different financial decisions. There is a wide variety of tax-efficient vehicles, including tax-efficient mutual funds, irrevocable trusts and tax-exempt commercial paper. Choosing the best tax-efficient investment can be a daunting task for those with little knowledge of the different types of products available. The best decision may be to contact a financial professional to determine if there is a way for you to make your investments more tax efficient.
The reduction of potential income due to taxes. Drag describes the loss in returns owing to taxation, usually on an investment. Tax drag is commonly used when describing the difference between an investment vehicle that is tax-sheltered and one that is not. For many individuals, tax drag can have a significant effect on overall investment performance. Tax-efficient investing techniques are very important for recognizing capital gains, transferring wealth and estate planning. For example, suppose that an individual can invest $1 million in two securities in either Country A (with a 25% withholding tax) or Country B (with a 15% withholding tax). Both securities pay a 2.5% dividend. Security A would return $25,000 minus $6,250 in taxes, for a total of $18,750. Investment B would return $25,000 minus $3,750 in taxes, for a total of $21,250. Therefore, returns would be 1.875% for Security A and 2.125% for Security B, equating to a tax drag of 25 basis points (the difference in returns between the two securities).
Investment earnings such as interest, dividends or capital gains that accumulate tax free until the investor withdraws and takes possession of them. The most common types of tax-deferred investments include those in individual retirement accounts (IRAs) and deferred annuities. By deferring taxes on the returns of an investment, the investor benefits in two ways. The first benefit is tax-free growth: instead of paying tax on the returns of an investment, tax is paid only at a later date, leaving the investment to grow unhindered. The second benefit of tax deferral is that investments are usually made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.
A deduction from gross income that arises due to various types of expenses incurred by a taxpayer. Tax deductions are removed from taxable income (adjusted gross income) and thus lower the overall tax-expense liability. Watch: Tax Deduction Vs. Tax Credit Different regions have different tax codes that allow a variety of expenses to be deducted from taxable income. Tax deductions are often used to entice taxpayers to participate in programs which have a societal benefit. For example, charitable donations and the expenses incurred to make one's home more environmentally friendly can sometimes be deducted from taxable income.
A dollar-for-dollar reduction in the tax payment required from a person. Watch: Tax Deduction Vs. Tax Credit Deductions and exemptions only reduce the amount of your income that is taxable. Tax credits reduce the actual amount of tax owed.
A court of law whose sole jurisdiction is to decide litigation involving federal income, death, and other taxes. This is where you go if you don't pay your taxes!
An arrangement whereby the tax benefits received from a given venture are reinvested in the venture to cover any cash shortages. A tax clawback is just one of many types of "clawback" arrangements, which cover various distributions such as profits, dividends or even stock distributions. Along with dividend clawbacks, tax clawbacks are among the most popular type of clawback arrangements, providing instant and easy access to additional financing. Clawbacks are also used to describe what, in effect, amounts to a return of previously distributed money. For example, when Troubled Asset Relief Program (TARP) funds were used (in certain cases) to finance executive bonuses in 2008, it prompted some in Congress to advocate a tax clawback, whereby the executives in question would be forced to pay back some of the bonus money in the form of higher taxes.
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