Which term describes a legal method to reduce or avoid taxes by exploiting favorable provisions?

• A. Tax evasion
• B. Tax shelter
• C. Tax haven
• D. Tax credit

Answer: (B)

Using legal provisions to reduce tax liability is described as a tax shelter. It covers strategies that structure income, investments, or expenses to take advantage of deductions, exclusions, credits, or favorable tax rules allowed by law, so you end up owing less tax. For example, contributing to retirement accounts or investing in tax-advantaged assets can lower taxable income, while certain depreciation rules or municipal-bond interest can reduce taxable income or tax due.

This differs from tax evasion, which is illegal nonpayment or underreporting of taxes. A tax haven refers to a jurisdiction with very low or no taxes, often used to hide wealth, but it describes a place rather than a legal method. A tax credit directly reduces the tax owed on a dollar-for-dollar basis, but it isn’t itself a sheltering strategy—it's a specific reduction rather than a broader planning approach.