Which term refers to a legally permissible method to reduce or avoid tax liabilities?

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

Answer: (A)

The idea being tested is how you can lower tax liabilities through planning that fits within the tax rules. A tax shelter refers to an arrangement or investment designed to legally reduce or defer taxes by taking advantage of provisions in the tax code. This can include deferring income, claiming allowable deductions for depreciation or expenses, or earning income that is exempt or taxed at preferential rates. It’s distinct from tax evasion, which is illegal, and from a tax haven, which is a jurisdiction with low taxes rather than a specific strategy. It’s also different from a tax credit, which is a direct, dollar-for-dollar reduction of taxes owed but not a broad planning method itself. So, when the goal is to legally minimize tax liability through compliant planning, the concept captured here is a tax shelter.