Definition of Tax Avoidance

An individual, under law and regulations can go through the process for minimizing tax liability. Taking this advantage through sound financial planning techniques is termed as “tax avoidance”.

Explanation of Tax Avoidance

Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his/her state income tax. An individual may, for example, avoid income tax by investing a large sum of money in municipal bonds, since the interest on such bonds is not considered taxable income on which federal tax is due. Interest on the same amount of money placed in a savings account must be included as taxable income.