tax optimization
Tax optimization consists of reducing tax liability by complying with current tax laws and using regulations to the taxpayer’s advantage. Taxpayers use legal tax mechanisms provided by the state to lower their tax burden. Tax optimization can be used by both individuals and companies.
The term “optimization” refers to improving an existing method to increase efficiency or profitability. Tax optimization, therefore, involves legally reducing taxes and must be distinguished from tax fraud, which is illegal. It also differs from tax evasion, which involves misrepresenting income or using other unlawful means to avoid paying taxes.
One example of tax optimization is when yacht owners register their boats in countries where registration is inexpensive and foreign income is tax-exempt. Another example is income deferral: Since the IRS does not tax money saved in pension plans, retirement accounts, or certain life insurance policies, some individuals defer income by placing funds in these accounts and withdrawing them later when they are in a lower tax bracket.
[Last reviewed in June of 2025 by the Wex Definitions Team]
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