No one likes to pay taxes. But taxes are the law. The terms “tax avoidance” and “tax evasion” are often used interchangeably, but they are very different concepts. Basically, tax avoidance is legal, while tax evasion is not.
What Is Tax Avoidance?
They may also achieve it by prioritizing investments that have tax advantages, such as buying tax-free municipal bonds.
Key Points to Note
- Anyone who invests in a retirement fund uses the mortgage deduction, or takes the child tax credit is practicing tax avoidance.
- These are legal tax breaks offered to encourage certain behaviors, such as saving for retirement or buying a home.
- At 2,600 pages, the U.S. Tax Code contains many other tax breaks, but it usually takes a professional tax preparer to figure them out.
Can you really avoid paying taxes?
It’s a question that comes up at tax time every year. People want to pay less to the government and save as much money as they can. You can’t avoid the IRS, but you can take steps to protect your income.
Credits and deductions can reduce your tax bill if you’ve earned them. However, that doesn’t mean every tax-saving tactic is right for you.
For instance, some people invest money in something that saves taxes on the front end but costs them more in the long run.
That’s why it’s always a smart move to talk with a tax professional to ensure you understand how your investments affect your taxes.
How to Avoid Paying Taxes Legally
Invest in Municipal Bonds
Buying a municipal bond essentially means lending money to a state or local governmental entity for a set number of interest payments over a predetermined period.
Once the bond reaches its maturity date, the full amount of the original investment is repaid to the buyer.
Interest on municipal bonds is exempt from federal taxes and may be tax-exempt at the state and local level as well, depending on where you live. Tax-free interest payments make municipal bonds attractive to investors.
Open a Health Savings Account
If you have an eligible high-deductible medical plan, contribute to a health savings account. Contributions to these accounts offer an immediate tax deduction, grow tax-deferred, and can be withdrawn tax-free for qualified medical expenses.
Any balance left at the end of the year can roll over indefinitely, similar to the assets in a retirement account.
Freezing Trust Cash
Freezing the value of assets many years before you plan to pass them onto excludes all assets appreciation from the estate and any taxes.
Shoot for Long-Term Capital Gains
A tax planner and investment advisor can help determine when and how to sell appreciated or depreciated securities to minimize gains and maximize losses.
Tax-loss harvesting can also offset a capital gains tax liability by selling securities at a loss.
Start a Business
When used in the course of daily business, many expenses can be deducted from income, reducing the total tax obligation.
Especially important tax deductions for self-employed individuals are they met health insurance premiums which are available if special requirements-they meet health insurance premiums which are available if special requirements.
Also, by strictly following Internal Revenue Service (IRS) guidelines, a business owner may deduct part of their home expenses with the home office deduction.
Take Itemized Deductions
Most people take the standard deduction available to them when filing taxes to avoid providing proof of all of the purchases they’ve made throughout the year.
Besides, itemized deductions rarely add up to more than the standard deduction.
But if you’ve made substantial payments for mortgage interest, property taxes, medical expenses, local and state taxes, or have made major charitable contributions, it could be worth it to take this step.
Enroll in College
One way to take advantage of tax deductions or credits is to enroll in college. The government currently offers credits and deductions — you usually have to take one or the other — to go back to school online or in your community.
Students can take advantage of one of two education tax credits: The first is the American Opportunity Tax Credit, which offers up to $2,500 off the cost of tuition, fees, and course materials paid during the taxable year per eligible student.
Use a Health Savings Account (HSA)
Employees with a high-deductible health insurance plan can use an HSA to reduce taxes. As with a 401(k), money is contributed to an HSA before taxes.
For 2021, the maximum contribution is $3,550 for an individual and $7,100 for a family. For 2022, the maximum deductible contribution level is $3,600 for an individual and $7,200 for a family.
Understanding Tax Avoidance
Millions of taxpayers use some form of avoid paying taxes if only by taking the child tax credit, investing in a retirement account, or taking the mortgage tax deduction.
The U.S. Congress placed there every tax deduction and credit available in the U.S.
Tax Avoidance vs. Tax Evasion
In short, most Americans practice some form of avoid paying taxes in order to minimize taxes due. Indeed, giving tax advice on how to do that is a major industry in America.
Tax evasion, on the other hand, is illegal. It happens when people underreport or fail to report income or revenue earned to a taxing authority.
Some practice tax evasion by not paying taxes at all. Tax evasion is serious and is punishable by jail time, a fine, or both.
Although it is important to pay all that is legally owed to tax authorities, nobody has to pay extra. A few hours at IRS.gov and scouring reputable financial information sites may yield hundreds, even thousands, of dollars in tax savings.