Now that we got past that headline, we want to make sure you noticed we said “avoid” and not “evade.” In our last blog, we talked about tax evasion and the stiff penalties that come with it. Today, we’re looking at tax avoidance which is completely legal and carries no penalties as long as you do it right.
Tax avoidance is essentially using tax rules to your advantage to make the most out of your money BEFORE you pay taxes and file your return with the IRS. A lot of people look at their hard work and paycheck and feel their money would be best used by people and organizations other than the government. That’s completely fine, and you shouldn’t feel guilty in doing so. After all, the IRS allows deductions for a reason.
Differences between tax evasion and tax avoidance
It’s important to understand the difference between tax evasion and tax avoidance, though. Everyone whose income is at or above the minimum is still required to file a tax return. (See IRS Publication 501 for the minimum income amounts.) All deductions you claim will need to be legal and in accordance with the tax code. Misrepresenting deductions falls into the tax fraud category, and we would point you to our previous blog about the stiff penalties and defenses for those cases.
An easy way to view the distinction between the two is this: tax evasion is when someone who owes taxes refuses to pay those taxes. Tax avoidance is when someone lessens the amount of taxes they owe by taking advantage of legal means to do so.
Deductions to help you avoid taxes
We said it above and we’ll say it again here: take advantage of tax deductions and don’t feel bad for doing so. The IRS allows people certain deductions that decrease the amount of taxes they owe for good reason. Sometimes it’s because money is put into retirement or savings accounts that won’t be taxed until a later date, and other times it’s because you’re contributing to a charitable cause to help make the world a better place.
There’s also nothing wrong with recognizing you’re going to owe a large tax amount and deciding to enter into legitimate transactions in order to maximize your profits without just turning those profits over to the IRS. This was likely the case when the CEO of Microsoft sold off more than $285 million worth of stock just before a new capital gains tax took effect in the state of Washington on January 1, 2022. You may be able to time a transaction to take advantage of existing laws before new tax laws are set to go into effect.
When reviewing your tax return, common deductions you may want to consider include:
- Charitable donations
- Contributing to retirement accounts such as a 401(k), IRA, Roth IRA
- Contributing pre-tax income to health and life insurance policies
- Paying business expenses before the end of the year to decrease net income
- College tuition payments
The list of deductions goes far beyond this. The IRS encourages you to take all the deductions to which you are legally entitled. You even can find information about potential deductions directly from the IRS here.
The best way to legally avoid paying taxes is to take a consistent account of all financial transactions throughout the year. A Certified Public Accountant (CPA) will be the best option to plan your taxes if you want to find more deductions you’re eligible for.
Whenever you find yourself in a dispute with the IRS, however, you should contact the law firm of Attorney Robert Boeshaar. We have extensive experience helping individuals and small businesses settle those disputes and preserve their financial freedom. Schedule a telephone consultation with us today.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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