Tax Avoidance vs Tax Evasion: What Is Legal and What Is Criminal?

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Tax avoidance or evasion is rampant since no one loves paying taxes. With the tax percentages ranging from 10 percent to 37 percent depending on annual profits, paying the taxman could easily be among the heftiest expenses, individuals or businesses deal with in a fiscal year.

Finding ways to pay as little as possible without breaking the law is understandable. The IRS has criminal penalties for tax evasion, not filing or wrong filing. Tax evasion cases could easily land you in prison for years and leave you with crippling fines.

Using legitimate ways to avoid some taxes can increase your after-tax profits without landing you in trouble. Knowing the thin boundary between the legal and the illegal will help you walk the IRS tight rope better hence increasing your profit margins.

What Is the Difference Between Tax Evasion and Tax Avoidance?

According to a U.S. Supreme Court ruling, every taxpayer has the right to decrease the expected tax amount or even avoid them altogether as long as they use means permitted by law. Such avoidance is 100 percent legal since they have legal grounding.

Tax evasion, on the other hand, involves unfounded fraud, lies or forgery whose purpose is to hide your exact profits hence allowing you to file fewer taxes or abscond paying altogether. Tax dodgers who use evasion tactics have no legal backing for any of their decisions to avoid paying taxes.

How to Avoid Paying Taxes Legally

If you want to keep more money in your pockets legally, you have to leverage a wide range of tax avoidance strategies. The good news is they are not hard to implement.

Ensure That You Are Not Overpaying

Before we start on tax avoidance, you should first ensure that you are not overpaying your taxes. Many people end up handing over more than they should to the IRS because they don’t fully understand tax laws or are lousy record keepers.

  • Research and consult experts to find out exactly how much tax you have to pay
  • Find out any rebates or tax relief programs you are eligible to
  • Use the law to identify any double payments you might have been doing
  • Invest time in meticulous bookkeeping or hire an accountant to help you set your records right

Investing in a tax expert could be worth it, especially if you find some discrepancies after running through some of the above steps. Chances are you’ve been overpaying all along, and you can lower your annual taxes before delving into tax avoidance

Identify Law Clauses That Give Your Rebates or Tax-Free Avenues

The federal and state tax guidelines have tones of adjustment, deduction, and tax credit clauses geared towards alleviating your tax burden. These could be as simple as a tax credit on eco-friendly investments to 401K accounts.

Here are the most popular tax avoidance strategies that will come in handy.

Opening an Health Savings Account

The biggest advantage of opening a Health Savings Account (HSA) is that you can make tax-deductible contributions without itemizing the deductions. According to 2019 HAS limits, you can contribute up to $3500 for one person and up to $7000 for families.

Using Home Equity

Home equity loans have tax-deductible interests. This is different from traditional loans. There will also be a limit on your annual deductions depending on whether you used the money to do renovations and how much you earn in a year. These deductibles will reduce your taxes by a significant amount.

Bumping Up Your Retirement Savings

Retirement savings plans take money from your pre-tax income. The saved amount will not be taxed at all. Increasing your 401(k) contribution to the latest $19,000 figure for 2019 or leveraging the $6000 catch up contribution if you are above 50 years will see you save more money without paying taxes for it.

Maxing Out Your Work Deductions

For ages, the IRS has let people deduct expenses that are necessary in running a business or doing their jobs. With proper accounting, you can make legal deductions on things like professional society subscriptions, tools, travel mileage, and union dues.

Look for IRS Credit

IRS tax credits are a great way to slash your taxes by the dollar. You can find active credits on the IRS website here.  A good example is the earned income credit that lets low-income taxpayers slash their tax bills.

The American Opportunity Tax Credit, on the other hand, relives eligible students of up to $2500 in taxes per year. Finding the right tax credit and applying it on your tax filing will help you avoid some taxes without landing you in trouble.

Consider Moving to a Tax-Friendly State

The beauty of the U.S. legal set up is that different states can come up with their taxation laws. Consequently, some regions have better taxation laws that leave you with more money at the end of a fiscal year.

While this might be a radical move to some, it is a worthy consideration to individuals like freelancers or startup businesses that aren’t bound to a specific region.

If you are considering this, you might want to add these nine states to your destination list. They don’t have an income tax.

  • Florida
  • Nevada
  • Alaska
  • New Hampshire
  • South Dakota
  • Texas
  • Tennessee
  • Washington
  • Wyoming

 Register a Business Under the Right Category

The latest tax laws have dropped the income tax on corporations from 35 percent to 21 percent. A qualified business income deductions clause now allows small business to deduct as much as 20 percent of their qualifying business income.

Tap into 529 Saving Plans

529 saving are future education accounts that have tax advantages. You can either go with a prepaid tuition plan or an education savings plan. The money you stash into these accounts for future education costs will be tax exempt.

In essence, you can save more for your kid’s college or your own further studies without spending as much as you would if you put the money in a regular savings account.

These deductions only apply to partnerships, LLCs, S corporations, and business that file Schedule C.

Registering your business in the right category could help you leverage the new taxation rates and these deductions to the fullest. Before starting your business, sit down with a qualified CPA to find out the best entity type for the new tax laws.

Is Tax Avoidance Ethical?

While some people will be content with the legality of tax avoidance, some will not follow our tips without questioning the moral standing of tax avoidance.

The primary purpose of avoiding tax is to increase your profits without harming the government or society. Even though you will end up paying less, the government can still make do since it knows and expects you to use the avoidance clauses to boost your effective income.

Better still, you can engage in philanthropic work with your increased income. You won’t have broken any law, and you will be giving back to the community under your terms.

Why You Shouldn’t Learn How to Evade Taxes

Tax evasion can be as simple as evading tax assessment or evading actual payment of taxes. Transferring your assets to prevent the IRS from tacking your tax liability on them is, for instance, an attempt at evading assessment. Moving the asset after your taxes are due is an attempt to avoid payment.

Other acts like failing to file taxes incomplete or filing the wrong taxes can also be attempts at evading your responsibility as a taxpayer.

The good thing is mistakes might not always qualify as tax evasion. Once you are under investigation, a prosecutor has to convince a court of law that you willingly evaded assessment and or payment of taxes. You will be given a chance to defend yourself.

A conviction can:

  • Result into Fines: If convicted, you will have to pay the liability plus an interest. On top of this, you will have to pay hefty fines for the crime. The current individual fine for tax evasion stands at a maximum $100,000
  • Land You in Prison: There are also prison terms for the crime. You can get as little as a couple of months to several years depending on the evasion magnitude

Most people end up with the fine. They only serve time in prison if they cannot come up with a payment plan to settle the tax liability, interests, and the fine.

Examples of Tax Evasion

Yes, paying taxes is frustrating. This doesn’t give you the freedom to flee your responsibilities. You can explore legal ways to alleviate the burden but should never take part in any of the following activities.

Under Reporting Your Taxable Income

This is the easiest and most tempting form of tax avoidance. Most people report their primary income and forego side jobs or small businesses. You should report everything, including income from tips, gambling income, mowing your neighbor’s lawn, or even selling birthday cakes to friends.

You will be found guilty if a prosecutor proves that you had extra income from such jobs and didn’t include it in your annual tax report.

Taking Deductions You Don’t Deserve

Even though tax credits and deductions are a legal way to avoid taxes, claiming rebates for expenses you didn’t incur or getting credits you don’t qualify to enjoy is illegal. This amounts to filing false information, which is a criminal offense according to the IRS.

Failing to File Taxes

Pretending like nothing happened and skipping to file taxes doesn’t work with the IRS. They have ways to prove that you exist and that you didn’t give the tax payment report. The government does this by monitoring reports filed by employers and financial institutions.

If you made money by any means, spent some money or deposited some amount to your bank accounts, the IRS will know and expect you to account for it. If you don’t, they can launch an audit and an investigation.

Willingly Paying Fewer Taxes

After filing your taxes, you are required to pay your dues in full. If you don’t pay by the deadline, you not only face fines but can also be prosecuted. The IRS is lenient enough to let citizens negotiate if they are having trouble paying. You can arrange for a favorable payment plan or get an extension under particular circumstances.

I Want to Pay Fewer Taxes. What Should I do?

If you’ve come this far, you must be very interested in paying fewer taxes without landing in jail. Here are some actionable steps you can take to stay on the safe side.

  • Hire an accountant to take care of your books if you are not experienced. It might seem like an extra expense, but in most cases, a professional on your books will save you more money than you spend paying him or her
  • Rethink your financial life. If you are a family, consider filing jointly and leveraging all tax credits. If you run an unregistered business, talk to a qualified CPA to find out the best tax-friendly business entity to register
  • Put more money into your retirement, education, and health savings accounts. You remain with more money since these accounts enjoy different forms of tax freedoms
  • Have a professional take care of your taxes. You can always get in touch and let us help you file the right taxes

Following the right steps is both ethical and safe. A clean tax record puts you in the clear, especially if you end up in political positions or land high profile jobs in large corporations.

Bottom Line

Paying your taxes in full is your legal duty. This doesn’t mean that you don’t have the right to stretch your profit margins by leveraging tax avoidance techniques. Knowing the difference between evasion and avoidance is the first step.

The next step is getting all the help you need to cut down your taxes without affecting your actual productivity.

You can let us handle all your tax responsibilities and identify possible tax avoidance loopholes as you keep on doing what you do best – running your financial empire. Get in touch today to learn more about our services by visiting our official website.

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