What Does the Process of Tax Avoidance Actually Look Like in Practice?

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According to one study, 76 million people avoided paying income taxes in 2020.

If you’re interested in tax avoidance, you might be surprised there are perfectly legal ways to do it.

Keep reading to learn more about the best tax practices and how to run a smart business!

Table of Contents

What is Tax Avoidance

Tax avoidance is minimizing your taxes and maximizing your after-tax income. This is perfectly legal because you use certain methods that are written into the tax code.

Businesses often use this to avoid paying taxes by taking as many deductions and tax credits that they can. They also shelter income from taxes to set up employee retirement plans.

For example, if you bought office furniture, you could write off that expense as a tax deduction to reduce the amount that you’ll have to pay back.

You can also set up a tax deferral plan like a 401(k), IRA, or SEP-IRA to avoid paying taxes until some later date.

Common Strategies

If you’re wondering how to reduce taxes owed to IRS, there are plenty of perfectly legal strategies. In fact, many of these are written into the Internal Revenue Code.

Lawmakers use this code to manipulate people by offering exemptions, tax credits, or deductions. However, they also subsidize essential services, like higher education, retirement saving, and health insurance by using this strategy.

They also wrote it into the code to help people achieve national goals. For example, if you install solar panels on your house or by an electric vehicle, you’ll often get a tax break.

One way that you can save money from taxes is by saving all of your receipts. This is helpful for investors, business owners, and even freelancers.

When you save the receipts, you can then itemize each deduction to avoid having to pay a larger amount of taxes.

You’ll also get a break if you’re contributing to an IRA or a ROTH. This will delay the time that you have to pay taxes, and you’ll get a tax break if you take it out at the appropriate time.

Another strategy you can try to do is to take a deduction from something like your medical expenses, charitable contributions, property taxes, and mortgage interest.

If you claim a credit that the IRS offers, that is also a form of tax avoidance, because you’re saving money on the taxes you’ll have to spend.

If you have investments, you can also hold onto them for a longer period of time. This will help to reduce the lower capital gains tax rate that you would have to pay on your profits.

Some people also put money into a Health Savings Account. Since this money is pre-taxed when it goes in, you won’t have to pay taxes on that income.

Tax Evasion vs Avoidance

While you can avoid paying your taxes, it’s not legal to evade them.

If you fail to file an income tax return or file a fraudulent one, you could be charged with criminal charges. In fact, tax fraud is a common way that people evade their taxes.

Tax evasion also includes using offshore tax havens and other secret banks to avoid reporting income. While it’s legal to put money into foreign bank accounts, it’s not legal to do it and avoid filing reports and reporting how much wealth you made so that you are charged the appropriate amount of taxes.

Some people also commit tax fraud by under-reporting income. For example, a waiter might put in their W2 earnings, but they may fail to mention all of the tips that they received.

Some people also underpay the taxes that they’re owed on purpose. They do this by just avoiding to pay and ignoring the deadlines of the IRS.

Some people also try and keep two sets of books. That way, when they’re audited, they think they can present one book that reports less income, but this is still fraud since they knowingly tried to evade taxes.

Some people also try to make false deductions. That’s why it’s important to always keep your receipts in case you are audited. That way you can prove your deduction was legitimate.

If you’re not sure whether you’re evading taxes or not, you should speak to a lawyer right away.

Tax Loopholes

Tax avoidance is just one of the many loopholes that are written into the code to help reduce the amount you’ll have to pay on taxes.

The tax code is very complex and hard to understand, so you may want to talk to a lawyer or an accountant who can help you understand how to take advantage of it without breaking the law.

You can also try using a tax shield as a loophole. This is deliberately using taxed income to help offset some of the taxable income.

However, the number of tax shields that are available are dwindling down, thanks to the Tax Cuts and Jobs Act removing deductions.

Discover More About Tax Avoidance

These are only a few things to know about tax avoidance, but there are many more strategies that you can try.

We know that doing your taxes each year can be really confusing, especially for a small business owner. That’s why we are here to help you out and avoid committing tax fraud!

If you loved the information in this article, make sure that you explore our website to find more that are just like this one!