You have likely heard how serious the federal government treats cases where people have not paid their taxes. At the same time, you have probably also seen advertisements detailing programs that teach you how to avoid having to pay tax. You might hear these and immediately dismiss them as scams aimed to take advantage of the general public’s collective unfamiliarity with the tax code (some indeed are). Yet many come to us here at Sapone & Pertrillo LLP questioning whether the actions they have taken to avoid paying taxes are indeed legal. You may be surprised to hear that some actually are.
The first thing to remember is that a distinction exists between tax evasion and tax avoidance. Tax evasion is knowingly not paying your takes. However, according to the Internal Revenue Service, tax avoidance is defined as any action aimed at limiting your tax liability. Tax avoidance strategies are perfectly legal, yet like many, you simply might not be familiar with them. Indeed, it is estimated that many overpay in tax when several options are available to help them lower their tax liabilities.
Among the most common tax avoidance option are federal tax credits. You can earn credits based off how much you make, how many children you have, if you employ workers or if you go to school. Similarly, you can also take advantage of tax deductions by deducting the amount you spend in property tax, the interest you pay on your mortgage, the amount you pay for child-care and your business expenses.
Setting up a tax-deferred savings plan (such as a 401k or an IRA) is another type of tax avoidance strategy (although in this case, you simply delay having to pay taxes). Other examples of legal tax strategies can be found by continuing to explore our site.