Is Tax Avoidance Legal Or Illegal? (Secrets Revealed)

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Taxes. If you have to somehow figure out how much you “owe” the government, then spend a significant percentage of your hard earned money and just give it to them. It is unlikely that there is a single person on this planet who likes paying taxes.

So, what can you do? Are we advising you to consider tax evasion? No, of course not; apparently the government is better at sniffing out tax evaders than they are at finding and arresting known pedophiles.

But, luckily, there are a few entirely legal ways of, shall we say, avoiding some of those big digits

We are, of course, talking about tax avoidance and how you can avoid forking over way too much money for the government to do nothing with. Let’s get started. 

Tax avoidance

Tax avoidance and tax evasion may seem similar, but there is a world of difference between the two. Although one is perfectly legal, the other will have you locked up faster than you can tear up your tax return.

Is Tax Avoidance Legal Or Illegal (Secrets Revealed)

To put it simply, or at least as simple as anything having to do with money and the government can be said simply, tax avoidance is arranging one's business dealings in such a way as to minimize one's tax liability and maximize one's potential tax advantages.

This is perfectly legitimate, within the bounds of the law, and very prudent.

If you happen to own a company in Dubai and find financial matters to be above your head, don't worry: a tax consultant in Dubai can handle all the details for you while you focus on what's really important to you.

Contrarily, tax evasion is the attempt to minimize one's tax obligations by means of fraud, dishonesty, or cover-up. It's illegal, and it may get you locked up quicker than murder. That being the case, it's not the wisest course of action.

The thin line

Finding the threshold at which permissible tax strategies like tax avoidance cross over into criminal tax evasion is the tough part

As a rule, the determining factor is whether or not the activities committed were done fraudulently.

Hence, the most important thing is the person's motivation. If you run a company, you should realize that you are probably under more scrutiny and inspection than the ordinary worker, even if your salary is about the same. How come this is the case?

As a result of the increased opportunities and legal and illegal avenues available to them, company owners may more easily avoid paying their fair share of taxes. Why don't we look at some typical tax-related crimes?

Under-reporting or omitting income

A clear case of fraud is failing to disclose all of one's income or reporting less than what one really earned.

Under-Reporting or Omitting Income

This may happen, for instance, if a shop owner fails to record all of the day's earnings or if a landlord fails to account for all of his rent collections. False and against the law.

False entries

A further illustration of tax avoidance is the practice of maintaining two sets of books and making fictitious entries in either the books or the records

If you do things such as not maintaining proper records or have a mismatch between the quantities stated on, this is a piece of clear evidence that you are attempting to cheat the system. All unlawful.

False or overstated deductions

Submitting deductions on a tax return that are either inflated or untrue is another example.

This may involve anything from paying your wife or children for work that they clearly did not do to overstating travel expenditures or claiming unjustified "charitable" deductions

The Internal Revenue Service is very watchful if it comes to overstated deductions.

Business expenses/personal expenses

Representing personal costs as company expenses is also deceptive, and it is a simple trap to fall into as an asset.

For instance, a personal computer or a vehicle often has both personal and commercial usage.

Proper record-keeping is the key to avoiding future hassles in this circumstance, which is important since it will go a long way toward averting a situation of tax fraud.

Hiding assets

Another potential source of concern is the transfer or concealment of assets or income.

Whether it's via fictitious allocations amongst taxpayers or by just stowing away cash in a secret account, tax evasion may take many shapes

When a company gives money to the kids of the controlling owners, this is called a "distribution," and it's a tricky situation since it involves improperly shifting taxable income to a family member at a lower tax rate.

This is a terrible plan. Let's move on to the mechanics of tax evasion now.

Skillful tax planning 

Skilled tax preparation is essential if you want to minimize your tax liability. Most tax strategies use a combination of methods to achieve the lowest feasible marginal tax rate via the structuring of transactions.

Business Expenses Personal Expenses

They include optimizing tax deductions and credits, limiting taxable income, and controlling when expenses and earnings occur

Expense and revenue forecasts are two more crucial factors. In order to make educated decisions when it comes to your taxes, you need accurate projections of your company and personal income  for a number of years. 

Many tax-saving tactics that work well at one income level might backfire and result in a higher tax bill if your income increases in the years to come, so it's important to account for this potential income growth in your estimates. 

You want to be sure that incorrect income predictions don't turn what seemed like the "perfect" tax strategy into something disastrous.

You should already be making projections of your income, cash flow, and sales revenues for basic business planning purposes, so a good deal of this data is likely at your disposal.

Think ahead

The whole point is to pay as little in tax as possible, and there are two main ways to do this (or "attack"):

The first is to maximize all of your legitimate deductions (both personal and business) to lower your taxable income, and the second is to minimize your income (both personal and business) to further reduce your tax bill

The next step, after arriving at a rough estimate of your tax liability, is to file for all of the deductions and credits to which you are entitled. When it comes to lowering your tax liability, tax credits are nearly always preferable to tax deductions.

The value of a deduction is affected by your marginal tax rate, but the value of a credit is fixed. This is a crucial rule to keep in mind when deciding which of two possible tax breaks to use in a given situation.

Timing of transactions

Control the tax year for deductions and income.

Although “do it now” or “just do it” may be excellent advice in most situations, when it comes to taxes, it might be more beneficial to consider the timing of various transactions

You can exert at least some degree of control over your taxable income in any year by thinking ahead and selecting an appropriate method of tax accounting to delay or accelerate when you incur expenses or receive income.

Careful planning like this can delay the timing of a transaction or event that gives rise to tax liability, and delaying the recognition of income can be quite valuable. 

Special considerations

As the use of tax avoidance expands in the U.S. Tax Code, it has become possibly the most complex and complicated tax code on the planet.

In fact, its sheer bulk and complexity mean many taxpayers miss out on certain opportunities of tax breaks and end up spending millions and millions of hours each year just filing tax returns, with a lot of that time used looking for options to avoid forking over higher taxes. 

Families often have a rough time making decisions about savings, retirement, and education as the tax code morphs every year. 

Businesses and companies, in particular, suffer under the consequences of a tax code that is constantly evolving, which in turn can affect growth strategies and hiring decisions

Types of tax avoidance

There are several ways of going about tax avoidance, which includes certain deductions and credits, loopholes, and exclusions that all comprise the U.S. Tax Code.

Types of tax avoidance

But, a few of these tools include the standard deduction, where it is estimated that about 90% of households use these rather than itemizing them.

And another worth mentioning is retirement savings, where if you are saving money for your retirement, you are probably already engaging in tax avoidance, and this is a good thing. 

Another example is workplace expenses, where you use deductions through your job to avoid taxes, and you may be able to claim certain expenses that aren’t reimbursed through your boss on your yearly tax return.

There are many more methods you can use, but these are a few of them.

Final word

Taxes are among mankind's most vexing, frustrating, obtuse, and complicated inventions, but they are unavoidable in almost every aspect of life.

So, it helps to know where you can cut corners, shave unnecessary expenses off the top, find loopholes, and the like, all while staying completely legal

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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