Tax avoidance is a method by which individuals and businesses use legal means to reduce their tax payments without actually breaking the law. Generally speaking, tax avoidance involves the use of legal loopholes to reduce taxable income and maximize tax savings. The main goal of tax avoidance is to legally reduce overall tax liability, which can be achieved by various methods. These methods include reducing taxable income, restructuring financial affairs and investments, obtaining tax credits or deductions, and utilizing tax deferral techniques.
Tax avoidance is not to be confused with tax evasion, which is the illegal act of intentionally falsifying or withholding required tax returns in attempt to reduce ones tax liability. Tax evasion is a federal crime punishable by jail time and monetary fines. Tax avoidance, however, is perfectly permissible and should be considered an important tool for individuals and businesses to use when trying to reduce the burden of taxation.
One way individuals and businesses can reduce taxes is through the use of deductions. Deductions allow individuals and businesses to reduce their taxable income which, in turn, decreases their tax liability. Deductions can come in the form of charitable contributions, moving expenses, business expenses, personal investments and more.
Another way individuals and businesses can reduce taxes is through the use of tax credits. Tax credits are financial incentives that, when applied, reduce ones total tax liability. The most common tax credits include the Earned Income Tax Credit, the Retirement Savings Credit and the American Opportunity Tax Credit.
In addition to deductions and tax credits, businesses can also utilize tax deferral to reduce their overall tax liabilities. Tax deferral is a process where taxes are postponed or delayed until a later date. This strategy allows businesses to enjoy the benefit of having immediate cash flow while delaying the tax burden until a later date, typically when profits are higher. Examples of tax deferral practices include contributing to a 401(k) retirement plan and taking advantage of various forms of tax deferred investments.
Finally, businesses can also restructure their finances and investments to minimize their tax liability. This may entail changing ownership structures, relocating a business or optimizing ones supply chain.
No matter the size or scope of a business, individuals and businesses can take advantage of legal tax avoidance strategies to increase their financial success. With a better understanding of these strategies, individuals and businesses can use tax avoidance to increase profits, build wealth and create a brighter financial future.
