It is sometimes surprising that people confuse “tax evasion” and “tax planning,” but there are vast differences between them. One is illegal and can result in serious penalties (tax fraud). At the same time, the other is something that government and tax authorities take as a given (tax planning).
Tax avoidance is a source of confusion. It usually refers to taking legal steps to pay the required taxes, but not more, as in the United States. It can also refer to a “grey zone” in the United Kingdom where minimizing taxes is legal but not ethical. This makes it a loaded term, implying that sometimes political attitudes or social theories are irrelevant to managing your legal tax obligations.
Both countries have complex tax codes that are constantly changing. Without careful records, knowledge about the tax codes, and an understanding of the decisions of tax authorities and courts, it is impossible to determine what a particular individual or business is legally required to pay tax time.
Tax planning was declared necessary by the U.S. Supreme Court over a century ago. It involves knowledge of tax codes, understanding how individuals and businesses can take advantage of hundreds of “tax breaks,” and preparing and filing taxes accordingly. Here are some well-known ways that most educated taxpayers can reduce their taxes.
- Your retirement savings should be increased. If it’s an employer-sponsored plan, these funds are paid from your pre-tax earnings. You can also open an Individual Retirement account (IRA), and most contributions will not be subject to tax.
- Take advantage of your work deductions. You can deduct expenses typically necessary for your job through the Internal Revenue Service (IRS). This could include anything from professional subscriptions to union dues.
- A home equity loan is a great option. The only way to borrow money where the interest you pay can be tax-deductible is through a home equity loan. There is a limit on the amount you can deduct. Laws change all the time, so it is important to get advice.
These are only a few legal ways that individuals can reduce their taxes. There are many other options, and some may be more suitable for businesses.
If you don’t know how to prepare taxes and file tax returns, you will almost certainly pay more tax than the law requires. Suppose they can be proven to be wrong by tax authorities. In that case, such violations will not lead to heavy penalties or prison sentences. The audit of records and cross-examination by taxpayers are not pleasant experiences.
The Worst Thing
You should provide all necessary materials and never conceal any information. It is also a good idea to retain qualified tax counsel for advice if you are being audited. Tax agents will use the concept of “intention” to determine whether you have made a mistake or committed a criminal or civil offense.
It is important to provide all information requested by tax agents and answer all questions, even if it seems detrimental to your case. You will feel more confident in making these decisions if you have qualified tax professionals as your counsel.
Tax and Law Research Inc. is available to answer your questions and direct you to additional information. We also offer a complimentary tax-planning consultation. We offer a variety of financial, tax advisory, accounting, and tax services to individuals and businesses.