The legal way to pay fewer taxes is tax avoidance.
Tax laws are one of the most complicated codified legal mandates. This complexity is a double-edged sword. On the one hand, compliance can be difficult. Professionals would usually have to be commissioned to ensure that taxes are paid correctly. On the other, the tax code’s many details can provide the taxpayers with the means to pay less.
Tax Avoidance Explained
Taxes are meant to fund government works in the community. Unlike charitable donations, it is involuntary. The amount that the taxpayer owes depends on the income earned, such as from wages or earnings from investments. Taxpayers can be individuals or corporations.
Since one of the functions of taxes is the redistribution of wealth, it is not unusual for taxpayers to want to keep more of their wealth for their own use. Tax avoidance allows this to happen through legal means. Minimising the amount owed to the government can be done using deductions and credits. Individuals can also do it by using provisions that can be interpreted to have tax advantages.
Tax avoidance is not the same as tax evasion. Although both results minimise the amount of taxes owed, tax avoidance is legal while tax evasion is not.
The law allows for tax avoidance to recognise the need of taxpayers to increase their savings or business capital. Because of the concept of tax avoidance, it is both legal and ethical to avail of these considerations.
Examples of Tax Avoidance
There are many ways you can do this. A typical example is the use of retirement contribution. It is usually written in the laws that retirement benefits can be deducted from an individual’s gross income.
Healthcare is another area where this can occur. The law recognises the importance of maintaining good health. Thus, healthcare expenses such as medical and dental insurance are usually deductible from the gross income.
Certain types of investment can qualify for this. An example is when you can deduct interest on mortgage payments.
Finally, business expenses can also be deducted. The caveat is that they must be incidental to the business and can be proven.
It is important to note that tax laws vary depending on the location. Countries and even states can pass laws on taxation. Each of those laws would have to be interpreted in the most harmonious way possible. This is the reason why taxes – and tax avoidance – needs to be carefully navigated.
Also, it has its limitations. At its core, it is about decreasing the amount owed in taxes. Taxes will still need to be paid.
Truthfulness is a necessary component of tax avoidance. It is what distinguishes it from tax evasion. If there is a fraudulent act, even if it is just an attempt to deceive, then the law is broken, and it is no longer considered avoidance.
For example, charitable contributions are usually deductible. But the deduction is limited to the amount that was given to the charity. If a person declares they gave more than they did, then it is tax evasion and not the other one.