What is Tax Avoidance
Tax avoidance is the legal way through the Internal Revenue Service (IRS) for taxpayers to apply exemptions and deductions to reduce their tax bill. Federal income tax is intended to tax higher levels of income at higher tax rates. Avoiding tax will lower your tax bill by arranging transactions so you can receive the largest tax break. Even though the terms tax avoidance and tax evasion sound similar, they are not. Tax evasion is an illegal activity to reduce tax liability by subterfuge, deceit or concealment. Continue reading to learn more on tax avoidance.
Finding business tax deductions
The first way to avoid a massive tax bill is finding tax deductions in your small business. The IRS is clear saying federal income taxes are not deductible; however, there are other overlooked income tax deductibles. The more tax deductions you can make, the less the amount of taxable income.
Vehicles for business purposes can be deducted as either business-related expenses or mileage. You have a good chance of receiving a larger tax break if you use a newer vehicle for your business. You can also deduct the vehicle’s depreciation value.
Expenses of going into business
Advertising, utilities, office supplies, and repairs are all included in the costs of starting a new business. A deduction of up to $5,000 of your capital expenses in the first year of business is acceptable. If there are extra costs, you can equally deduct it over the next 15 years.
Fees your business pays for professional services like lawyers, tax professionals, and bookkeepers are fully deductible. Most of these charges are deductible the year they incur. However, if the work will be reflected over many years, the fee must be deducted over the period the service will be provided.
Stolen goods are deductible. Depending on what goods or services your business provides, you may be able to recover unpaid debt.
The IRS allows you to deduct up to 50% of the cost of entertaining current or future customers. Entertaining includes business related expenses if the business is discussed at the event. Also, expenses are deductible if the entertainment takes place before or after a business discussion. Keep all receipts of entertaining purchases.
You can deduct acquired expenses during a business trip. Fees include plane tickets, room and board, and costs of operating your vehicle. You can mix business with pleasure if business is the main purpose of the trip. If you bring your family along, you can only deduct your expenses.
When you use a credit card to pay for a business expense, the charge and the interest accrued is deductible. Also, the funds from a loan used for business purposes is deductible. Keep track of where the money has been spent. The IRS may ask for this information.
Costs incurred from moving can be deducted if you have moved for your business or job. Your new and old workplace must be at least 50 miles apart. If it is your first job, the deduction is calculated from your old home. Deduct the expense of moving you and your belongings.
Software depreciates over 36 months, and hardware over five years. If the software came bundled with the computer, it is considered hardware. Therefore, it also depreciates over five years.
Charitable contributions are deductible for limited liability, S corporation or partnership businesses. Simply giving your old office equipment can help an organization and give you a tax benefit if it has not fully depreciated.
You can deduct education expenses if they relate to your business, trade or occupation. Expenses are only eligible if the knowledge can be used to maintain or improve the skills of your current business. Education that will qualify you for a new job is not deductible.
Advertising and promotion
You can deduct all costs for advertising your business. Advertising expenses include business cards, newspaper ads, and billboards.
The goal for tax planning is to lower the amount of taxable income so you are taxed in a lower tax bracket with a lower tax rate. Minimizing taxes involves skillful planning to reduce your tax liability. Although there is no way to lower your tax rate, you can take actions that will give you the same result. Actions include the following:
- If you have a business, choose its type. For example, is it a sole proprietorship, partnership, or corporation? Each type of organization has its tax breaks.
- Make sure your transactions are made so that payments you receive are considered capital gains. Long-term capital gains made by noncorporate taxpayers will have lower tax rates.
- Shift your income from yourself to your children by hiring your children. Tax law limits allow you to shift unearned income to children under 18. Ask a tax Expert for other savings with this strategy.
Other strategies to reduce your tax bill include:
Give yourself a raise
Boost retirement savings
The more money you invest into your retirement savings, the less money considered taxable income. Ask a tax Expert to see how much you can contribute.
If your employer offers a medical reimbursement plan, also known as a health care flex plan, take it. A portion of your salary can go into a separate account for paying medical bills. A flex plan will allow you to avoid income and Social Security taxes, saving you 20 – 35% compared to using the money after tax.
Some employers offer a reimbursement plan for child care. Just like the health care flex plan, a child care reimbursement plan will allow a portion of your salary to go into a separate account for child care. You will not be charged income or Social Security taxes this way.
If you are unemployed and looking for another job in the same line of work, you can deduct your job-hunting costs. Food, lodging, and transportation are deductible if the expenses are over 2% of your gross income.
If you plan on getting married, doing so at the beginning of the year can have tax benefits. However, while most married couples pay a tax penalty for getting married, others do not. Ask a tax Expert to see how getting married will affect your taxes.
Having a new child, whether adopted or biological, will save you on taxes. It will allow you to take off $3,950 from your taxable income and you may also qualify for a $1,000 child credit. If you want to see benefits before filing taxes, add one extra withholding allowance on your W-4 for a larger take-home pay.
If you have adopted a child, add up your total adoption expenses. You are credited up to $13,190 in adoption fees and more if you adopt a special needs child.
Avoiding tax evasion
Failing to pay taxes that are owed is tax evasion. While most times tax evasion seems deliberate, sometimes the IRS will flag you for strategies they deem illegal that you were unaware of practicing. Tax evasion is thought only to be about income taxes, but businesses can also practice it with state sales and employment taxes. Just like individuals, businesses must pay taxes. Businesses are the most common to be scrutinized when filing taxes because they have more options to avoid taxes whether legally or illegally.
Do not under-report income.
Keeping money from the IRS is considered fraudulent. It is important to report every bit of income you receive.
Do not make false entries.
Keeping two sets of books can lead to irregularities in reporting earnings. Failure to keep adequate records will raise a flag with IRS as fraudulent intent. The same holds true if there are inconsistencies in the amounts.
Do not claim false or overstated deductions.
If you claim a lot of charitable deductions or overclaim your travel expenses, it will raise flags with the IRS. False claims include if you claim you had paid your children or spouse for work they did not perform.
Do not claim personal expense as business expense.
Proper record keeping will help you stay away from claiming personal costs as business expenses. Keeping business and personal equipment separate is important. Careful record keeping prevents this type of tax fraud.
Do not hide or transfer assets or income.
This kind of tax fraud can range from hiding the funds in a bank account to the improper exchange of property or income between taxpayers.
Do not engage in a “sham transaction.”
A fraudulent transaction is as simple as labeling one as something it is not in hopes for a larger tax break. You cannot avoid income tax liability by saying a transaction is something it is not.
Tax avoidance will help reduce your taxable income legally. The IRS has many regulations to follow. Ask a tax Expert if you need more help on reducing your taxable income.