There are two constants in life – death and taxes. Since neither one are events that people look forward to, it’s only natural that we fight both of them with tooth and nail. After all, taxation is the loss of our hard earned money… and death is the loss of, well, everything else.
We do our best to avoid death’s inevitability by eating right, exercising, cutting down on sweets and cigarettes, and making sure we look both ways before crossing the street.
And as for taxes – that’s a little more complicated.
You see, the IRS draws a line between tax avoidance and tax evasion. In general terms, here’s the difference:
- Tax avoidance is when someone works within existing laws to pay the least amount of taxes that the IRS says are rightfully due from them. Tax avoidance is legal.
- Tax evasion is when someone works outside of existing laws by not paying the taxes that the IRS says are rightfully due from them. Tax evasion is illegal.
Tax avoidance is perfectly legal, and the United States Supreme Court has recognized this fact. The Court has stated that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” See Gregory v. Helvering.
Let’s look at an example: Tax avoidance is when someone creates a legitimate company (like a home-based business) to take advantage of tax write-offs that come with owning a business that is producing a profit. The person actually sells goods or services in their spare time and reaps the rewards by being able to write-off a portion of their home and car. Tax evasion is when someone sets up a fake company, which doesn’t actually do any business, to hide income that they’re earning so that they don’t have to pay taxes on it.
Of course, that’s just one example but there are many others. In helping taxpayers with IRS taxation issues, I would heartily advise legal tax avoidance efforts. Some of those include:
- Set up a profitable small business
- Claim all deductions that you rightfully can claim
- Put as much money as possible into your 401k
Having said that, let me now highlight a challenge that taxpayers are facing now and going to face in the future: The shrinking opportunity to legally avoid taxes. In some cases, tax loopholes exist which taxpayers are legally taking advantage of, but those loopholes are closing. In other cases, the IRS creates layer after layer of obfuscation and complexity so that tax advantages are minimized.
What can you do about it? Frankly, not much. When Congress and the IRS detect that their pockets have a small hole in them, resulting in precious nickels returning to the taxpayer’s pockets, you can be sure that they’ll get out the red tape and they’ll sew up their pockets to collect more.
But until then, take advantage of those opportunities!