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What is Tax Avoidance?
Mary McMahon
Mary McMahon
Tax avoidance is a strategy which involves exploiting legal means of reducing taxes with the goal of minimizing tax liability. Avoidance is a perfectly legal approach to handling taxes, although sometimes avoidance practices can stray into the realm of being abusive, at which point people may cross the line into tax evasion. In tax evasion, people utilize illegal means to avoid paying all or part of their taxes; evasion can result in prosecution and fines or prison time.
Most taxpayers engage in a certain amount of tax avoidance, because people want to avoid paying more taxes than they need to. In a simple example, most people claim all of the exemptions available to them. Likewise, people may take advantage of retirement accounts which offer tax savings if they plan on saving money for retirement; as long as one is putting money aside, one might as well reduce taxes at the same time. These tax avoidance strategies are usually encouraged by financial planners and accountants.
A skilled accountant can show a taxpayer where he or she can save on taxes, and provide advice about conducting financial affairs in a way which will limit tax liability. Accountants will usually not guarantee to reduce tax liability by a set amount or percentage, but they do pride themselves on finding as many ways as possible to generate tax savings for their clients.
Other tax avoidance strategies may be more aggressive. While still legal, they are sometimes deemed ethically questionable, and taxpayers may skirt the line between legality and illegality. Most accountants have personal limits when it comes to assisting people with tax avoidance, and while they will provide advice and help with fully legal activities, they may be reluctant to be involved in more gray areas. Aggressive tactics can include taking advantage of loopholes in the law which may be subject to interpretation, and not all accountants interpret these loopholes in the same way.
When people engage in tax avoidance, they are knowingly trying to reduce their taxes, but they are not knowingly breaking the law. Tax evaders, on the other hand, are aware of the fact that the means they are using are not legal, and they are choosing to engage in evasion activities despite this. Evasion tactics vary by nation, but include hiding or moving income so that it cannot be taxed even though it is legally taxable, or simply refusing to send in tax payments.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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Discussion Comments
@Viktor13 - I know what you are saying. Those with the money to hire the real experts do save a lot of taxes. But most of them pay a lot of taxes too. And lower income people are often eligible for credits and deductions that phase out when you start making more money, so it kind of balances out for everyone.
And there is a lot that the average guy can do to make sure they don't overpay either. Even going to one of the inexpensive tax places they advertise on TV can save you money by making sure you take advantage of all the deductions and credits available to you. There are computer programs that help too, and they don't cost much.
There are tax avoidance techniques that any one can use regardless of income. You just have to know what they are, or hire someone who does.
Nobody should have to overpay their taxes, but it seems like all of these corporations and rich people hire lawyers and tax experts to save so much money, and us little guys are stuck with the full bill. I don't understand why the tax laws have to be so complicated in the first place. Why isn't it just, you made X, so you owe Y, and that's it?
It seems to me that a whole lot of people have a vested interested in keeping things so complicated. The government likes it because it makes people overpay, and the tax people like it so that they can make money off people by keeping them from paying what they don't owe in the first place.
This kind of thing is exactly why I am going to law school. Legal tax avoidance is a fine art, and if you're good at it you pretty much have a job for life helping people and companies hang on to their money, rather than have it go to the tax man. The tax laws are so complicated that you pretty much need someone whose full-time job involves working with it.
I always loved numbers and math, so I studied accounting in college and took the CPA. Once I started learning about taxes and all of the different things that can be done to adjust the amount owed, I knew law school was for me. This is a fascinating subject.
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