Are You Guilty of Tax Avoidance?

Proudly, I am! What is the difference between tax avoidance and tax evasion? About 10 years…in jail! There are many legitimate tax deductions and strategies that purposely exist in the tax code for our benefit. Many people refer to these as loopholes. I don’t like referring to tax deductions and strategies as “loopholes.” The term loophole carries the connotation of a taxpayer getting away with something until Congress plugs it up.

Let me illustrate with an example.

Up until 2002, if a person lived in San Diego and worked in Coronado, and took the Coronado bridge to get to work every day, that person would have had to pay a toll to use the bridge (the toll has since been eliminated, but bear with me for the purposes of my example). That person would be making a choice to pay the toll. If, however, he discovered an alternate route which allowed him to avoid paying the toll, he could choose that route instead. But, if one day he chose to break through the tollgate, he would be evading the payment of the toll. That’s the difference between avoiding taxes using legitimate tax strategies and evading taxes illegally.

The IRS gives us choice and control as to how, when, or if we pay tax on our accounts. If we don’t understand that then we do what everybody else does and it can cost us a fortune.

Many Americans are utilizing a tax deduction and strategy right now, whether they realize it or not, as they save for their retirement. Instead of contributing after-tax dollars to a traditional savings account and paying tax on the growth in the account each year, they choose to contribute pre-tax dollars to a 401(k), or contribute after-tax dollars to an IRA and take a tax deduction for the contribution, and defer paying tax on the growth in the account to a future date.

Another tax deduction and strategy people utilize is homeownership. We all have to live somewhere and, under current tax law, if you choose to own a house and you carry a mortgage, you can deduct the interest you pay to the lender, as well as the property taxes, and mortgage insurance premiums, from your taxable income on your tax return each year. However, not every homeowner benefits from this tax deduction. The IRS gives you the choice of claiming the greater of the standard deduction or the itemized deduction. If a homeowner has no mortgage, or their itemized deductions are less than the standard deduction, they will not benefit from this tax deduction and may pay more in taxes than they otherwise would.

There are many rules in the tax code that allow a taxpayer to reduce or avoid the payment of taxes and these rules are available to ALL taxpayers. Many Americans end up paying a substantially greater amount of tax than they have to simply because they were not aware of the legitimate tax deductions and strategies available to them or they choose not to employ them. It is up to the taxpayer to research and understand all legitimate deductions that may be taken. For those who lack the expertise or time to do their own research, perhaps the expertise of a financial strategist or a tax strategist is the answer.

There are plenty of tax strategies that everyday Americans can take advantage of and reduce their tax burden that they don’t employ. The law says you must pay all the taxes you are required to, but no more!

If there were opportunities to avoid paying some of the taxes you may be currently paying would you want to know how to do that? Call us to schedule a time to discuss your specific circumstances.

This blog post is designed to provide the introductory information in regard to the subject matter covered. Neither the company, the advisor, nor their representatives offer legal or tax advice. Consult your attorney and tax advisor as to the applicability of this information to your specific circumstances and for complete up-to-date information concerning federal and state laws in this area.

The company makes no determination which strategy is best suited and applicable to you. No determination can be made without a competent financial services professional first receiving and reviewing your personal financial information and assessing your suitability, risk analysis, and individual circumstances.