what is tax avoidance 
tax avoidance refers to the use of legal methods to minimize the amount of income tax owed by an individual or a business it s generally accomplished by claiming as many deductions and credits as are allowable it may also be achieved by prioritizing investments that have tax advantages such as buying tax free municipal bonds tax evasion relies on illegal methods such as underreporting income and falsifying deductions they re quite different practices understanding tax avoidancetax avoidance is a legal strategy that many taxpayers use to lower their tax bills millions of individuals and businesses use some form of tax avoidance to legally and legitimately cut down how much they owe the internal revenue service irs methods of tax avoidance are also referred to as tax shelters when used in this context 1taxpayers can take advantage of tax avoidance through various credits deductions and exclusions including tax credits and deductions must first be approved by the u s congress and signed into law by the president before they can become part of the u s tax code these provisions can then be used for the benefit and relief of taxpayers 2tax avoidance is built into the internal revenue code irc lawmakers use this tax code to manipulate citizen behavior by offering tax credits deductions or exemptions they indirectly subsidize certain essential services such as health insurance retirement savings and higher education or they may use the tax code to advance national goals such as greater energy efficiency 3tax credits work somewhat differently than tax deductions they re subtracted from what you owe the irs or other tax authorities after you prepare your tax return and figure out what you owe tax deductions are subtracted from your gross income to arrive at your taxable income 3special considerationsthe expanding use of tax avoidance in the u s tax code has made it one of the most complex tax codes in the world its complexity causes many taxpayers to miss out on certain tax breaks because they simply don t understand them taxpayers end up spending billions of hours each year filing tax returns and much of that time is spent looking for ways to avoid paying higher taxes 4families often have a difficult time making decisions about retirement savings and education issues because the tax code can change annually businesses especially suffer the consequences of a tax code that frequently evolves and this can affect hiring decisions and growth strategies proposals to the tax code often attempt to simplify the process by flattening tax rates and removing many tax avoidance provisions proponents of establishing a flat tax rate argue that it would eliminate the need to pursue tax avoidance strategies but opponents call the flat tax concept regressive make sure you save every receipt that may be useful for legal tax avoidance if you re a business owner freelancer or investor types of tax avoidancetaxpaying entities can avoid paying taxes in several ways with the help of the credits deductions and exclusions that make up the u s tax code these are just a few of the tools that taxpayers have at their disposal to take advantage of tax avoidance the irs has reported that 87 3 of taxpayers used the standard deduction rather than itemize their deductions in 2020 5 the standard deduction is 14 600 for single filers in 2024 and 29 200 for married couples filing jointly 6the alternative to claiming the standard deduction is to tally up every itemized tax deductible expense you paid during the tax year and enter them all on schedule a of your tax return you can then claim the total of these deductions instead but this is only advantageous if the total amount is more than the standard deduction you qualify for you d be subtracting less from your taxable income otherwise the tax code doesn t allow you to claim both the standard deduction and to itemize deductions as well you must do one or the other 7saving money for retirement means that you re probably engaging in tax avoidance every individual who contributes to an employer sponsored retirement plan or invests in an individual retirement account ira is engaging in tax avoidance the investor gets an immediate tax break equaling the amount they contribute to a traditional plan each year up to a limit that s updated annually income tax on the money isn t owed until it s withdrawn after the saver retires the retiree s taxable income will be less in the years the contributions reducing taxes owed growth on the money is typically taxed after retirement when withdrawals are made roth plans work differently there s no immediate tax break for making contributions they allow investors to save after tax money so the tax break comes after retirement in the form of tax free savings roth accounts allow the saver to permanently avoid paying income tax on the money their contributions earn over the years subject to some qualifying rules 8the u s tax code allows corporations and high net worth individuals hnwis to move their money to offshore tax havens these are locations that have looser regulations more favorable tax laws lower financial risks and confidentiality going offshore by setting up subsidiaries or bank accounts allows taxpaying entities to avoid paying higher taxes in their home countries 9tax avoidance vs tax evasionpeople often confuse tax avoidance with tax evasion both are ways to avoid paying taxes but tax avoidance is legal and tax evasion is not tax evasion occurs when people underreport or fail to report income or revenue they ve earned to a taxing authority such as the irs you re guilty of tax evasion if you don t report all your income such as if you omit tips or bonuses paid by your employer claiming credits to which you aren t entitled is also considered tax evasion some taxpayers are guilty of tax evasion by not filing their tax returns or not paying their taxes due even if they ve filed returns 10tax evasion is a serious offense entities that are found liable can be fined jailed or both 11