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Tax saving, avoidance and evasion can be worlds apart

On Behalf of | Dec 1, 2019 | Federal And State Tax Collections |

Many people and businesses wonder if they could pay less in taxes. But they often also worry that trying to keep their tax bill as low as possible could get them in trouble with the law.

Experts generally agree that paying only the required taxes is both smart and ethical, and that knowing where to find the line can be tricky.

Discovering tax savings

A person pays a higher or lower tax bill depending on their life decisions.

Many are surprised to find themselves claiming child and earned income tax credits due to having a new family member. Few people give birth just for those deductions, but they often can claim the savings.

Sometimes life reduces your taxes. This is the essence of tax saving.

Choosing tax avoidance

A special kind of tax savings is tax avoidance. Instead of making the happy discovery that a decision will also reduce your taxes, tax savings are a significant reason for the choice.

For example, some people do not want a Health Savings Account (HSA). Maybe they would see the doctor less often because they would not want to dip into the account. Maybe they are terrible at keeping records.

But then they might read an article in Forbes that claims the HSA is “the best legal tax-avoidance strategy available to American taxpayers.” They do some research and set up their HSA.

As the Forbes contributor says, tax avoidance is generally very legal. And, simply put, the line between tax savings and tax avoidance is intent.

When tax avoidance may be tax evasion

Simply put, the line between tax avoidance and tax evasion is the law. Illegal tax avoidance is evasion.

For example, a Fortune article this year described a variety of corporate avoidance strategies such as those involving intellectual property (IP) like patents, trademarks, and trade secrets.

According to the article, American companies sometimes move IP to a smaller company they own (a subsidiary) in a foreign country where taxes are lower. The parent company then pays royalties to the subsidiary for the right to use that IP. Such a move might be irrational or even unthinkable without the intent to avoid taxes.

Among others, one rule of thumb is to consider whether a tax avoidance move would still make reasonable sense if it offered no tax savings.