3 Useful Tax Avoidance Strategies
As we’ve previously discussed, there’s an important distinction between tax avoidance and tax fraud or tax evasion. Tax avoidance is the use of lawful means to lower one’s tax liability. Tax evasion is the willful falsification of information for the purpose of reducing one’s tax burden. Failing to pay one’s tax burden may also constitute evasion. Tax evasion is illegal and can bring harsh penalties. Tax avoidance, by contrast, is permissible provided that the avoidance complies with the spirit of the law. This means that avoidance must be lawful in its substance, not just its form. If a taxpayer uses means which clearly go against the purpose of a law, it won’t be permitted. This is true even though the means may otherwise be perfectly permissible in a different context.
In this post, we’ll identify and discuss several examples of tax avoidance. If performed properly, these examples can show very useful strategies to reduce taxes. As a judge famously said, legitimate tax avoidance does not violate any patriotic duties. Americans have every right to lower their tax burden if they can do so lawfully. As citizens, it’s our responsibility to pay the amount of tax which we legitimately owe. But, we may also do whatever we can to lawfully lower that amount if we so choose. And it is the responsibility of our government to wisely use the funds we pay in taxes.
Let’s get started and explore a few examples in detail.
Claiming Deductions for Business Expenses
If a taxpayer operates his or her own business, or is a co-owner, that taxpayer can claim deductions to reduce taxes. There is a wide variety of deductions available to business people. The facts of a given case determine which deductions are available. One of the more common business deductions is the automobile or mileage deduction. Business people who use a vehicle for business purposes may be eligible for a deduction. Utilizing the auto deduction can be a bit tricky, though. There are two ways to claim the deduction: the actual expense method and the standard mileage rate method. Each method has its place depending on the specific situation.
Other common deductions include travel expenses, business insurance premiums, and equipment. Remember, unless the business is a C corporation, business income will be passed through to the individual owners. This means that individual business people are responsible for maximizing the business deductions shown on their personal income tax returns. To minimize their liability, business people need to keep track of their expenses and claim the correct deductions.
Claiming a Deduction for Charitable Contributions
Another legitimate strategy for reducing taxes is making a contribution to a qualified charitable organization. As we pointed out in an earlier post, only certain organizations may qualify as charitable organizations. If an individual business person makes a donation to a qualified charity, then that business person may claim a deduction. This also applies to C corporations as well. C corporations may claim a deduction to reduce their corporate tax liability for charitable contributions.
Charitable contributions are subject to specific rules. As a result, business people should consult with a professional beforehand. For instance, if a person plans to donate property other than cash, there may be issues with valuation. In some cases, it may be optimal to donate non-cash items. The charitable contribution deduction is among the most commonly used deduction. It’s basically a win-win: taxpayers reduce their tax burden while contributing to charity. If you’re looking to optimize your return, you should consider making charitable contributions.
Holding Investment Property for Lower Tax Rates
Yet another example of tax avoidance would be holding investment property to receive favorable tax rates. If you acquire property for investment purposes, you will pay specialized rates when selling the property. If you hold the property for less than one year, you will pay at the short-term capital gains rate. But if you hold it for more than one year, you will pay at the long-term capital gains rate. This schedule applies to most investment property sales situations. There are some situations, though, such as those involving employee stock compensation, which may have different rules. The current short-term rate is 20% and the long-term rate is 15%. Accordingly, if someone buys investment property – stocks, bonds, foreign currencies, gold, etc. – they can choose to hold it specifically for a better rate.
Let’s suppose someone invests heavily in a certain company. This person invests $100,000 and receives a large number of shares of stock. Then let’s suppose that the company’s stock price increases substantially, and within six months the shares are worth twice their purchase price. This investor could sell the shares at that point, but then the gains would be taxed at the short-term rate. If the investor simply holds the shares for another six months, the long-term capital gains tax rate applies. In this hypothetical, this holding strategy would result in thousands of saved tax dollars.
Our Manhattan Tax Attorneys Can Help
Here at Mackay, Caswell & Callahan, P.C., we are very familiar with issues related to tax debt. We understand the importance of taking legitimate means to reduce your tax obligations. The tax avoidance examples we discuss in this post can hopefully help our readers and prospective clients toward this end. When people need counsel related to tax avoidance and tax debt resolution, they routinely choose MCC. Our experienced professionals have a long track record of achieving great results for our clients. If you have a tax or business issue, reach out to one of our top New York City tax attorneys today.
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