Ten Good Tips for Legal Tax Avoidance
There is a distinction between tax evasion and tax avoidance. Tax evasion is using illegal means to reduce or eliminate tax liabilities, while tax avoidance involves tax planning and strategy to legally reduce or eliminate tax liabilities, according to the Legal Match website. The IRS encourages taxpayers to pursue every opportunity for legitimate deductions.
There are three main options to avoid or minimise taxes: income deferral, tax deductions and charitable contributions. For small businesses there are even more opportunities to avoid taxes.
Income deferral means postponing the receipt of income until after the close of the tax year. It is difficult but not impossible for individuals to postpone income. Employees anticipating end-of-year bonuses can check with their employers to see if it is possible to delay the payment until after Dec. 31.
Take advantage of all possible deductions from your personal taxes, advises Legal Match. These include casualty or theft losses. If the loss is substantial enough, you might be able to write off a large portion of it from your taxable liabilities. You also can write off interest expenses, like mortgage interest or student loan interest payments.
You can write off medical and dental expenses including co-pays, prescriptions and some insurance plans. Miscellaneous itemised deductions include tax preparation fees, the costs of a safety deposit box holding financial documents, union dues and subscriptions.
Charitable deductions include cash contributions to charities, non-cash contributions (clothing, furniture and appliances) and mileage driven for charitable acts. These contributions in total should not exceed half your adjusted gross income.
Charitable contributions are one of the few ways individuals can control the timing of deductions. A large contribution made on Dec. 31 counts on that tax year.
Tax Avoidance for Small Businesses
Small business owners have even more options to avoid taxes than do individuals. Among these, according to the Focus business website, is the ability to wait until year end to purchase supplies. This is not the time to add inventory, as that will not reduce taxes. Use the end of the year for purchases of office supplies, copy toner and other things your business will use and consume well into the next tax year.
Small business owners also can write off bad inventory. Write off damaged or obsolete inventory items either by donating them to charity or by reducing the value of the obsolete inventory. Small business owners also can contribute to a tax-deferred retirement plan, including SEP or SIMPLE plans, and write off part or all of their contribution.
(Individuals who contribute to a traditional Individual Retirement account can do this, too.) Finally, business owners can write off bad debts. If you are in a service industry with clients who haven't paid money they owe you, you can write off these bad debts at the end of the year.