In the world of finances, tax evasion and tax avoidance are two terms that often get confused and yet have completely different meanings.
Simply put, the term tax evasion means not paying the taxes that you owe. Penalties for this type of infraction can range anywhere from fines to jail time depending on intent. Intentionally foregoing the payment of your taxes will most likely result in hefty punishment.
Don’t believe us? Go read about actor Wesley Snipes' recent 3 year stint in prison after opting out of paying his taxes.
Important things to remember when trying to “Avoid” Tax Evasion
- Declare your independent contractor’s income
- Don’t inflate business expenses
- Report income earned in other countries
- Don’t declare personal expenses as business expenses
Tax avoidance on the other hand, is when you arrange your income in a manner that legally allows you to pay the lowest amount of taxes. And yes, this is legal. In fact, there’s an entire industry built around this concept—it’s called tax consultancy—something we love helping clients with here at Bookly.
Speaking on the constitutionality of the matter, Judge Learned Hand said:
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.
In most cases, tax avoidance is more applicable to higher income earners. There are less ways for low income individuals to avoid payment of taxes. This fact has been at the helm of much political debate—something we’ll leave to the pundits.
Methods of Tax Avoidance
- Deferring income (401k)
- Getting income through Capital Gains
- Using the primary residence capital gain exclusion to its full effect