Tax Planning is the number one way to reduce your taxes.
Tax Evasion is the number one way to end up in jail.
And what the heck is Tax Avoidance?
Many people, like yourself, dread tax time, and you probably ignore your taxes until you need to file them, but this can actually cost you. Tax Avoidance is the act of avoiding paying any more in taxes than absolutely necessary by doing things like claiming more deductions or lowering your income bracket.
Now you may be asking us, “But isn’t this illegal?”. No, it’s not.
Tax avoidance and tax planning are different than tax evasion.
Tax Evasion
Tax Evasion is the intent to reduce your taxes through deceit, subterfuge, or concealment. This is 100% illegal.
Tax evasion includes things like:
- Purposely not reporting income
- Hiding income – like “paying” a child or a shell company – as a way to keep yourself or a shareholder in a lower tax bracket.
- Falsely claiming deductions for things that didn’t happen (ie: giving to a charity when you didn’t),
- Inflating deductions beyond their reality (ie: writing off an entire week-long vacation with your family as ‘business travel’ because you had an hour-long dinner with a client).
- Failing to keep accurate financial records / Discrepancies in financial records.
On this flip side of tax evasion is Tax Avoidance and Tax Planning.
Tax Avoidance
Tax Avoidance is reducing the amount of taxes you owe by carefully planning for them throughout the year – (a.k.a: Tax Planning) It is completely legal to take advantage of any legal reductions.
Some common methods of tax avoidance are:
- Reducing your amount of taxable income through legal channels
- Lowering your tax rate
- Controlling when you must pay taxes
- Claiming all your available tax credits and deductions
- Controlling the effects of the Alternative Minimum Tax
- Avoiding common tax deduction mistakes
Tax Planning
Tax Planning is a proactive approach to taxes – by planning for your taxes throughout the year you can avoid paying extra taxes at the end of it. In other words:
Tax Planning = Tax Avoidance.
Tax planning is the number one way to reduce your taxes, and the easiest way to set up a plan is to work with a CPA. CPA’s must maintain their certification through continuous education on current tax laws and changes. They will look at your specific needs and discuss all your different options with you. They then help you create a tax plan and will set up regular (usually quarterly) meetings to review your plan, as well as be there for you year-round when unexpected changes or life events alter your goals.
Tax Planning can involve things like:
- monthly reviews of your income and expenses
- quarterly meetings with your CPA to discuss what tax options are legally available to you.
- creating a plan of action based on your situation which will help you pay the lowest amount of taxes possible.
- Updating your plan when your needs or values change – like a new addition to your family or opening up a new store.
Tax planning won’t be the most fun part of running your own business, but when you owe fewer taxes at the end of the year, you will find tax planning and tax avoidance well worth it.
Especially if you can use that extra money on something you love, like spoiling your grandkids or taking a tropical beach vacation!