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Tax Avoidance

Methods of Legal Income Tax Avoidance

Methods of Legal Income Tax Avoidance

In the United States, the Internal Revenue Service (IRS) describes different methods of legal income tax avoidance within the text of the Internal Revenue Code. These methods are considered legal not only because of their foundation in the Internal Revenue Code but also due to a decision made by the Supreme Court of the United States in 1935 in the case of Gregory v. Helvering. 
Ambiguities in tax law are often difficult for people with no experience in the legal or accounting fields to understand. As such, many people seek out the assistance of a tax attorney when hoping to uncover new means of income tax avoidance. The tax attorney can help to translate the wording of the tax law and advise on the client on the best method of filing taxes. By exposing these ambiguities to a tax authority, the taxpayer may receive a reduction in taxes for that tax year.
By applying for disability, a person may receive special tax treatment depending on the extent of the disability and its affect on the person's ability to work and provide for him or herself. When some applies for disability payments, the condition is investigated to determine if that person does qualify. As the person then has a reduced income, he or she may be eligible for specific forms of income tax avoidance.
Tax credits are provided by the Internal Revenue Service and other tax authorities for those taxpayers that qualify for the credit. The Internal Revenue Code outlines different tax credits that are available as a means of income tax avoidance. However, the person must ensure that he or she meets the minimum requirements to receive the credit. A tax credit is different from a tax deduction in that it is applied prior to filing taxes and its effect is immediate, thus reducing a person's income taxes prior to having to pay them.
Tax deductions are available to taxpayers as they file their income taxes. The Internal Revenue Code outlines various deductions that can be applied for in order to lower income taxes. This form of income tax avoidance is applied for while filing tax returns and its effect is felt through the amount of money that a person may receive in their tax return.
Prior to seeking out legal means of income tax avoidance, it is recommended that a person consult with a tax attorney and/or qualified accountant. In this manner, the taxpayer can be assured that he or she is taking the proper action and will not incur penalties and other ramifications as a result.

Defining Tax Avoidance

Defining Tax AvoidanceTax avoidance, by definition, is the use of legal methods to reduce the amount of taxes on pays or the deferment of those taxes altogether through those means.
As it is a legal practice, taxpayers who engage in tax avoidance cannot prosecuted unlike those who commit tax evasion.

There are many methods of legal tax avoidance in the United States and other countries. In fact, these nations often encourage these methods as it promotes the saving of funds and preparation for retirement. This is not to say that these government approve of tax evasion as they still expect taxes to be paid. However, there are means provided to lower taxes such as tax deductions and credits which are listed by the Internal Revenue Service in its publications and on its website. Some methods of tax avoidance include preparing for retirement and the transferring of assets into a trust.

Preparing for retirement is an act that the government of the United States supports. This means that the person is being financially responsible and is saving money. There are several retirement plan options.        

In 1935, The United States Supreme Court–in Gregory v. Helvering–imposed a law that defined tax avoidance as a legal means to reduce the taxes one would have to pay. In this landmark case, a woman who owned shares of stock sold said shares and claimed that the money she received for the sale should be tax-free according to the tax law of 1928. The woman’s claim eventually made its way to the Supreme Court. The court ultimately ruled the woman’s actions to be fraudulent. However, in the decision, the court stated that, “The legal right of a taxpayer to decrease the amount of what otherwise would be his or her taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” This affirmed tax avoidance as a legal means that cannot be prosecuted if done in the proper fashion.