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Tax Avoidance

Double Taxation

Double Taxation

Depending on a person's country of residenceFinancial advisers describe two different situations in which double taxation may occur. As described above, most cases of this form of taxation occur as two or more nations impose taxes on one source of income.
 
 
This often happens in cases where a person is either a permanent or temporary resident of one country but earns his or her income in another. That income is typically taxed prior to the person receiving the money, but as he or she has to file taxes in the country of residence, that person is taxed yet again.
 
 
Another situation in which this term is used is by tax abolitionists in the United States. These individuals support tax avoidanceThere are methods of tax avoidance that coincide with double taxation despite having to pay to financial jurisdictions out of one income. This comes in the form of tax treaties which can be formed between those financial jurisdictions should they have a trading or other financial relationship with each other.
 
 
These treaties often provide legal tax avoidance by lessening the taxes levied on a person's income from one jurisdiction with respect to those levied by the country of residence – essentially, the taxes imposed by the residence of the taxpayer will be the normal amount whereas the taxes imposed by the other nation will be adjusted to be a lower amount.
 
 
An example of the treaties established to lessen the effect of double taxation is present within the European Union. The member states, or nations, of the European Union have created several tax treaties which help to alleviate the tax burden placed on citizens in those nations as they often work and reside in different countries. These treaties provide a degree of tax avoidance while not completely disregarding the tax laws of the nations involved.
 
 
One location in which double taxation is prevalent is the United States. This is due to the application of United States income taxes on citizens regardless of their location or on citizens of neighboring countries who work in the United States. An example of this is citizens of Canada who work in the United States. These citizens earn their income outside of Canada, but they may be taxed by both nations depending on the stipulations of the tax treaties established by the neighboring countries.
 
 
Similarly, double taxation can occur within the United States as individual states have different tax laws. This means that if an employee resides in one state and works in another, he or she may be taxed by both jurisdictions. Furthermore, unless one of the two states has a law prohibiting this form of taxation, double taxation between states can be upheld in the judicial system.

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.

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