Few people are excited about the prospect of paying taxes. That is particularly true when circumstances in a given year are such that significant liability is incurred. However, it is important for Florida residents to realize that there is never an obligation to pay more than is actually owed, but to also understand the critical distinction between tax avoidance and tax evasion.
Minimizing taxes through legal means
Tax avoidance is the process of reducing taxes owed by taking advantage of wholly legal means to lower taxable income and maximize available credits. There are many ways in which this can be done, as long as all provisions of the Internal Revenue Code are followed. Some of the most popular methods of tax avoidance include:
- Seeking out available tax deductions and claiming them promptly
- Using deferral vehicles, such as IRAs, to defer tax obligations
- Researching relevant loopholes that reduce taxable income
- Utilizing capital losses to offset income
All of the above strategies are perfectly legal, and have the effect of helping taxpayers mitigate liabilities, but that is not to say that every technique used to sidestep obligations is permissible.
The pitfalls of tax evasion
Standing in direct contrast to tax avoidance is the notion of tax evasion, which involves the application of illegal tactics to keep from paying the true amount due. This could include disguising or misrepresenting the true amount of income earned in a given year, shifting money to offshore accounts that go unreported, claiming inapplicable deductions and the like.
The danger of tax evasion is that if a taxpayer is caught breaking the law in this manner, he or she may be subject to felony charges. If convicted on tax-related felonies, the result can be hefty financial penalties as well as potentially lengthy terms of incarceration.
Though a healthy reluctance to fork over significant sums of money in taxes every year is certainly understandable, attempting to skirt the law to avoid it is always unwise. By understanding what is allowable when it comes to reducing overall obligations, it is possible to stay on the right side of the government while realizing savings at the same time.