Benjamin Franklin once said, “nothing is certain but death and taxes.” If you skip filing your taxes, IRS will come looking for you. Failing to pay taxes comes with hefty penalties and high interest. However, there are several ways you can avoid paying taxes. The rich have learned ways to avoiding tax that helps them keep their wealth to themselves. In this article, we are going to discuss 11 simple ways to avoid paying taxes legally.
Is Tax Avoidance Legal?
Yes. Tax avoidance is legal, but tax evasion is illegal and is punishable by imprisonment. Tax avoidance involves some actions you take to lessen your tax liability and increase after-tax income. Tax avoidance can help you reap huge tax benefits that can save you lots of cash.
How Can I Legally Avoid Paying Taxes?
The following are some ways you can legally avoid paying taxes and maximize after-tax income.
1. Put Your Money in an Offshore Account
One of the ways you can avoid paying taxes legally is by opening offshore accounts. Some of the tax haven countries like Bermuda, Switzerland, and The British Virgin Islands allow foreigners to open offshore accounts. These countries have zero or low corporate tax on bank deposits. Also, tax haven countries do not disclose financial information about offshore account holders and business activities to their home countries.
2. Use Health Savings Account (HSA)
The way to avoid paying taxes legally is by opening a Health Savings Account. HSA deductions are excluded from taxable income. However, there are maximum contributions for individuals which stand at $3,650, and $7,300 for a family. You can grow your funds in the HSA tax-free and even the gains won’t be taxed. Withdrawals are not taxed either.
3. Contribute to a Retirement Account
You can also avoid paying taxes by contributing up to $20,500 to a 401(k). It is because contributions to IRA accounts are excluded from taxable income. This in return lowers your tax liability. You can grow your funds in the Individual Retirement Account (IRA) without any tax imposed on them until retirement. After you retire, you can then withdraw these funds tax-free.
4. Get Paid in Stocks and Options
You can also avoid paying taxes by getting paid in stocks and options. What it means is that instead of a company paying you a salary, they give you shares so that you are a shareholder. Stocks are not taxed, unless you sell them or you get a dividend from them. The interesting part is, that you can use stocks as collateral to borrow loans. Elon Musk, the world’s richest man uses this strategy to avoid taxes.
5. Invest in Bonds
You can avoid paying taxes legally by investing in a bond. Investing in a bond means lending money to the state or local government. Once the bond reaches its maturity date, the principal amount and interest are paid to the lender.
Interest in bonds is exempted from tax. Investing in government bonds is a secure investment with a 100% return guarantee and interests are exempted from federal taxes.
6. Start a Business and Claim Business Deductions
You can also avoid taxes legally by starting a business. Self-employed people get tax deductions like health insurance premiums if they meet certain requirements. For instance, business people can deduct part of their home expenses like internet fees from business revenues.
If you pay for your own health or care insurance, you can claim them as business deductions. This can significantly reduce your business tax liability.
7. Contribute to Charity
If you give cash donations, goods, or clothing to charity, you can claim income tax relief. If you can give away enough, you can reduce your taxable income to zero. The obvious thing is that you will lose the asset you are giving away.
However, you can keep hold of the asset. For instance, if you have a freehold property, you can grant a least on it. You can then proceed to give it to charity. At the end of the lease period, the property reverts back to you.
8. Don’t Take an Income
If you own a business, you can avoid taking an income and also avoid income tax. Many super-wealthy people do not take an income from their businesses. If you really need cash, you can get it from your other investments or by selling assets. Since you own the business, you still retain the amount you would have been paid within the business.
9. Employ Your Partner or Spouse
If you are married and have a business, you can employ your partner and split your income, and file taxes jointly by having separate bank accounts in marriage. This will help you lower income tax liability significantly.
For instance, if you pay yourself $100,000, and the tax rate is 24%, then your tax liability will be $24,000. If you employ your partner and split the income, your taxable income will shift to the lower tax bracket. In this case, it will shift from 24% to 22% for married people filing taxes jointly. You will pay a total of $22,000 altogether, thereby saving $2,000.
10. Qualify for Tax Credit
Tax credits are also an excellent way to avoid paying taxes. You can think of tax credit in two categories, individual credit and business credit. You may also take advantage of other credits such as a child tax credit for those who have children. Each child can qualify for a $2,000 credit on your taxable liability. If you also have dependents who are not your children, each of them can qualify for $500.
Read also: How rich people spend their money.
11. Leave the Country
If you want to avoid paying taxes, you can leave your country and move to another country where taxes are more friendly. However, this varies depending on the country you want to leave.
For instance, you will need to be out of the UK for at least 5 years to avoid capital gains tax for assets you hold in the country. However, if you work out of the country for a complete tax year, you are not liable to UK income tax.
Summary of How to Avoid Paying Taxes Legally
You can’t avoid taxes fully, but you can significantly reduce your tax liability through some of the ways mentioned above. Most super-wealthy people take advantage of these tax avoidance strategies. They use them to lower their tax liability, that helps them to keep much of their wealth to themselves. Remember, tax avoidance is legal.