For many successful people, limiting the amount that they pay in taxes is a point of personal pride. Tax avoidance is as American as apple pie in the eyes of many people, including workers, investors and business owners. What you don’t pay in taxes goes back into your pocket or back into your business, so clearly minimizing taxes will benefit you.
However, there is a fine line between tax avoidance or minimization strategies and tax evasion, which violates federal law and leaves you vulnerable to prosecution. Understanding the difference between these two approaches to tax reduction can help you make better decisions when filing your tax return.
You shouldn’t have to lie or misrepresent anything for tax minimization
Depending on how you file and the nature of your income, you will have many opportunities to reduce your tax obligations through write-offs, deductions and exemptions. Making the most of what is available to you is a savvy move that can benefit your finances. A last-minute charitable donation to your favorite nonprofit, for example, could reduce your taxable income and tax obligations without breaking any laws.
However, if you need to stretch the truth or outright lie on your tax return forms in order to qualify for an exemption or increase the deductions you claim, doing so could constitute tax evasion. Increasing the number of dependents you have, claiming deductions for purchases that are clearly personal and other similar tactics, including deciding not to report certain forms of income, could constitute tax evasion and leave you vulnerable to both a potential audit and even criminal charges.