Tax evasion vs. tax avoidance: What's the difference? Here's how to make sure you're not overpaying Uncle Sam in 2024
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People sometimes use the terms “tax avoidance” and “tax evasion” interchangeably, but in the eyes of experts and the government there’s one big difference between the two: legality.
Simply put, tax avoidance involves legal strategies that can minimize your tax bill, whereas tax evasion is a failure to pay or a deliberate underpayment of taxes. Such actions have previously landed high-profile individuals such as Wesley Snipes in prison.
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The Internal Revenue Service has clarified this difference by saying: “Tax evasion is illegal … tax avoidance is perfectly legal.”
With that in mind, here are the top three legal ways to avoid (not evade) taxes this year.
3. Investing
The government takes a carrots-and-sticks approach to encourage investments in the national economy. That makes investing a great way to minimize taxes while building wealth. Many people are unaware of the various tax-advantaged accounts available or that they can contribute to a 401(k) and an IRA in the same year.
Unfortunately, failing to make these investments means forfeiting the opportunity to maximize annual contributions, potentially missing out on decades of compound interest.
You can ensure you are optimizing taxes paid on your investments with Playbook.
Playbook combines a robo-advisor with human expertise to create a tax-efficient plan that ensures you are optimizing your tax returns when it comes to your investments.
It’s easy to get started: Just sign up, download the app and answer a few questions about yourself and your finances.
Playbook doesn’t charge AUM fees and their flexible plans help ensure you have a tax-efficient roadmap that also lets you keep track of your portfolio’s growth.
Investing in real estate
The tax system also provides incentives for real estate investments. For instance, Section 1031 of the Internal Revenue Code allows real estate investors to defer taxes on capital gains by exchanging one investment property for another.
Investing in necessity-based commercial properties is one way to earn income through real estate qith potential for steady returns and appreciation.
With First National Realty Partners (FNRP), accredited investors can access highly vetted, grocery-backed real estate investments. Through FNRP's secure online platform, you can explore available deals, talk to experts, and make an allocation, all in one personalized portal.
If you aren't an accredited investor but are still interested in entering the real estate market, Arrived could be your gateway to real estate returns.
With Arrived, you can invest in shares of vacation and rental homes without taking on any landlord responsibilities. You can start by browsing the Arrived curated list of properties vetted for their appreciation and income generation potential. Then, starting with as little as $100, you can allocate and take advantage of this inflation-hedging.
Read more: Suze Orman says Americans are poorer than they think — but having a dream retirement is so much easier when you know these 3 simple money moves
2. Retirement planning
Retirement planning and retirement accounts are well known for being advantageous when it comes to taxes. You can open an individual retirement account (IRA) through a financial institution like a bank or insurance company to make tax-deferred investments. You might also have access to employer-sponsored, tax-advantaged accounts such as a 401(k), Roth IRA and Roth 401(k).
There’s another retirement account option that gives you both tax advantages and can act as a solid hedge for your overall portfolio.
American Hartford Gold — one of the nation’s most trusted precious metal companies offers valuable services in safeguarding your finances through tangible assets.
With a Gold IRA, investors can merge the tax advantages of a traditional retirement account with an alternative asset known to hedge against inflation. Gold IRAs function similarly to traditional IRAs, yet distinguish themselves by allowing investors to add gold and other precious metals in their portfolios. American Hartford Gold allows you to grow your money in a tax-deferred account until you decide to withdraw.
1. Relocation and owning a business
Moving to another state with lower tax rates is probably the most straightforward way to minimize taxes. For instance, Texas has no state income tax, while California's top marginal tax rate could be as high as 14.4%.
An analysis by the Tax Foundation found a correlation between state migration patterns and individual tax policies from 2020 to 2021. Put simply, moving to save on taxes isn’t uncommon and could be a potential part of your effective tax strategy.
In the same way, owning a business has several tax implications you should be aware of.
Some of the most well-known advantages are tax deductions for business expenses such as office supplies and vehicles — but there are multiple other credits and deductions available. As the filing deadline nears, finding dependable tax filing software is crucial to making sure you optimize your return so as to get the biggest refund or just make sure you aren’t overpaying.
TurboTax and CashApp offer effective tax filing solutions for those navigating taxes as an individual or as a business owner.
When you need to tackle a more complex tax return and need a little extra help, TurboTax is your go-to filer. TurboTax Deluxe and Premier line up your personal information with hundreds of tax deductions to see whether you qualify. TurboTax also offers a service for self employed individuals, providing assistance for finding deductions and tax credits that freelancers and independent contractors may depend on.
Need a full-service option that won’t break the bank? TurboTax Live Assisted offers live tax advice, professional reviews and filing services, so you can sit back and let the professionals handle the headache of filing your taxes.
Looking to file for less this year? Cash App Taxes is a free software option that offers a maximum refund guarantee without having to pay an extra fee.
By downloading the mobile app, you can file your taxes in just a few minutes using your smartphone. Simply snap a photo of your W-2, and Cash App Taxes will autofill your information.
With 9 million returns filed and a 5-star rating from Forbes, there’s no reason to spend more money than you need to on your taxes this year.
If you want a more detailed list of options, click here for our guide to the Best Tax Filing Software.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
