Question

Is the principal goal of tax planning to absolutely minimize the amount of taxes that a taxpayer must pay? In your post, include an example of how you can minimize your tax liability through tax avoidance, which is a legal method of minimizing taxes within the tax law. Try to add a point to the discussion forum.

Please be original.

Answer 1

Tax avoidance is the use of perfectly legal methods of minimizing your income tax liability. It involves declaring all income, but maximizing any available deductions and credits.

On the topic of tax avoidance, the U.S. Supreme Court has even declared it is “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” This is to say you aren’t required to pay more in taxes than the law prescribes.

Given that the word “avoidance” might be construed as some sort of dodge, tax avoidance might better be stated as tax minimization. The idea — widely practiced by both individuals and tax practitioners — is to use every means legal and necessary to reduce the amount of taxes you owe.

Examples of tax avoidance methods include:

• Making an IRA contribution to lower your taxable income
• Using a Subchapter S corporation format in your business in order to reduce the amount of income subject to Social Security and Medicare taxes
• Appealing to the local municipality or county tax authorities to have the value of your property lowered, which lowers your real estate taxes
• Taking advantage of tax credits (which directly reduce your tax liability) for installing energy-efficient component systems in your home
• Deducting expenses used in connection with your investment activities
• Choosing to buy a home, rather than rent, because of the generous deductions connected with mortgage interest and real estate taxes
• Choosing to hold capital assets for more than one year, to take advantage of lower long-term capital gains tax rates