A Guide on How to Avoid Paying Taxes, Legally

Paying taxes is a necessary evil for all of us, but fortunately, there are ways to reduce the tax burden you must deal with every year. The perfectly legal ways of reducing how much tax you pay don’t involve shady deals or schemes that will put you at risk of breaking the law. 

This article will explore and advise you on how to avoid paying taxes legally.

We will look at tax deductions, tax credits, and even investments that could help lower your taxable income and increase the amount of money you can keep in your pocket.

Tax Avoidance vs. Tax Evasion

There are a lot of misconceptions out there about tax avoidance versus tax evasion. People often lump the two together when, in reality, they are entirely different concepts.

Tax evasion

On the other hand, tax evasion is the illegal act of deliberately hiding income or falsifying your financial situation to avoid or underpay taxes.

Examples of Tax Evasion

Although tax evasion generally boils down to either hiding income or misrepresenting income received, the act of doing so can take many forms. 

Here are some examples of tax evasion.

Failing to report income

Failing to report income is done by under-reporting income on tax returns from a job, whether it’s salary or tips, not reporting income from investments, such as a business or real estate, or not reporting any other forms of income you receive.

Claiming excessive deductions

Claiming excessive deductions is done by inflating the value of charitable donations, falsely claiming business expenses, or taking deductions on personal expenses for things that are not eligible, such as personal travel or purchasing items not used for work purposes.

Moving taxable assets offshore

Moving taxable assets offshore is done by moving them to an offshore bank account in order to hide and make them inaccessible to tax authorities.

Using shell companies

Using shell companies is done by creating a dummy corporation – usually offshore or in tax havens – to funnel income or profits in a manner that distorts actual earnings. 

Using company assets for personal use

Using company assets for personal use is done by using a company’s physical assets, such as property, vehicles, and equipment, as well as intangible assets, such as intellectual property and business databases, for non-work or business-related purposes.

Six Ways for Freelancers to Legally Avoid or Reduce Taxes

As a freelancer, there are benefits to this over being employed when it comes to federal taxes. For a start – unlike income tax that is automatically deducted from your wages by an employer – you have more control over the taxes you pay. 

You can find out more about this program in our article: Complete Guide to the NHR Portugal Tax Regime

Self-employment tax deduction

There are several ways to reduce tax bills, and pay no taxes legally, and one of the easiest ways is to take full advantage of a self-employment tax deduction scheme. 

In the US, this deduction allows you to deduct a portion of your self-employed income from your taxable profit, provided they’re allowable expenses.

To qualify for the self-employment tax deduction, you must be:

• A sole proprietor
• A partner in a partnership
• A member of a limited liability company (LLC)
• Someone who files a Schedule C or Schedule C-EZ (Form 1040) with their tax return

If you meet any of the above criteria, you can claim the self-employment tax deduction on your Schedule SE (Form 1040) and report your self-employed income in the “Other Taxes” section of Form 1040. In this way, the IRS will differentiate the self-employed tax from the federal income tax.

For example, let’s say you’re a sole proprietor and earned $80,000 in net income from freelancing. At the current tax rate of 15.3 percent – which is imposed on 50 percent of your income — you would owe the IRS $6,120 in self-employment taxes. However, because you can deduct that portion of your self-employed income from taxes, your taxable income would be $73,880. Which means you would save $936. 

This scheme can save you a significant amount of money on your taxes each tax year. If you think you might qualify for this deduction, talk to a tax professional to verify your eligibility.

Deduct for business expenses

You can deduct various business expenses from your taxable income as a freelancer. These deductions include office supplies, travel expenses, and marketing costs.

You’ll need to keep records of all your annual spending on deductible business expenses. You’ll also need to ensure that stay within the tax law of deducting only expenses related to your business. Otherwise, you could face stiff penalties from your federal tax authority.

Another way to deduct business expenses is by using the standard mileage deduction. With this method, you can deduct a certain amount for every mile you drive for business purposes.

No matter which method you choose to calculate business expenses, make sure that you keep thorough records of all your spending. This will help you avoid any problems down the road and make it easier to present proof of expenditure if requested.

Contribute to a retirement plan

There are a few different ways that you can contribute to a retirement plan as a freelancer, which is also one of the simple ways to avoid or underpay taxes legally. There are two common ways to do this if you’re an American citizen. These are:

Contribute to an HSA

When saving for retirement, one of the best ways for American taxpayers to minimize their saving is to contribute to a Health Savings Account (HSA). 

An HSA is a tax-advantaged health savings account that can be used to pay for qualifying medical expenses, including insurance premiums. 

Contributions to an HSA have to be made with pre-taxed income, which means they lower your taxable income. And, if you use the money in your HSA to pay for qualifying medical expenses, the withdrawals are tax-free.

There are a few things to keep in mind if you’re thinking about contributing to an HSA:

• First, you must enroll in a high-deductible health insurance plan (HDHP) to be eligible for an HSA.
• Second, there are contribution limits for HSAs. For 2023, the contribution limit for a freelancer with self-only HDHP coverage is $3,850, while the contribution limit for freelancers with family HDHP coverage is $7,750. 
• And finally, you’ll need to designate a beneficiary for your HSA when you open the account.

Donate to charity

On the question of paying no taxes legally, one of the most popular ways to do so is to donate to charity. By donating to a registered charity or private foundation as a freelancer, you can receive a tax receipt, which you can use to reduce your taxable income. 

In order to ensure that you maximize tax savings when you donate to charity, there are a few things to be mindful of:

• Make sure that you are donating to a registered charity. You can verify a charity’s registration via the website of your country’s tax authority. A tax authority would be irs.gov in the US or gov.uk in the UK.
• Keep track of all your donations so you can present your receipts upon request. 
• Make sure you declare your donations when filing taxes to receive the maximum benefit.

Donating to charity is a great way to lower taxable income, on top of providing financial support for those in need. Although charitable donations don’t generally save you money, many of us appreciate having greater control over where our taxed income – or non-taxed income in this instance – is distributed.

Claim Child Tax Credit

The Child Tax Credit is a tax credit available to tax-paying parents with dependant children under the age of 17. The refundable tax credit is worth up to $2,000 per child, which can be claimed yearly when filing tax returns. 

To qualify for the maximum tax credit, parents must have a gross income of under $200,000 for single parents and $400,000 for cohabiting parents. Each child must have a valid Social Security number. Additionally, the child must reside with the taxpayer for more than half of the tax year.

Frequently Asked Questions about Tax Avoidance