Tax Avoidance

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tax avoidance

Definition Lawful minimization of tax liability through sound financial planning techniques such as phasing the sale of assets over a period long enough to effect maximum exemption from capital gains tax. Whereas tax avoidance is legal, tax evasion is not.

The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income. Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal Income Tax, gift tax, or estate tax. An individual may, for example, avoid federal income tax by investing a large sum of money in municipal bonds, since the interest on such bonds is not considered taxable income on which federal tax is due. Interest on the same amount of money placed in a savings account must be included as taxable income. Tax avoidance must be distinguished from Tax Evasion, which is the employment of unlawful methods to circumvent the payment of taxes. Tax evasion is a crime; tax avoidance is not.

[edit] Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The United States Supreme Court has stated that "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." See Gregory v. Helvering. Examples of tax avoidance include:

[edit] Examples of Tax Avoidance in the US
An IRS report[1] indicates that, in 2009, 1,470 individuals earning more than $1,000,000 annually faced a net tax liability of zero or less. Also, in 1998 alone, a total of 94 corporations faced a net liability of less than half the full 35% corporate tax rate and the corporations Lyondell Chemical, Texaco, Chevron, CSX, Tosco, PepsiCo, Owens & Minor, Pfizer, JP Morgan, Saks, Goodyear, Ryder, Enron, Colgate-Palmolive, Worldcom, Eaton, Weyerhaeuser, General Motors, El Paso Energy, Westpoint Stevens, MedPartners, Phillips Petroleum, McKesson and Northrup Grumman all had net negative tax liabilities.[2] Additionally, this phenomenon was widely documented regarding General Electric in early 2011.[3] Furthermore, a Government Accountability Office study found that, from 1998 to 2005, 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.[4] [5] What Does Tax Avoidance Mean? The use of legal methods to modify an individual's financial situation in order to lower

the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. This practice differs from tax evasion, which is illegal. Read more: http://www.investopedia.com/terms/t/tax_avoidance.asp#ixzz1X2o3zgQk Investopedia explains Tax Avoidance Most taxpayers use some forms of tax avoidance. For example, individuals who contribute to employer-sponsored retirement plans with pre-tax funds are engaging in tax avoidance because the amount of taxes paid on the funds when they are withdrawn is usually less than the amount that the individual would owe today. Furthermore, retirement plans allow taxpayers to defer paying taxes until a much later date, which allows their savings to grow at a faster rate.

Read more: http://www.investopedia.com/terms/t/tax_avoidance.asp#ixzz1X2o7hHvg
The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income. Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal Income Tax, gift tax, or estate tax. An individual may, for example, avoid federal income tax by investing a large sum of money in municipal bonds, since the interest on such bonds is not considered taxable income on which federal tax is due. Interest on the same amount of money placed in a savings account must be included as taxable income. Tax avoidance must be distinguished from Tax Evasion, which is the employment of unlawful methods to circumvent the payment of taxes. Tax evasion is a crime; tax avoidance is not.

strategy to pay the least amount of tax possible through legal means. For example, taxpayers may buy tax-free municipal bonds; shelter gains inside tax-deferred ira, keogh accounts, salary reduction plans or tax free roth ira accounts; shift assets to children who need not pay taxes on part of their income; make legitimate charitable contributions to generate tax deductions; and establish trusts to avoid estate taxes. Illegal strategies to avoid paying taxes are called Tax Evasion. Read more: http://www.answers.com/topic/tax-avoidance-in-accounting#ixzz1X2oNUbnl

Tax Avoidance and Tax Evasion: The Indian Case Anil Kumar Jaina1

a1

Banaras Hindu University

‘Tax avoidance’ and ‘tax evasion’ are terms so frequently referred to in economic and business relationships today that they constitute part of our conversational language and people in general use these terms even without knowing their exact meaning and difference. Whereas tax avoidance implies a situation in which the taxpayer reduces his tax liability by taking advantage of the loop-holes and ambiguities in the legal provisions, in the case of tax evasion, facts are deliberately misinterpreted and the tax liability is understated. Thus, while tax avoidance is perfectly legal and is, at times, referred to as ‘tax planning’, tax evasion is illegal and, therefore, carries with it the risk of penalties and prosecutions under the tax laws. As such, the black economy comprises the sum total of all the various methods of tax evasion but does not include tax avoidance. Accordingly, whereas the consequences of the two phenomena are different for the taxpayers, both reduce the revenue of the Exchequer and consequently need to be checked to the greatest extent possible.

Tax Avoidance Schemes
Tax avoidance schemes are a legal means of avoiding having to pay all or some taxes due. While some including politicians and economists may argue that tax avoidance schemes are immoral they are still legal but should not be confused with tax evasion schemes which are illegal. Changing Tax Residence The most common form of tax avoidance, in the UK at least, is to change one’s tax residence to a known tax haven such as Monaco. Alternatively it is possible to become a perpetual traveller although the latter method can cause more problems than it resolves. In order to change tax residency it is usually necessary to move to the country where taxes will be charged. Relinquishing Citizenship Some countries, especially the U.S. tax individuals and companies on their entire global earnings and this means that changing tax residence to a tax haven will not prove an effective means of tax avoidance. This is unusual, though, and even in these cases some salaried money can still be kept without being taxed. Some former U.S. citizens have even given up their citizenship simply and solely to avoid the U.S tax laws. This may be one of the more extreme tax avoidance schemes but it certainly works. Double Taxation In order to prevent residents that have moved from one country to another from being taxed twice, some countries have established bilateral double taxation treaties. Without these agreements it may prove possible for a person to be taxed on their income once when they earn it and once in the country of citizenship. Businesses And Organisations

Another of numerous tax avoidance schemes is to establish an entity into which assets can be transferred. Gains are then realised through that entity through a variety of different means and the money retransferred back to the individual at a later date. However, it is important to realise that if a salary is taken then this will be taxable and when the individual reclaims the money they may be liable for taxation then too. Vague Legal Terms Most tax avoidance schemes are borne through vagueness in legal terminology and financial requirements. Where vagueness or inaccuracy exists, these are usually exploited by tax lawyers, businesses, and individuals in order to avoid paying as much of their tax as possible. Tax Avoidance Schemes The issue of tax avoidance schemes has clearly established a precedent and governments attempt to do all they can to redress the balance. The difference between the amount of tax owed and the actual amount of tax paid in a country is usually referred to as the tax gap.

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