Panama Papers: Tax Avoidance and Tax Evasion

panama

The recently leaked “Panama Papers” exposed the existence of thousands off shore bank accounts including some high and mighty political figures. The super-rich have been taking advantage of tax havens since World War I, paying tax lawyers to find loop holes in tax rules to avoid paying taxes isn’t something new.

Key differences between Tax Avoidance and Tax Evasion

Definition of Tax Avoidance

An arrangement made to beat the intent of the law by taking advantage of the shortcomings in the tax rules. It refers to finding out new methods or tools to avoid the payment of taxes which are within the limits of the law. The only purpose behind tax avoidance is to postpone or shift or eliminate the tax liability. This can be done investing in government schemes and offers of tax credits, tax privileges, deductions, exemptions, etc., which will result in the reduction in the tax liability without breaching any laws.

Definition of Tax Evasion

An illegal act, made to escape from paying taxes. Such illegal practices can be deliberate concealment of income, manipulation in accounts, disclosure of unreal expenses for deductions, showing personal expenditure as business expenses, overstatement of tax credits or exemptions. Tax evasion is a criminal activity and is subject to punishment under the law.

trust fund baby

A trust fund baby is the perfect example of tax avoidance by the rich. A trust fund is a legal entity that allows the rich to establishment an investment account for their children, grandchildren, nieces and nephews. The income earned in the account and the release of the funds to the beneficiaries are under specified conditions. (The U.S. Secretary of State, John Kerry married Teresa Heinz who has a trust fund valued around 500 million dollars).

I am not a tax expert but many tax filers will pay more in taxes this year than they should. It is a simple case of missing available deductions and tax credits. The problem is understanding the tax rules, knowing what is available and whether you qualify.

Some unclaimed deductions & credits for U.S. citizens

  • Tax Preparation Fees
  • Child and Dependent Care Credit- summer camps fees are eligible
  • American Opportunity Tax Credit
  • Lifetime Learning Credit
  • Energy Credits
  • Savers Credit – for people with low to moderate income who make contributions to an eligible retirement plan
  • Mortgage Points – to lower an interest rate on a home loan
  • Moving expenses

Some unclaimed deductions & credits for Canadians

  • Equivalent-To-Spouse Credit – single mothers
  • Medical expenses – any 12 month period , combine with spouse and children under 18
  • Charitable donations – spouses can pool them together to get a bigger deduction
  • Childcare Expenses – include hockey schools and summer camp fees
  • Pension Income Credit RIF payments qualify
  • Moving expenses

Tax planning in order to defer taxes, to maximize deductions & credits and divide income among family members is something that all tax payers should consider doing.

Just remember that both Tax Avoidance and Tax Evasion are meant to ultimately reduce tax liability but in the eyes of the law, avoidance is legal and evasion is not.

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4 thoughts on “Panama Papers: Tax Avoidance and Tax Evasion

  1. There is a lot of fuzz also in Belgium. Some important families from big industrial companies are on the list.
    Next to legal aspect (you should not do illegal stuff, when all is legal, there should be less fuzz), there is the moral aspect.
    Is it ok to use an international anomaly to pay far less taxes than the normal working guy? Just because you have an expensive tax expert you can pay?

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    • A good friend of mine was seriously thinking about moving to Panama, he is tried of seeing his tax money being wasted. The Canadian governments are increasing taxes every year. He sees his tax money going to people who don’t want to work. He believes that the current tax system isn’t fair for the average worker.

      He believes that 30% of all tax money is wasted. I am sure that if he won the million dollar lottery, he would be packing his bags. The real question is what is a fair tax rate?

      Liked by 1 person

      • Good question: what is a fair tax rate. When it is too ;ow, you need to forsee money for everything.
        An example: In Belgium, income is taxed in brackets and the highest goes to 55 pct. There is a lot of money wasted indeed on people that play the system and refuse to work.
        On the other hand, my kids get free dental care till the age of 12. After that one check up per year is free. I guess that when using the system as designed, in the end you pay less than you think.

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      • I think that accountability in government spending is really lacking. I don’t mine paying gasoline taxes if they used the money to fix roadways. I hate the fact that my 84 year old mother whose income is just above the poverty line has to pay income tax.

        Liked by 1 person

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