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.
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.