How to Legally Avoid Paying Income Tax

While many Americas are willing to pay their fair share of income tax (although the definition of “fair share” may be debatable), that does not mean they should miss out on every legal method they can use to reduce the income tax they have to pay.

This article outlines ways that anyone can use to reduce their income tax.  Income tax can be reduced using methods that fall into three primary categories: nontaxable income, deductions, and credits.

Nontaxable Income

Certain types of income are nontaxable, which means the person who earns that income does not pay any income tax on these types of income.  Therefore, the more of your income you can earn from one or more of these sources, the less income tax you will pay.

Nontaxable income sources include but may not be limited to the following:

  • Municipal bonds earn tax-free interest for the investor.  However, municipal bonds have a drawback in that they do not pay as much interest as other types of investments.
  • Income from long-term capital gains is nontaxable, so long as the taxpayer’s income is below the allowed threshold.
  • Disability benefits are nontaxable if the premiums for the disability policy were paid by the taxpayer rather than by an employer.
  • Social Security benefits are nontaxable, again so long as the taxpayer’s income is below the allowed threshold.
  • Foreign income up to a set threshold that can vary each tax year is nontaxable.

Deductions and Exemptions

Deductions allow a taxpayer to reduce their taxable income, thereby reducing the amount of tax they will have to pay.  Common deductions include the following:

  • Standard deductions are set amounts a taxpayer can deduct from their taxable income based on their filing status used on their tax return.  The amount allowed for standard deductions often increases slightly each tax year.
  • Itemized deductions can be used to decrease a taxpayer’s taxable income when certain items total more than their standard deduction.  Common itemized deductions include money spent on health care expenses, mortgage interest, state and local taxes, and charitable contributions.
  • Personal exemptions are effectively amounts that reduce your taxable income based on the number of individuals claimed on a taxpayer’s tax return, with one exemption allowed for the taxpayer and each dependent.

Credits

Tax credits are items that reduce a taxpayer’s tax liability dollar-for-dollar.  Common tax credits include but are not limited to the following:

  • Adoption credit, for expenses related to the adoption of a child under the age of 18.
  • Foreign tax credit, for ensuring a taxpayer does not pay income tax on foreign-earned income to two countries.
  • Social Security overpayment credit, which commonly occurs when someone has more than one employer during a tax year and combined they withhold too much Social Security tax.

Speaking with a Tax Attorney

If you need to speak to someone about preparing your tax return or being sure you are taking advantage of every legal avenue to reduce the amount of tax you owe, you should speak with a tax attorney.  A tax attorney will be able to evaluate your individual situation and ensure you are using all the available deductions and credits to limit your tax liability.

If you wish to speak with a tax attorney, please call the telephone number located at the top of this web site.  You will be put in touch with a tax attorney free of charge and with no further obligation.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.