How to Avoid Paying Taxes Legally: A Detailed Guide

The question of “how to avoid taxes” is not far-fetched because there are many legal routes to avoid paying taxes.

To legally avoid taxes, individuals and businesses often take advantage of specific strategies and provisions within tax laws that allow for reducing taxable income.

Tax avoidance methods are entirely lawful and can help taxpayers minimize their tax liabilities through deductions, credits, and other legal avenues. 

This guide will explore and advise you on how you can legally avoid paying taxes. To understand the legalities of tax avoidance, the guide explains the difference between tax evasion and tax avoidance and provides insight on 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.

Understanding Income Tax

Income tax is a tax imposed by governments on the financial income earned by individuals and businesses within their jurisdiction. It is typically calculated based on the total income or profit of the taxpayer and is paid annually.

Income tax is one of the most common taxes paid. While there are many typical taxes like sales tax, property tax, and value-added tax (VAT), income tax is usually the most significant for individuals because it is directly linked to personal earnings. For businesses, income tax is crucial as it is based on the profits they generate.

Tax Avoidance vs. Tax Evasion

Taxes are a complicated system with many misconceptions. While confronting this system might be scary, knowing the difference between tax avoidance and tax evasion will help avoid problems with the authorities. People often lump the two together when, in reality, they are entirely different concepts.

Tax avoidance

Tax avoidance is completely legal. It is a legitimate practice of reducing tax liability by using available methods, such as taking advantage of tax deductions, tax credits, or other tax-reducing incentives made available within the legal framework. In other words, legal methods are available to reduce tax burdens while still following tax laws.

One of the best tax avoidance programs is the Cyprus tax on non-residents regimes. The program offers significant tax benefits to individuals who qualify. Non-residents who become tax residents of Cyprus but are considered “non-domiciled” are exempt from certain taxes, particularly foreign-sourced income. This program makes Cyprus attractive for high-net-worth individuals seeking a low-tax jurisdiction.

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. Individuals or businesses that avoid tax by being dishonest and underreporting income commit a criminal offense, which can lead to penalties, fines, and imprisonment. Therefore, if you have permanent residency in another country, make sure you are familiar with the tax obligations in your country of tax residence. 

Examples of tax evasion

Although tax evasion generally involves hiding or misrepresenting income received, it can take many forms. 

Failing to report income

Failing to report income is 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

Excessive deductions are claimed by inflating the value of charitable donations, falsely claiming business expenses, or deducting personal expenses for things that are not eligible, such as personal travel or purchasing items not used for work purposes.

Moving taxable assets offshore

This involves moving them to an offshore bank account to hide them from tax authorities.

Shell companies

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

Using company assets for personal use

This involves using a company’s physical assets, such as property, vehicles, and equipment, and intangible assets, such as intellectual property and business databases, for non-work or business-related purposes.

Six Ways of Avoiding or Reducing Taxes

Many individuals and businesses prioritize reducing tax liability, and there are several strategies for legally avoiding or reducing federal income tax. Whether you are a salaried employee, a business owner, or a freelancer, understanding how to minimize your tax burden is crucial.

While freelancers often have more control over the taxes they pay, such as being able to deduct expenses directly from their tax bill rather than waiting for a refund, these strategies apply to a variety of people. For example, freelancers and remote workers may benefit from foreign tax incentives. Still, salaried employees can also leverage deductions, retirement savings plans, and other tax-advantaged options to reduce their taxable income. 

Here are six ways to avoid or reduce paying taxes: 

1. 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 there are 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. 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 significant 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.

2. Business expenses

As a freelancer, you can deduct various business expenses from your taxable income in a calendar year. These deductions include office supplies, travel expenses, and marketing costs – even if it’s for a home office.

You’ll need to keep records of all your annual spending on deductible business expenses and know which items are tax deductible.

You’ll also need to ensure that you deduct only expenses related to your business, as required by tax law.

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.

It makes sense, as it’s still an expense for any business owner. In some cases, this doesn’t apply when driving to and from work, but you can include it when going to business meetings. This is crucial for small business owners, as time spent on the road could mean a reduction in income.

Educational expenses and business trips are another deductible that most people don’t consider. Whether they’re a side business or your main income, some countries let you include those details in your personal tax return.

Follow your country’s tax law and use the correct tax code for all your filings. Otherwise, your tax break can quickly become a nightmare, and you will have to repay an excessive amount in federal income taxes.

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 prove expenditures.

3. Contribute to a retirement plan

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

• Contribute to an IRA (Individual Retirement Account) – With a traditional IRA, you will not have to pay taxes on the money you contribute until you withdraw it in retirement. The age for withdrawal is 72.
• Contribute to a Roth IRA – With a Roth IRA, you’ll pay tax on the money you contribute now, but you will not have to pay tax on it when you withdraw it in retirement. The age for withdrawal is 59 and a half.

An example of this is that if you, as a worker in the 24 percent tax bracket, contribute $10,000 to your IRA, you will save $2,400 on income tax for that year. 

4. Contribute to an HSA

One of the best ways for American taxpayers to minimize their retirement savings is to contribute to a Health Savings Account (HSA). An HSA is a tax-advantaged account that can be used to pay for qualifying medical expenses, including insurance premiums. 

Contributions to an HSA must be made with pre-taxed income, which means they lower your taxable income. 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 was $3,850, while the contribution limit for freelancers with family HDHP coverage was $7,750. 
• And finally, you’ll need to designate a beneficiary for your HSA when you open the account.

5. 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. 

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 the Internal Revenue Service 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 and provide 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.

6. Claim Child Tax Credit

The Child Tax Credit is a refundable tax credit available to tax-paying parents with dependent children under the age of 17. It is worth up to $2,000 per child and 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 over half of the tax year.

2024 income tax rates

Here is a table with the 2024 income tax rates for different countries around the world.  

How Can Global Citizen Solutions Help You?

Global Citizen Solutions is a boutique migration consultancy firm with years of experience delivering bespoke residence and citizenship by investment solutions for international families. With offices worldwide and an experienced, hands-on team, we have helped hundreds of clients worldwide acquire citizenship, residence visas, or homes while diversifying their portfolios with robust investments. 

We guide you from start to finish, taking you beyond your citizenship or residency by investment application. 

Frequently Asked Questions about Avoiding Paying Taxes

Is it possible to legally pay no taxes?

Yes, it is possible to pay no taxes legally. For example, the Antigua and Barbuda tax encourages business owners and freelancers to move corporations to the country. In return, taxes on income are excluded from payable taxes.

What is tax avoidance, and is it legal?

Tax avoidance is perfectly legal and can be achieved in numerous ways, such as through tax credits, contributing to retirement accounts, or business deductions.

A perfect example of tax avoidance is Portugal’s cryptocurrency policy, which declares cryptocurrency-generated income non-taxable.

Can you go to jail for tax avoidance?

You cannot go to jail for tax avoidance. Tax avoidance schemes are legal parameters used to reduce tax owed on taxable income come tax season.

What are the advantages of tax avoidance?

The advantages of tax avoidance are that you can save money by reducing your tax burden, as well as redirect money from income taxes you would have paid to the government, to charitable organizations.

What are the effects of tax avoidance?

The effects of tax avoidance are that you can pay lower income taxes legally. 

How can I legally not pay taxes?

You can legally avoid paying taxes on some or all of your income by:

• Taking advantage of a self-employment tax deduction scheme
• Deducting business expenses from your gross income on your tax return
• Contributing to a retirement plan and a Health Savings Account (HSA).
• Donating to charity
• Claiming child tax credits

Is there a way to live without paying taxes?

How the rich avoid paying taxes legally is by living in tax havens like the United Arab Emirates and Monaco, which have no form of income taxes or taxes on wealth and assets.

You can also live without paying taxes by obtaining citizenship through a citizenship-by-investment program in a country like Antigua and Barbuda that doesn’t impose income tax, inheritance, or capital gains tax on residents who make a qualifying investment in the economy.

Is it ok to not do your taxes?

If you don’t pay your taxes, you may face penalties, and IRS collection actions, such as a tax levy or lien.

How can businesses legally reduce their tax liability?

Businesses can legally reduce their tax liability by taking advantage of tax deductions and credits, such as operating expenses, employee benefits, and research and development. They can also defer income to future years or accelerate deductions. Utilizing tax-advantaged retirement plans and strategically structuring operations, like setting up in low-tax jurisdictions, can further minimize taxes.

What is the difference between tax evasion and tax avoidance?

Tax evasion is illegal and involves deliberately not paying owed taxes, while tax avoidance is the legal use of strategies to reduce or minimize tax liability within the law.