What are the different forms of tax avoidance?
Tax avoidance is the practice of reducing the amount of tax paid by legally utilizing certain deductions, credits, and other benefits. It is different from tax evasion, which is the illegal act of not paying taxes. In California, there are several forms of tax avoidance which taxpayers can use. One form of tax avoidance is using deductions to reduce taxable income. This can include deductions for mortgage interest, charitable contributions, home office expenses, health savings accounts, and student loan interest. These deductions can lower the amount of income subject to taxation, meaning less tax is owed. Another form of tax avoidance is taking advantage of tax credits. Tax credits are direct reductions of the amount of taxes owed. There are a variety of credits available to California taxpayers including credits for child and dependent care, adoption expenses, and the Earned Income Tax Credit. Taxpayers can also reduce their tax liability by investing in tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts. These accounts allow for contributions to be deducted from taxable income, or for income to be tax-free if used for qualified expenses. Another form of tax avoidance is utilizing tax-deferred accounts such as annuities and Coverdell education savings accounts. With these accounts, taxes are deferred until the funds are withdrawn, allowing for tax savings that can be used for retirement or college savings. Finally, taxpayers can reduce their taxes by taking advantage of certain tax planning opportunities such as timing income and expenses or gifting assets to family members. By taking these opportunities, taxpayers can reduce the amount of taxes they owe and maximize their income.
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