A number of scams promote tax free havens and loopholes, but what most people don't know is that there are a number of legal ways to avoid paying income taxes. The most important thing to remember about these techniques, though, is that they will require some extra effort on your part. You can effectively lower or altogether avoid paying taxes, but some techniques will require that you make changes to your tax situation so that you can qualify for the deductions and exclusions to income.
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Take advantage of all the credits for which you qualify. There are two types of credits, refundable and non-refundable. Refundable credits can reduce your tax below zero and result in a refund while non-refundable credits can reduce the tax to zero but not below. For example, the earned income credit is a refundable credit designed specifically for low-income taxpayers. As it works, if you are eligible to claim the credit, it is conceivable that you may receive a refund that is larger than what you paid in taxes during the year, thereby eliminating your tax altogether.
Start a business in a foreign country. Your income will still be taxed if you live in a foreign country because the United States is the only country in the world that still taxes citizens who take up residency abroad; however, foreign business income is taxed at a lower rate than that of individual earned income. To take advantage of this tax break, though, you will need to become a legal resident of another country. This doesn't mean that you need to expatriate, but go about the process of becoming a resident. You will still be able to maintain your U.S. citizenship if you become a resident of another country. Only if you agree to forgo your citizenship, along with the right of the Internal Revenue Service to tax you, will you be forced to take up full citizenship in another country. Although having a foreign business is the most advantageous tax status to have because it allows you to take up to £104,000 from the company tax-free, just living abroad could dramatically reduce or eliminate your taxes because up to £59,410 of your income could qualify to be excluded from income tax calculations.
Itemise your tax returns and take full advantage of the deductions that are available to you. The most lucrative deductions are those for business losses. You can deduct your business start-up expenses as well as any additional costs directly associated with running your business. You are, therefore, only taxed on what you earn after you've deducted these expenses. To understand how advantageous this tax status is, consider how much less you would be taxed if, as a wage earner, you were taxed after you'd paid your living expenses.
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- Internal Revenue Service: Tax Information for International Businesses
- Internal Revenue Service: Publication 535-Deducting Business Expenses
- Internal Revenue Service: Publication 54-Tax Guide for U.S. Citizens and Resident Aliens living abroad
- Internal Revenue Service: Five Facts About Foreign Earned Income Exclusion