Volume 67, Issue 8

The Art of Avoiding Income Tax
by Ari Yasgur

Often considered the greatest obstacle to living the “American Dream,” federal income taxes are a sad reality that all American residents must abide by. No person should be subject to a greater tax liability than the law requires. For this reason, many individuals use legal tax loopholes in order to avoid paying income taxes.  And, every year in April, loopholes become the talk of the town.  

When engaging in strategies attempting to trim down one’s tax liability, the taxpayer must be certain that their strategy is considered tax avoidance, and not evasion. Tax avoidance is encouraged, and is completely ethical and legal, where as tax evasion is completely illegal. This article will discuss two forms of avoiding Federal Income Taxes.

Income tax rates and laws vary widely throughout many countries. There are some countries, however, which choose not to tax the income of non-citizens at all. These countries are commonly known as “tax havens.” One of the most popular “tax havens” is the Cayman Islands.

There is only one way of legally taking advantage of the Cayman “tax haven.” A corporation must be legally formed under Cayman law, and a stream of income must be reaching the corporation. The catch, however, is that the corporation must have a business purpose other than simply the avoidance of income tax. Cayman must be appropriate for the purpose of the business; however, the business need not call for Cayman as its location.

United States citizens and residents have been taking advantage of “tax havens” for many years now. However, there is another form of income tax avoidance that is often more effective and less commonly known. This method is known as Expatriation. In order to take advantage of this tax loophole a person must renounce their United States citizenship. Despite how crazy it may seem, in the past few years, several high worth individuals have renounced their citizenship and moved abroad in order to avoid certain taxes.

 The major benefit of renouncing one’s citizenship is that the U.S. can only tax personal income produced within the U.S., for people who are citizens and/or residents. Individuals that renounce their citizenship can completely avoid paying estate taxes, gift taxes, and of course, Federal Income Tax. Expatriates may still hold certain types of accounts and trusts within the United States, which cannot be taxed by the federal government.

The leading problem associated with the expatriation method is the requirement to leave the United States. The fact that a person renounces their citizenship is not enough, because residents are still required to pay income taxes. In order not to be considered a resident, a person cannot live in the U.S. for more than 120 days per year. In addition, if the IRS can prove that a person moved abroad simply to avoid paying income taxes, they reserve the right to continue taxing that individual at their normal tax rates. The person may also not move back to the U.S. for ten years, or else their income may be retroactively subject to taxes for all of the years that they were not considered residents.

No individual should pay more income taxes than the law requires. Taxpayers are encouraged to come up with unique methods of circumventing the income tax system. However, some of these effective methods, like the ones described above, can be somewhat unfeasible for certain people. Each and every taxpayer should be constantly evaluating tax-avoiding strategies to determine which would be most appropriate for them.  That way, come April, we all won’t be paying more than we should be.

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