Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
Paying taxes is like letting an older sibling have a bite of your donut. They take a big one and leave you with less to enjoy. You can’t refuse because that will mean getting a whooping.
Federal income tax is something you must pay as you earn a living. We all know it’s necessary because that's what the United States uses for nation-building. But it doesn't mean we do it gladly; often, we're left with less than what we worked hard for.
To many of us, tax is a burden to carry. Yet it doesn't have to be. You can find legal ways to ensure the government takes as little of the donut as possible. Let us give you tips.
Federal income tax rate definition
A federal income tax is levied on a US citizen’s paycheck or bottom line on the federal level. Therefore, it doesn't matter what state you live in. As long as you're in the United States, you must pay federal income tax from your earnings.
The IRS is the sole institution that can levy federal tax, deducting it from your salary, bonus, and tips if you're an employee. If you have investments, the IRS will tax that, too. Even your unearned income is not an exemption.
The existence of federal tax implies the existence of state-level taxes. Since the US has a federal government composed of 50 state-level governments, you may have to pay taxes on both.
Is avoiding paying federal income tax wrong?
No, it isn't. You might think it is wrong to avoid paying taxes; everyone must do so after all. However, you must understand that avoiding tax payments and evading them are two different things.
Tax avoidance
Tax avoidance means you're using legal methods of lowering your taxes. In other words, you can claim a bigger federal income tax rate standard deduction or take advantage of laws that give you tax breaks and credits. Using our donut example, it'll be like telling your sibling not to bite off a huge chunk because a portion is going to your pet dog.
Tax evasion
On the other hand, tax evasion means using illegal methods or tax scams to conceal or alter your income—for example, changing your net taxable income to a loss on your income statement or adding more to your itemized deduction. It's like telling your older sibling you ate the whole donut whenever they ask where it is.
Evasion eventually catches up to taxpayers who do it. As long as they stay within US jurisdiction and do business within the country (with a legally registered business entity), they will face audits.
The consequences of evasion include fines of up to half a million dollars or five years of jail time.
5 legal federal income tax avoidance strategies
If you’re a self-employed ecommerce seller, you are in a good position to play the tax avoidance game. You have to pay your taxes yourself, so you have more control.
Have a go at these tips and get a little bit more out of your income.
Have kids.
Contrary to popular belief, having children can be a source of financial joy, at least in a taxation context. If you're raising children under six years old, you can claim an estimated tax credit of $3,600 per child.
It doesn't stop there. The money you shell out for childcare can also make you eligible for a tax credit. If your children grow up to become teenagers, you can get $3,000 worth of tax credit to offset your childcare expenses.
Get a higher education.
If you've been putting off taking a master's degree, tax credits may be a good nudge. With the Lifetime Learning Credit, you can get 20% of the first $10,000 of your education expenses annually if you enroll yourself in any school. And it's not limited to an MBA. You can even learn to cook in any formal school and get a tax credit.
Donate.
Donating will help you avoid paying taxes by means of tax deduction. If you donate to a charitable cause in cash, you can get a $300 deduction, lowering your adjusted gross income before the IRS takes its share. Thus, you not only avoid paying your usual taxes upon filing, but you also do a bit of philanthropy.
Save for retirement.
Putting in a portion of your income to a retirement plan can merit you a tax credit. The government will reward you as much as 50% tax credit off your net taxable income if you actively put money in an eligible individual retirement account.
Go green.
The US government also incentivizes purchasing big-ticket green items. Countries like the United States have a target to meet when it comes to reducing carbon emissions, and part of that action plan is to switch to green energy. Install solar panels on your warehouse’s roof and go full solar-powered to get the tax credit.
Lower your federal income tax rate with expert eCommerce accounting
You need squeaky clean accounting books to avoid any suspicion of evading paying the full federal income tax rate for business owners. Also, having an accurate picture of your income will help you and your accountant determine what tax deductions or credits you can take advantage of. Unloop can help you do your books and your financial reporting accurately. Call us at 877-421-7270 for more information on our income tax services.