Tax avoidance involves the use of legal tax planning techniques to minimize a taxpayer's tax liability. Examples of tax avoidance are:
- Waiting to sell an investment until the capital gains tax replaces the ordinary income tax.
- Paying funds to registered nonprofit entities in order to use the related charitable deduction.
- Paying pre-tax income into a qualifying tax sheltered retirement plan.
- Acquiring a mortgage in order to take advantage of the related tax deduction on interest payments.
Tax avoidance schemes can be reduced by adopted a cleaner tax code that contains fewer provisions allowing taxpayers to reduce their tax liabilities.
The key distinction between tax avoidance and tax evasion is that tax avoidance employs legal means to minimize one's tax liability, while tax evasion uses illegal methods.