Since ancient civilizations, governments have used taxes as an essential revenue. With this long history, taxes continue to fund public services and infrastructure worldwide. Sometimes paying taxes can be complicated, and it is not easy to keep up with the details of the law. In this article, we explained some of the key points that can help you legally avoid paying taxes and reduce your tax bill.
Tax deductions, tax credits, and some investment options can help you legally reduce how much tax you pay. Eventually, you may have more money left from your earnings. Let’s explore legal strategies to pay less tax.
What to Discover in This Guide?
What are Income Taxes?
Even if you do not see yourself as informed enough about taxes, you must be familiar with income taxes. It is your individual or personal income tax that is levied on your wages, salaries, dividends, interest, or other income you might earn during the year.
The calculation of the income tax is dependent on the state in which you earn your income. On the other hand, some states avoid double taxation by letting your earned income be taxed in your state of residence in case that state has reciprocity agreements with other states.
The law says that as a taxpayer, you must file an income tax return annually, which will, in the end, determine your tax obligations.
What Does Taxable Income Mean?
Taxable income means the portion of your gross income. The reason it is used is to calculate how much tax you owe in the given tax year. It can also be called adjusted gross income (AGI, which is minus allowable itemized or standard deductions.
Remember that most income is taxable if there is no specific exemption by law. Your income can be your money, property, goods, or services. You do not need to wait to receive a form to report your income. In any case, you are expected to report your income on your personal tax return.
Federal Income Taxes
The Internal Revenue Service (IRS) imposes federal income tax on the yearly income of individuals, corporations, trusts, and other legal entities. All sorts of earnings, including commissions, bonuses, tips, wages, salaries, investment income, and some unearned income, are subject to federal income taxes and constitute a taxpayer’s taxable income.
Individual federal income tax rates in the United States are progressive, which means that they rise in line with taxable income. As of 2024, the federal income tax rate ranges from 10% to 37%, with rates applied at certain income thresholds. Tax brackets are the ranges of income to which the rates apply. Every income bracket’s associated tax rate is applied to income falling inside it.
Healthy Savings Account
A particular kind of savings account that permits you to deposit funds for qualified medical costs before taxes. You can reduce your out-of-pocket medical expenses by utilizing untaxed cash in an HSA to cover certain additional charges, such as coinsurance, copayments, and deductibles. Generally speaking, premiums cannot be paid with HSA funds.
You can contribute to an HSA if you have an HSA-eligible plan, also known as a High Deductible Health Plan (HDHP), which is typically a health plan (including a Marketplace plan). It only covers preventive services before the deductible. However, you can use the funds in an HSA at any time to pay for qualified medical expenses.
Tax Deduction
Every year, taxpayers can claim several credits and deductions on their taxes that might help them pay less in taxes or even get a refund from the IRS.
Tax Avoidance vs. Tax Evasion
As we mentioned before, taxes are not a generally easy topic. So it is normal that there are many misconceptions. For instance, tax avoidance may be confused with tax evasion. But the two concepts are very different: while tax avoidance is a legal way to reduce taxes, tax evasion is illegal.
To make the difference between the two more understandable, please see the distinctions between them and have a clear view of the legal way you will follow.
- Legality: While tax avoidance operates within the restrictions of the law by employing legal strategies to lower tax liability, tax evasion is unlawful and entails purposeful misrepresentation to trick tax officials.
- Transparency: Using legal tax breaks and exemptions is a common component of tax evasion, which is usually apparent. Tax evasion, on the other hand, is opaque and involves dishonest methods like underreporting income or fabricating documentation.
- Penalties: Because tax evasion is unlawful, it can result in harsh punishments, such as lengthy jail terms and substantial fines. On the other hand, there are no penalties associated with tax avoidance; nonetheless, authorities may contest excessively active avoidance strategies.
- Ethics: Tax evasion is excessive and may raise ethical concerns.
- Impact on Public Finance: Although tax evasion is illegal, the extensive use of tax avoidance by wealthy individuals or businesses can burden public finances. It reduces the revenue base required to pay for public services.
Tax Avoidance
After the comparison, let us get you through more detailed information about tax avoidance and what it means for your budget control.
Tax avoidance is legal. It simply means taking advantage of any tax deductions, tax credits, or other tax-reducing incentives that are available through a tax system.
Tax avoidance can be a legal way to avoid paying taxes. For instance, you can avoid paying taxes by using tax credits, deductions, exclusions, and loopholes to your advantage.
Corporations often use different legal strategies to avoid paying taxes. These include offshoring their profits, using accelerated depreciation, and taking deductions for employee stock options.
Tax avoidance can be illegal, though, when taxpayers deliberately make it a point to ignore tax laws as they apply to them. Doing so can result in fines, penalties, levies, and even legal action.
Tax Evasion
It is an illegal activity in which someone avoids paying an actual tax liability. If this person is caught evading taxes, they are generally subject to criminal charges and substantial penalties.
Tax evasion may involve the following:
- Dishonest tax reporting
- Overstating the deductions
- Profits, or gains, rather than the amounts actually earned
Top Personal Income Tax Rates in Europe in 2026
| Country | Top Statutory Personal Income Tax Rate |
|---|---|
| Austria | 55.0% |
| Belgium | 50.0% |
| Bulgaria | 10.0% |
| Croatia | 33.0% |
| Cyprus | 35.0% |
| Czech Republic | 23.0% |
| Denmark | 55.9% |
| Estonia | 24.0% |
| Finland | 57.65% |
| France | 45.0% |
| Georgia | 20.0% |
| Germany | 45.0% |
| Greece | 44.0% |
| Hungary | 15.0% |
| Iceland | 46.29% |
| Ireland | 40.0% |
| Italy | 43.0% |
| Latvia | 33.0% |
| Lithuania | 32.0% |
| Luxembourg | 42.0% |
| Malta | 35.0% |
| Moldova | 12.0% |
| Netherlands | 49.5% |
| Norway | 22.0% |
| Poland | 32.0% |
| Portugal | 48.0% |
| Romania | 10.0% |
| Slovakia | 25.0% |
| Slovenia | 50.0% |
| Spain | 47.0% |
| Sweden | 52.2% |
| Switzerland | 40.0% |
| Turkey | 40.0% |
| Ukraine | 18.0% |
| United Kingdom | 45.0% |
How to Avoid Paying Taxes Legally: Top 7 Ways
By choosing to reside in countries with advantageous tax policies or those that do not impose income taxes, digital nomads can increase their tax savings. They frequently use international tax treaties to their advantage and establish their companies in low-tax jurisdictions.
Generally speaking, digital nomads who live in a state for a certain amount of time throughout the tax year and get income there are required to file state taxes. Still, some US states tax their former citizens as well. After they move out, these states have the authority for the digital nomad taxes if they provide ID cards or driver’s licenses.
1. Self-employment tax deduction
The typical self-employment tax for independent contractors, freelancers, and business owners is 5.3% of net profits, calculated after business expenditures. So, this percentage covers your social security and medical contributions.
Making the most of a self-employment tax deduction program is one of the simplest methods to lower tax obligations and pay no taxes at all. If your self-employed income meets certain permissible expenses, you can deduct a portion of it from your taxable profit in the United States.
To be eligible for the tax-saving opportunities on self-employment, you need to be:
- An individual business owner
- An associate within a collaboration
- An LLC’s (limited liability company) member
- Submitter of a tax return together with a Schedule C or Schedule C-EZ (Form 1040)
2. Deduction for business expenses
Savvy entrepreneurs make the most of the opportunity to claim business expenses as a tax deduction when they file their taxes. This covers expenses for your home office, phone and internet fees, supplies for your craft, marketing and advertising, client meetings, business travel, industry-related education, and more.
You must maintain documentation of all your yearly deductions for company expenses and ensure that you are aware of the goods that qualify for tax exemptions. Additionally, you must make sure that you only deduct business-related expenses in accordance with tax rules. If not, the Internal Revenue Service or another federal tax body may impose harsh fines on you.
The standard mileage deduction can be utilized as an additional method of deducting business expenses. You can deduct a specific amount using this strategy for each mile you drive on business travel. Given that it remains an expense for any business owner, that makes sense in the long run. While commuting to and from work, this may not always be applicable; nevertheless, it can be applied when attending business meetings.
Just be sure to abide by the tax laws in your nation and to use the appropriate tax code on all of your filings.
3. Contribution to a retirement plan
As a freelancer, you can contribute to a retirement savings account in a few different ways. This is also one of the easiest ways to avoid paying too much or too little in taxes legally. If you’re an American citizen, there are three typical methods to accomplish this. These are the following:
- Put money into an Individual Retirement Account (IRA)
- Make a Roth IRA contribution
- Contribute to 401(k)
4. Contribution to an HSA
The first step is opening a health savings account, or HSA for short. It functions similarly to a traditional IRAs, helping pay for medical costs in the event of illness.
You must visit a bank or other financial institution that offers HSA accounts to open an HSA.
Just remember that in addition to a high-deductible health insurance plan, you also need to get one, as these policies have cheaper premiums than those with lower deductibles.
When tax season arrives, how can an HSA assist you?
The annual cash restrictions indicated below apply to the annual HSA contributions that you can deduct from your income taxes each year.
- The money in your HSA is not subject to taxes on any income it may receive.
- Withdrawals made to cover medical costs will not be subject to taxes. Withdrawals made for non-medical costs will incur penalties and taxes.
- You are not charged a fee if you take money out of your HSA for any reason at all once you turn 65 or become incapacitated. Additionally, you only have to pay ordinary income tax on withdrawals made for non-medical costs.
5. Donation to a Charity
The charitable contributions will need to be claimed by taxpayers as itemized deductions on Schedule A of IRS Form 1040 under the heading “Gifts to Charity.” Because they are all tax-deductible, it’s crucial to request a tax receipt when you donate clothing, make an online donation, or attend an in-person or virtual charity event. You can include even the costs of volunteering, such as automobile mileage.
You can lower your taxable income by donating as a freelancer. You may contribute to a private foundation or registered charity and receive a tax receipt.
Here are a few things to be mindful of:
- Contributing to a recognized charity
- Maintaining a record of all your donations
- Make sure to disclose your donations when submitting your taxes
6. Claim of Child Tax Credit
Among your tax strategies, you can include the Child Tax Credit (CTC). It offers an additional way for business owners with children to reduce their tax liability. The starting amount of the tax credit for your 2026 taxes is $2,000 for each eligible child. To be eligible for the tax credit, your kid must also be younger than age 17 at the conclusion of the calendar year.
For parents who pay taxes and have dependent children under the age of 17, there is a tax credit called the Child Tax Credit. Each child is eligible for a refundable tax credit of up to $2,000, which can be claimed each year when filing taxes.
7. Time year-end income and expenses
The tax year for almost all freelancers is the calendar year, and they all file on a cash basis.
Cash-basis refers to the practice of counting income only in the year of receipt. Additionally, you write off a cost in the year that it was purchased.
It is significant because it enables you to do some astute year-end tax planning. You can reduce your annual tax burden. You could expedite the payment of deductible expenses while deferring income.
Waiting to bill consumers until the following year is one strategy to postpone income. Remember that just waiting until the following year to cash a cheque won’t save you from having taxable income. When you receive a check, rather than when you cash it, it counts as income.
Purchasing items for your company before the end of the year is another way to increase your deductible expenses for the year. The best news is that you can benefit from the deduction even if you don’t need to pay cash by December 31. You can use your credit card in its place and fully deduct the cost.
Note that it is always recommended to consult a qualified tax professional to ask your questions specific to your circumstances, as this article only provides you with general information on maximizing your tax savings.
Income Tax-Free Countries to Relocate
In 2025, the UAE, Panama, and the Caribbean programs offer a better environment for those seeking a tax relocation.
The Dubai Golden Visa program requires a minimum investment of AED 2 million (USD 550,000) in the UAE. Once you receive your Golden Visa, you can benefit from the UAE’s tax-free environment, as there are no income taxes imposed on individuals.
Panama, another favorable option for tax purposes, offers investors permanent residency through an investment program. By obtaining your Golden Visa in Panama, you can benefit from a favorable tax environment, as there is no income, corporate, capital gains, or estate tax for offshore entities.
In the meantime, Caribbean countries stand out as being the offshore tax havens. Countries like St Kitts & Nevis, Antigua & Barbuda, Dominica, Grenada, and St Lucia offer citizenship programs that provide both global mobility and tax benefits by imposing no or lower taxes than those in EU countries.
Get Golden Visa: Your Guide to Relocation for Tax Efficiency
At Get Golden Visa, we have helped many investors obtain residency or citizenship through investment for tax efficiency or potential relocation since 2014. We guide you through every step of your investment journey.
To build a secure and strategic future plan, fill in the contact information below. Let us help you create a plan “B” for you and your loved ones.
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Frequently Asked Questions on Avoiding Paying Taxes Legally
What is the $600 rule in the IRS?
The $600 rule states that you must report any business that pays you more than $600 and file a 1099.
How can I reduce my taxable income legally?
You can reduce your overall tax liability. Your methods can include saving for retirement through tax-deductible contributions, investing in tax-exempt bonds, and using flexible spending plans offered by employers.
How can I avoid paying capital gains tax?
Various tax strategies can be employed to lower taxable income. These include utilizing primary residence exclusions, reinvesting proceeds through 1031 real estate exchanges, balancing investment gains with losses, or considering relocation to countries that do not levy a capital gains tax.
Will federal taxes not be withheld if the check is too small and you have dependents?
Yes, federal taxes can be withheld at 0% if your paycheck is small enough and your W-4 (dependents) will reduce your taxable income below the withholding threshold.
Is avoiding taxes legal?
Tax avoidance, which involves using legal methods such as claiming allowable deductions and credits to reduce your taxable income, is legal. You basically reduce your taxable income by making strategic tax planning.
How do you calculate taxable income?
To calculate taxable income today, you add up all sources of taxable income and subtract any deductions to find your taxable income amount.
What are the tax avoidance examples?
Tax avoidance examples include claiming allowed tax deductions and credits, making tax-advantaged investments, and receiving income as directors’ loans.
Which European countries offer the lowest tax rates?
European countries with the lowest tax rates include Bulgaria, Malta, and Gibraltar.
Which European countries offer the highest tax rates?
Denmark, France, and Austria have the highest top personal income tax rates in Europe.
Which Golden Visas have tax reductions for non-citizens?
Golden Visas that offer tax reductions for non-citizens include those from Italy, Greece, and Portugal. They usually do not tax your foreign-sourced income, and you may receive additional tax benefits.
How do I pay taxes in the US as a non-citizen?
Non-citizens living and working in the US may be required to file a federal tax return. For more precise information, please ask your tax advisor.
How do I pay property taxes in Europe?
Property taxes in Europe are levied on assets such as real estate and are paid on a recurring basis by individuals or legal entities.
