11 Most Effective Ways To Avoid Paying Taxes (Legally)

Tax avoidance is a perfectly legitimate goal. Anyone and everyone can take advantage of legal and widely available tax-reducing strategies as they make their way through the fiscal year and ultimately prepare to file with the IRS come tax season. Tax avoidance is not the same thing as evasion, however — which is criminal behavior. While it's illegal to underreport your income to reduce the amount of tax you owe the government, legitimately minimizing the taxable income you are on the hook for isn't an opaque procedure reserved for the ultra-wealthy. Millionaires have found plenty of avenues to reduce their tax burden. Still, they aren't the only ones who can utilize tax-advantaged retirement savings accounts, favorable deduction opportunities, or beneficial philanthropic giving.

There are plenty of ways that people across the financial spectrum can turn tax season to their advantage — legally — and many of these approaches don't require any specialized knowledge or legwork. The average refund in 2023 was $2,753, consider one or more of these tax-reducing strategies to make the most of your tax refund, cut down on the cost of taxes, and leverage the tax system's variety of benefits to your advantage.

Take advantage of tax credits

Tax credits are the first port of call for anyone looking to reduce their income tax burden. Tax credits change on a routine basis, and new deduction opportunities are introduced into the tax code every year while some phase out. Deductions like the Earned Income Tax Credit, deductions for continuing education, consideration for children or other dependents, and many others factor into everyday Americans' tax preparation strategy year after year.

Unfortunately, many people don't realize that they can add one or more deductions to their tax return on top of the standard figure ($13,850 in 2023 for single or married filing separately) to reduce their taxable income. For many, the tax process is a straightforward accounting of money earned throughout the year and a sort of roulette spin to learn how much they've been overtaxed on each paycheck. Often, with taxable income reduced via the standard deduction those who work in typical employment arrangements will see the amount they should be taxed on drop significantly and therefore create a yearly return of money. It's worth noting, though, that some tax credits are refundable while others are not. A refundable tax credit may add to your tax return directly while a nonrefundable credit can only lower your calculated taxable income figure.

Consider opting for itemized deductions

The standard deduction is the best approach for many tax filers. However, workers are able to take an itemized deduction instead of the standard number if they choose. This requires a bit more calculation and effort to add up everything you can leverage to create a more beneficial tax return, so it isn't the best course of action for everyone. Moreover, even after calculating everything you might be able to deduct, the standard deduction may still be favorable. Yet, for some people, taking an itemized deduction allows for a beefy minimization of taxable income beyond what's typically available.

Itemized deductions include things like home mortgage interest, unreimbursed medical expenses, charitable donations, or significant losses due to theft, fire, flood, or similar emergency events. If you have incurred significant out-of-pocket expenses in the past year, an itemized deduction can help dramatically reduce your tax bill by vaulting the total amount you can subtract from your taxable income well beyond the standard rate. In 2023, single filers can expect a standard deduction amount of $13,850, while joint filers can deduct $27,700 without adding up itemized subtractions and head of household filers will get a $20,800 credit. If your out-of-pocket expenses add up to create an itemized figure rising above the threshold that your standard deduction can provide, it's worth making the extra effort to further minimze your tax burden. 

Invest in your IRA or Roth IRA (depending on personal strategy)

Both of these retirement investment accounts are tax-advantaged opportunities to set aside money for your later years. They go about providing a tax benefit in two divergent ways, however. A traditional IRA allows you to deposit funds before they are taxed, and then the tax bill is levied when you withdraw from the account. A Roth instead allows you to withdraw funds tax-free — meaning you're taxed today on deposits but the account's growth isn't.

Both options have their place in modern retirement planning and either account provides a legal and highly effective means of reducing your overall tax burden. Investing in a standard brokerage account, for instance, will see you pay tax on the income you use to deposit funds and a capital gains tax assessment when you sell assets to fund your lifestyle later on. While both are advantageous, it's important to think about which approach might benefit you more (or perhaps you might opt to use both types of accounts in tandem). A traditional IRA's tax-deferred organization means that you may find it easier to contribute a higher amount to your future, today. As well, tax is assessed on distributions, meaning that you'll treat withdrawals from the account like a paycheck and can control your tax burden directly since you're both the payer and payee. A Roth IRA allows you to earn tax-free growth on your savings and is the better choice for many, particularly young savers.

Invest in real estate assets

Real estate assets have long functioned as a primary means of holding, growing, and transferring wealth. Real estate investments are a great option because people will reliably need places to live for as long as society exists. A rental property (including commercial real estate) often makes for consistent monthly dividends in the form of rent checks. However, rental properties have their own unique volatility that rivals or even surpasses that of the stock market. While it's unlikely that a rental home will lose substantial value as a result of competition or brand insolvency in the same way that publicly traded companies might, a renter may choose to stop paying rent or fail to move out at the end of a lease term. Additionally, landlords often need to reinvest in the property to maintain it as a quality living space.

Expenses that rental properties demand of a landlord include routine upkeep like painting as well as more substantial, yet occasional, fixes like replacing windows and appliances. All of these expenses can be funneled through your tax calculation. This is called depreciation and allows you to write off costs associated with owning the asset on your taxes. Therefore, not only is real estate investment beneficial for creating long-term wealth and short-term cash dividends, it can be leveraged to reduce your taxable income and chip away at the amount that Uncle Sam shaves off the top of your paycheck.

Enroll in collegiate classes

There are specific tax credits set aside for college students that can make a sizable dent in your tax bill. This is great for parents of college students who are still being claimed as a dependent, and perhaps even better for students who filed taxes themselves since many student credits are refundable and will flow directly into your bank account if you are studying full time and therefore likely working sporadically or not at all.

The American Opportunity Tax Credit offers a reduction of up to $2,500 per student on your taxable income with a refundable amount of up to $1,000. The Lifetime Learning Tax Credit is another option for those pursuing routine studies and covers educational expenses beyond a four-year degree program. The LLTC isn't refundable and offers up to $2,000 in deductions, but it can be claimed indefinitely, as long as you or your dependent are engaged in some form of continuing education. In contrast, the AOTC requires at least half-time enrollment.

Freelance employees: Consider creating a business entity to manage your income and work

Freelancers, contractors, and other non-traditional gig employees may not benefit from routine company incentives, but they can leverage their status in another way. A contract employee can opt to be paid through an incorporated company rather than directly. There is more complication with this route, however. Because wages aren't paid directly to the individual you have significantly more control over your income as you close in on new tax rate thresholds. For instance, there is a sizable jump from a 12% to a 22% tax rate for married people filing jointly when income hits $94,301. A contractor can pay themselves just under this number, regardless of how much they earned in the previous year. This can help you avoid the new tax bracket rate altogether, or minimize its impact by deferring some of your income at the end of the year and paying out a higher monthly salary figure in January.

Another benefit is the ability to write off business expenses or make purchases using company funds rather than personal ones. If you need to purchase a new computer, you can either write it off as a business expense or simply buy the computer with company funds. Many freelancers work from home and therefore a wide range of potential business expenses can be leveraged to lower your tax burden and perhaps even operate at a legitimate net loss while remaining cash-positive and paying yourself a living salary.

Assign your assets to an irrevocable living trust

An irrevocable living trust reallocates asset ownership of things like investment accounts, real estate holdings, and even cash or business assets. Living trusts can be established in two separate varieties, but an irrevocable trust is what you'll want to utilize if tax reduction is your primary aim. This type of trust account can be set up with a little bit of paperwork and a quality plan. To use this type of legal framework, you'll reassign assets permanently to the trust. This means you can't reclaim them as personal property later on, but it allows for protection during bankruptcy proceedings and the ability to avoid a potentially lengthy probate process in order to pass on assets in the future. Similarly, by placing your assets in an irrevocable trust you'll avoid any estate taxes that might otherwise play a role when passing on property through a more traditional avenue.

This type of trust is a great way to start building a protected portfolio of assets for your loved ones. It can limit what you're able to do with reallocated assets in the present, but an irrevocable living trust can make for an excellent means of legally protecting important or expensive property from tax liabilities over the long term.

Strategize stock sales to avoid short term capital gains assessments

When using a non-tax-advantaged investment brokerage account, like one at Schwab, Robinhood, or other standard trading platforms, long-term thinking and proper strategy are a must. Short-term capital gains taxes can eviscerate the benefit provided by the sale of stocks. Any time you sell assets there will be a tax liability. Selling at a loss isn't great for the overall health of your portfolio, but it can offer its own value come tax time. However, when selling at a profit you'll be on the hook to pay capital gains taxes on the increase in value that you receive.

Short-term capital gains rates are assessed on any sale involving assets you've held for less than a year. Tax rates on these sales can rise to as much as 37% on a progressive scale. In short, the tax liability lines up with ordinary income tax considerations. But if you keep stocks for longer than the one-year period before selling them, you will be assessed on a much more generous scale that ends at 20% with most people paying no more than 15% on a portion of their profits. Moreover, the lowest bracket is marked by a 0% tax rate while short-term sales incur at least a 10% tax levy. Therefore, with strategic sales, it's possible to enjoy a slice of your investment profits without any additional tax liabilities.

Claim your dependent children for a major tax deduction

If you have children, claiming them as dependents can make for a sizeable reduction in your overall tax burden. Dependent children each offer a $2,000 deduction. Moreover, a portion of this tax credit is refundable up to $1,400. As a result, with some intelligent tax planning, you might be able to boost your refund by over $1,000 per child.

It's important to note though that once your children start working, venturing into tax-paying territory themselves, revisiting their dependent status will be necessary. A parent can't claim a child tax deduction on a person who is also filing taxes. The child is either attached to your income tax filing or completely separate. As your children approach working age, it will be important for you to have a conversation with them about taxes and the best strategy for reporting income and minimizing the household's overall tax burden. For reference, a single person under 65 (i.e., your employed child) must file a return if their gross income is at least $12,950. A teenager working part-time might easily remain under this threshold, potentially delaying that conversation. Even so, it's worth having the discussion so that everyone knows where they stand.

Donate unneeded goods to charity

Charitable donations are tax-deductible, so anything you no longer need that a reputable charity is willing and able to take as a donation can provide a nice boost to your overall deduction. Charitable donations must be claimed as itemized deductions, however. Therefore, using donated funds, goods, and other items in this manner is only viable if you are already planning to take an itemized deduction or if the addition will make that approach worthwhile. Still, donating to charity is certainly a good deed and something that will strengthen your community.

If you are planning to include charitable donations in your itemized deduction, it's important to get a tax receipt. This will give you all the information you require as well as proof if the IRS decides to ask for more information from you. Some caps must be kept in mind. Charities must be qualified to accept tax-deductible donations, and a 60% adjusted gross income cap comes into play as well. Non-cash gifts also fall into a variety of categories. For donations valued at less than $250, a receipt from the organization is required with a few boilerplate pieces of information included. If a donation rises above this threshold, however, to claim the deduction you'll need "contemporaneous written acknowledgment" by the organization in question regarding the gift. Additional forms are also required for any donation beyond a $500 valuation.

Consider writing a book about your experiences

Finally, many individuals have resorted to novel tax deduction attempts. For instance, Yahoo! News reported on a man caught dealing drugs had the IRS breathing down his neck after the authorities had busted his operation and rounded up the proceeds of his illicit business venture. When the IRS audited him, he filed a tax return claiming a variety of deductions corresponding with the expense of running his "home business" and eventually won his tax case in court.

While most tax filers won't have this bizarre avenue available to them (and likely won't want to), another tax reduction strategy could be in the cards for just about anyone willing to spend some time documenting their experiences. Another tax filer spent over a year traveling around the world and then successfully wrote off the entire cost of the trip because he published a book that chronicled his adventure. The author sold just 20 copies of the story, but that was enough to categorize the trip as a business expense and allow him to deduct $50,000 from his taxable income. Taking inspiration from this story, it might be worth publishing some sort of autobiography about your exploits to create a unique tax deduction that covers some of your routine expenses and allows you to reduce a good chunk of your taxable income.