Tax Deduction. Really? Better Make Sure You Can Spot The Scams.

While American People can be divided on lots of different issues; there's one thing most people in this country can agree on. We all hate paying taxes.

Even, our founding fathers hated "taxes". That's why the tax code requires us to pay what we owe but makes it clear that we have the right to take any legal measure available to us to reduce what that amount is and that has been upheld in the highest court in the land.

The key part of this is "legal measures". However, there are lots of scams out there that if you participate in could land you in jail, even if you didn't know they were illegal. So it's important to be able to spot a scam when you see it. It's also a good idea to have your own tax advisor give whatever idea you\'re planning the once-over just to be on the safe side.

The best way to tell if looking at a legitimate "tax reducing measure" or a scam is to ask yourself, "What does the government get out of this?" You see the IRS, is never going to simply give a tax break that takes money out of their coffers, or reduces the amount coming in, to the benefit of individual taxpayers without some gain being made for the government.

For example, there are all kinds of deductions for real estate, both for homeowners and for investors. Why, because the government benefits, it means they don't have to provide those homes. There are also many deductions for business. Why, again, because the government benefits from the jobs those businesses provide.

Sometimes the government benefit is a little less obvious and you really have to think about it, for example, the Traditional & Roth IRA, you get to save money that is either tax deferred or tax free. Plus with the Roth you can take the money out without any penalty or income tax after 5 years and you can take your own contributions out any time. Now why is that, what's the benefit?

If you have money saving up without being taxed, it grows faster and you have more money to retire on, meaning you are less dependent on the government to support you. Plus, in a tax deferred situation, when you start drawing the money out to live on, you then pay income tax on it just like you did when you were working, so the IRS gets tax money coming from you for an extended period of time. Definite benefit, definitely.

The Roth IRA, and my preference if you can qualify, does not require you to pay income tax when you withdraw the money because the tax is not deferred. You paid the "taxes" when you originally received the money and before you deposited it. So the government still gets the benefit of you being less reliant on them, plus they get their money up front. The reason that you can withdraw it without penalty is to encourage you to take it out and use it.
Why, because even though you don't pay income tax, when you spend it you'll have to pay sales and other taxes. Again benefit.

Here are some tax reductions techniques I've seen, that are definite scams.

Social Security Refunds: Get a refund on the money you've been forced to pay social security. Just pay the fee and an upfront percentage of the refund to have the claim processed. Not only is there no government benefit here, it would bankrupt an already shaky system.

Slave Reparations: If you are a descent of slaves, you can pay a fee to have a reparations claim prepared for you. Filing this claim just gets you into trouble with the IRS because there's no authority for it anywhere. While you may or may not consider it just that the US make amends to the descents of slaves through reparations, there is no benefit to the government to make that happen.

Layered Trusts this is a scheme this is promoted based on it being used by the rich and famous. People who are really rich and have held their wealth for generations, hire highly skilled legal and financial advisor's to analysis the tax codes and the business and estate laws to shape the best plans for their circumstances. Unless you're in that position setting up layered trusts to avoid taxes will probably spell disaster for you.

This doesn't mean you should avoid all trusts. The use of a Living Trust to avoid probate and make it easier to transfer assets and land trusts for both protection and privacy when dealing with your property holdings are both highly recommended and very useful tools for managing your affairs. However, neither of these are tax reduction tools.

Opt Out of Taxpayer Status: There are still books, articles and websites that claim that paying taxes are voluntary because Congress does not have the authority under the Constitution to collect taxes. Meaning paying income taxes is just voluntary. So to stop paying taxes, you can, for a fee, just opt out. Following this method is a definite "Go to jail, Go directly to jail. Do not pass go and do not collect $200" kind of move.

Avoid Employment Tax Withholding: If you work a regular job and your boss does not collect federal and state withholding & employment taxes, you should either pay them yourself through estimated withholding (like you were self-employed), or find another job. If you are the boss, this is another "Go Directly to Jail" move. You're messing with one of the benefits the government receives by giving businesses all those tax deductions.

Here what all of these scams have in common, no benefit to the government, either directly or indirectly. If you are being told about a tax shelter or deduction, that provides no benefits to the government, chances are it's not real. For help with finding out how to get all the legitimate "tax deductions" you're entitled to and pay the absolute minimum check out our tax reduction toolkit.