Tax planning is one of those commonly used words that are not well understood by many people, who are also (coincidentally) tax payers. Tax avoidance and tax evasion are also some of the terms that are often used in finance and are often confused with tax planning. Here is a look at all these financial terms:
This financial term is the calculated art of avoiding or postponing tax payments within the limits and guidelines of the stipulated tax law. This planning might involve taking advantage of tax depreciation, favorable tax-law provisions and increasing tax deductions. Because Tax planning takes place within the letter of the law, it is not illegal and therefore, attracts no penalties.
As a tax payer, your aim should be to implement safe tax planning strategies due to the advantages they offer. For instance, with a credible strategy you can save a lot of money that can be used for investment. The financial language surrounding tax may be a bit difficult for the novice mind, and it is therefore, advisable that you seek help from a financial or accounting expert to help you take advantage of tax planning.
This term refers to the complete or partial non-payment of tax by making dishonest deductions or failing to declare your income. Tax evasion if and when discovered by the "tax man" can incur severe penalties which may involve huge fines and even jail terms.
Tax avoidance, as the name implies is the act of eluding tax payments through a contrived or an artificial scheme. This act is illegal and may therefore incur penalties such as jail terms and fines when discovered.
Basically, the difference between tax panning, tax evasion and tax avoidance comes down to 'intent'. While tax planning takes place within the 'intent' of the law, the other two financial terms do not take into consideration tax laws and are therefore, considered illegal.
Tax payers are allowed to make arrangements that minimize their tax liabilities, but this should be done within the confines of the law. If tax planning is not carried out within the confines of the law, then this may be regarded as tax avoidance or tax evasion (they both attract severe penalties). To avoid "angering" the tax authorities, it is best to seek advice from reputable tax or financial professionals to help you take advantage of the benefits of tax planning.