What is the difference between tax evasion VS tax avoidance? At Vengerick Art we receive this question daily. Thus we felt it will be helpful to better explain the differences, and why the rich buy art to avoid taxes.
“The best things in life are free, but sooner or later the government will find a way to tax them.” –Anonymous
Before we start, Vengerick Art is NOT lawyers, this is NOT legal advice. This article is for entertainment purposes only. With this in mind defiantly consult a lawyer for all tax questions.
The Difference Between Tax Evasion VS Tax Avoidance
First we must look at the difference between the two ways people pay less in taxes. Obviously One is 100% legal and the other is 100% illegal. Some people use the terms “tax avoidance” and “tax evasion” interchangeably, but they actually have opposite meanings.
Another major difference between tax avoidance and tax evasion is that while the former, when done correctly, can lower your taxes, the latter can land you in jail.
Tax Evasion Definition — The failure to pay or a deliberate underpayment by making false declarations of taxes. Thus 100% Illegal.
They can’t collect legal taxes from illegal money. – Al Capone
Examples Of Tax Evasion:
- Lying About income
- Falsifying income records
- Just paying less on taxes
- Inflating your expenses and deductions
- Hiding money
- Hiding interest in an offshore account(s)
Anyone can get caught for tax evasion, here is a list of 10 Celebrity Tax Evaders.
Tax Avoidance Definition — An action taken to lessen tax liability and maximize after-tax income. Conversely 100% Legal.
Examples Of Tax Avoidance:
- Using pre-tax dollars to fund an IRA or 401(k)
- Taking deductions for things such as mortgage interest, property taxes, medical expenses, and charitable contributions.
- Claiming tax credits offered
- Deducting business expenses to reduce your taxable income
- Holding investments longer to benefit from a lower capital gains tax rate
Most countries have a voluntary tax reporting system. This allows tax payers to self report income and deductions to the government. Consequently this allows tax evasion by not reporting all income someone makes. Also people and companies making money from illegal activities. Especially gambling prostitution and drugs trafficking. Often fail to report their income.
In contrast, tax avoidance is completely legal. Furthermore regulations allow eligible taxpayers to claim certain deductions, credits, and adjustments to income. Including deductions for mortgage payment, company expenses and qualifying investments.
Many times people complain tax laws are written for the rich and wealthy. For example, most people do not have the ability to open an offshore trust, or company in Panama, just to reduce their taxes.
10 Tax Haven Countries in the World.
- British Virgin Island
- Cayman Islands
- Bermuda
- Netherlands
- Switzerland
- Luxembourg
- Hong Kong
- Jersey
- Singapore
- United Arab Emirates
The Art Of Tax Avoidance
If you are looking for a safe effective way to avoid taxes. Surely you must consider following in the steps of the rich, and ultra wealthy.
First the rich have been using art as a tool for tax avoidance since before world war 2. Second the ultra wealthy continue to be very creative with tax laws, and generating big profits using art. As a result of the increasing profits, and tax savings. Many officials call art a smokescreen for the rich to hide their wealth behind.
Art can be viewed in a multitude of ways.
A store of wealth, masterpiece to cherish,
family heirloom, part of a trust or estate,
or even a gift to a cultural institution.
Collecting more taxes than is absolutely necessary is legalized robbery. – Calvin Coolidge
1. Luxury Freeport: Tax Evasion VS Tax Avoidance
Before we continue for the uninitiated. A freeport is a form of free economic zone (or foreign trade zone, as it’s known in the US). A special area, usually in or around a port of entry, where goods can be stored without being subject to that country’s customs duties.
Since these items are considered to be just transiting through, they haven’t technically entered that country so can’t be taxed. Important to realize, often collecting art is about money, and not about the appreciation of the artwork itself.
Freeports are the secrecy jurisdictions of the art world, where art collectors and art dealers can park their speculative art purchases in complete anonymity, while being invisible to tax authorities and foreign governments.
The movie Tenet does an excellent job offering a rare behind the scenes look at luxury freeport. For example, imagine James Bond-007 has a storage unit. Of course that storage unit is ultra luxury, private and complete with vodka martinis.
Why do the rich love freeports so much? Beyond privacy the freeport offers zero taxes on the sale and transfer of art. Thus freeports are the ultimate tax free secrete of the rich.
2. Flipping Art, Defer Capital Gains Tax
Introduced in the 1920s lowering the tax burden for farmers who wanted to swap property. This tax avoidance strategy became a powerful tool for real estate investors flipping, office buildings for shopping malls.
Now, this provision in the tax code is an important secrete to the rich. Thus “flipping art”, known as a like-kind exchange, has become a popular tactic for wealthy art buyers and seller. Consequently buyers of art that want to put off, and even sometimes completely avoid taxes. Usually use like kind exchange to upgrade to Rothko and Picasso, thus pay zero tax on the art they sold.
Many art investors sell and repurchase a series of works of escalating value without paying tax until an ultimate sale many years down the road. This process some compare to receiving a no interest loan from the government.
3. Museum Donations
When it comes to donating art to museums there is endless benefits for tax avoidance. Therefore you always need a very good lawyer to represent you in these transactions. Creative is the key when the rich consider donating art to museums and there can be many motivations.
Benefits donating art to museum include:
- Income tax deduction of the full fair market value of the art
- Avoidance of capital gains tax on appreciated assets
- Estate and gift tax deduction
4. Offshore Trust and Estate Tax
When the rich look for privacy they turn to offshore trusts. For instance offshore trust is one of the best tools for securing assets from creditors, divorces and judgements. So if you want to be rich and stay rich you MUST have an offshore trust.
The secrete rich use is to combine the security of an offshore trust with the tax benefits of art. If you think you are not rich enough for an offshore trust, then think again. Many law offices will setup everything for you, including an offshore bank account for less than $1000. In some jurisdictions the complete trust setup can be finalized and the art transferred in just a week.
Tax Evasion VS Tax Avoidance Simplified
As you can guess we have simplified Tax Evasion VS Tax Avoidance to its simplest form. Taxes is an endless topic with many variables.
We hope you know a little more now than you did before about how following the rich, can help you save on your taxes.
In our experience contacting a lawyer you trust, or knowledgeable art dealer to ask questions is an excellent first step. A good place to start is list three reasons why you wanted to lower your taxes then contact someone you trust to give you guidance.
We all have the right to reduce our tax burden, not just the ultra rich and wealthy.
You can learn more why the rich buy art here.
As always if you have questions or comments feel free Vengerick Art contact us.