1. how does tax - avoidance differ from tax - evasion?\n2. what common tax - saving methods are available to…

1. how does tax - avoidance differ from tax - evasion?\n2. what common tax - saving methods are available to most individuals and households?\n3. for the following tax situations, indicate if the item refers to tax - exempt income or tax - deferred income.\n a. interest earned on municipal bonds\n b. earnings on a traditional individual retirement account\n c. education ira earnings used for college expenses\n d. earnings on a roth individual retirement account\naction activity:\n1. research famous people who have had tax issues. what was their main mistake?\n2. using personal financial plan sheet 10, tax planning activities, interview someone and ask them which of these actions they have taken and why. for example, when did they last change their withholding amounts and why?

1. how does tax - avoidance differ from tax - evasion?\n2. what common tax - saving methods are available to most individuals and households?\n3. for the following tax situations, indicate if the item refers to tax - exempt income or tax - deferred income.\n a. interest earned on municipal bonds\n b. earnings on a traditional individual retirement account\n c. education ira earnings used for college expenses\n d. earnings on a roth individual retirement account\naction activity:\n1. research famous people who have had tax issues. what was their main mistake?\n2. using personal financial plan sheet 10, tax planning activities, interview someone and ask them which of these actions they have taken and why. for example, when did they last change their withholding amounts and why?

Answer

Brief Explanations:

  1. Tax avoidance is a legal way to reduce tax liability by using tax - saving strategies allowed by law, while tax evasion is illegal non - payment or under - payment of taxes.
  2. Common tax - saving methods include contributing to retirement accounts (like 401(k)s, IRAs), taking advantage of tax deductions (such as mortgage interest, charitable donations), and using tax - free investments (like municipal bonds).
    • a. Interest earned on municipal bonds is tax - exempt income. Municipal bonds are often exempt from federal income tax and sometimes from state and local taxes as well.
    • b. Earnings on a traditional individual retirement account are tax - deferred income. Contributions are made pre - tax, and taxes are paid when withdrawals are made in retirement.
    • c. Education IRA earnings used for college expenses are tax - exempt income. When used for qualified educational expenses, the earnings are not taxed.
    • d. Earnings on a Roth individual retirement account are tax - exempt income. Contributions are made with after - tax dollars, and qualified withdrawals (including earnings) are tax - free.
  4. Researching famous people with tax issues can involve looking at public records, news reports, etc. Their main mistakes could range from improper accounting, misclassification of income, to illegal tax evasion schemes.
  5. When interviewing someone about tax planning actions, it helps to understand their financial situation and how they manage their taxes. For example, changing withholding amounts can be due to changes in income, family situation, or new tax laws.

Answer:

  1. Tax avoidance is legal; tax evasion is illegal.
  2. Retirement account contributions, deductions, tax - free investments.
    • a. Tax - exempt income
    • b. Tax - deferred income
    • c. Tax - exempt income
    • d. Tax - exempt income
  4. Varies based on individual cases (e.g., improper accounting, misclassification).
  5. Varies based on interviewee's situation (e.g., income change, family situation change).