Avoiding tax payments that you rightfully owe the government is not legal. That said, there is no reason for you to overpay, given that there are several ways for you to legally keep your tax payments low. Read on for a better understanding of how taxation works and how you can save your dollars: 

• All types of income are not taxed in the same manner: If you earn a steady paycheck, you will need to pay an income tax on the amount you earn, Social Security, and Medicare. In comparison, if you earn your income only through your investments, there are no employment taxes levied. In fact, in this case, you will only have to pay capital gains. As a result of this, many wealthy people maximize their tax savings by earning a majority of their income through their investments.

• Divert your income into tax-deferring avenues: If you divert some of your income into your employer’s 401(k) scheme, you will not have to pay tax on this diverted sum. You’ll only have to pay tax on this amount once you start receiving payouts during your retirement years. Given that you’ll have to pay a lower tax rate during retirement compared to when you are employed, you stand to gain significantly.

• Avoid taxes with 1031 Exchanges: Section 1031 of the IRS Code, lets you avoid paying taxes if you sell a property and invest the proceeds you received into a similar property. Although your gains are not tax-free, you are essentially deferring it, like you do by diverting money into your 401(k) scheme. 

• Relocate to a state with lower taxes: In addition to the federal tax, most people also pay state taxes. However, states across the US do not have a uniform state tax. While some states levy a high personal income tax, other states may have a high sales tax or property tax. If you find that you are paying high state taxes and you don’t necessarily have to continue living in the same state, you can consider relocating to a state where the taxes aren’t as high. When deciding which location to reside in, make sure to take all the taxes that are levied in the area into account. 

• Change your W-4: If you were caught off guard by a big tax bill this year, you should consider making adjustments to your W-4. The W-4 form is something an employee gives their organization to instruct the employer on how much tax can be withheld from their paycheck. If you received a hefty tax bill, consider adjusting your W-4 such that more tax is withheld on a monthly basis so you have to pay less at the end of the financial year. 

In addition to these tips, you can also consider making charitable contributions to save on tax payments. Remember that your financial situation may be such that you are unable to put all these tips into effect right away. However, you can make a note of them since there may come a time when you’ll be able to use them.