• Tax avoidance and tax evasion—Tax avoidance is legal; tax evasionis illegal.There is nothing wrongwith attempting to minimize taxeswith legal tax-saving strategies.However, the difference betweenlegal avoidance and illegal evasion isoften insignificant enough that ajudge must decide.
• Tax credit and tax deduction—A tax credit is much morevaluable than a deduction becauseit's a direct, dollar-for-dollar reductionof your taxes. A tax deduction,on the other hand, is simply a reductionof your taxable income.
• Tax-free and tax-deferred—Tax-free simply means that you willnever pay income tax on a tax-freeinvestment. Tax-deferred, however,means you're in the clear for now, butyou will eventually have to pay. Forexample, qualified retirement accountsare tax-deferred, meaning youdo not pay tax on the returns untilthey're withdrawn.
• Tax tables and tax rate schedules—Both tax tables and taxrate schedules are used to figure outthe amount of tax an individual mustpay. If your taxable income is lessthan $100,000, you can generally usetax tables, which simply involve lookingup the correct filing status andtax bracket to determine your taxrate. If your income is $100,000 ormore, however, you must use the taxrate schedules, which require thatyou do some computations to arriveat your tax rate.
• Tax audit and tax examination—There's no real difference.
They both stink.
Ed Slott, CPA (www.irahelp.com).