Your Guide to Legally Reducing Taxes
Learn moreOctober 29, 2024
Historically taxes have funded public infrastructure and services around the world. Today, managing your tax obligations remains crucial, but navigating the details can be challenging.
In this guide, we’ll share legal methods to reduce tax liabilities effectively. By using deductions, credits, and strategic investments, you can better manage your finances and increase your retained earnings.
Taxable income refers to the portion of your total income that is subject to taxes. It’s calculated by taking your gross income (wages, salaries, dividends, interest, etc.) and subtracting any allowable deductions or exemptions. It's important to include all forms of income—wages, dividends, or even freelance fees—and be aware of any exemptions that may apply.
In other words, taxable income is what remains after applying these adjustments and is the basis for determining how much tax you owe to the national tax authorities responsible for collecting taxes.
Income tax is a tax levied on your earnings, including wages, salaries, investments, and more. In many countries, taxes are deducted based on progressive rates, meaning higher incomes are taxed at higher rates.
Typically, you must file an income tax return annually, which determines your tax responsibilities. For expats in Greece, it’s essential to understand local laws, especially if a tax treaty between countries prevent double taxation on income. Additionally, expats must have an understanding of the local tax rates. For this, please read What is the Tax Rate in Greece?
In the U.S., the IRS (Internal Revenue Service) imposes federal taxes on a progressive scale ranging from 10% to 37%. This means higher earnings incur higher tax rates. Understanding these brackets can help you strategically manage your income distribution and minimize tax burdens.
In the United Kingdom, federal or national income taxes are known simply as income tax, and they are imposed by the central government on individuals and businesses across the country.
These income taxes are collected by Her Majesty's Revenue and Customs (HMRC), the UK’s tax authority, rather than by regional or local governments. Like Greece, the UK also uses a progressive income tax system, with rates that increase with income levels.
In the United States, HSAs are tax-advantaged savings accounts designed for medical expenses. Contributions are made pre-tax, and qualified withdrawals for medical expenses are tax-free. If you have a High Deductible Health Plan (HDHP), an HSA can provide significant savings on healthcare costs.
However, some countries offer similar accounts or incentives to encourage savings for healthcare, though they differ in terms of eligibility, tax benefits, and usage.
As a freelancer, you can save for retirement with Individual Retirement Accounts (IRAs) or Roth IRAs, which provide tax-deferred or tax-free growth, respectively. Contributions to these accounts can reduce your taxable income, making them an effective tool for long-term tax planning.
Although Greece does not have an exact equivalent to the American Roth IRA, it offers its citizens and residents private pension plans through insurance companies or financial institutions.
Some Greeks make voluntary contributions to the country's main social security fund, known as EFKA (Unified Social Security Fund), to increase their retirement benefits.
However, EFKA contributions are not tax-exempt, and the fund operates primarily as a pay-as-you-go public system, unlike a private, tax-sheltered retirement account.
For freelancers and entrepreneurs, claiming business-related expenses is an effective way to reduce taxes. Deductible expenses may include office supplies, travel expenses, marketing costs, and more. Maintaining thorough records of these expenses is crucial to maximizing deductions while staying compliant with tax regulations.
This also applies to expats in Greece who are looking to start their own businesses. However, it is crucial to ensure that foreigners have valid residency permits in order to start their own business. For more information about incorporating in Greece, please see How to Open a Business in Greece in 2024.
In the United States, if you use your vehicle for business purposes, the IRS allows a per-mile deduction that reduces your taxable income. This can be particularly beneficial for freelancers meeting clients, traveling for business, or making deliveries.
Meanwhile, in Greece, instead of a per-mile deduction, Greek tax law allows taxpayers to deduct actual business-related vehicle expenses, such as fuel, repairs, insurance, and maintenance. These expenses must be documented and supported with receipts, and only a portion of these costs may be deductible, depending on the type of vehicle and how it is used for business.
While both avoidance and evasion are ways to reduce taxes, only tax avoidance is legal. Tax avoidance includes using permitted deductions, credits, and planning strategies to minimize liabilities.
Tax evasion, in contrast, involves illegal methods, such as underreporting income or falsifying information, which can result in significant penalties.
Tax rates vary greatly across Europe. Here’s a brief look at top personal income tax rates as of 2024:
Some countries also offer tax incentives for expatriates, like Italy, Greece, and Portugal, which provide tax reductions for non-residents or individuals who qualify for special tax programs.
For expats and freelancers in Greece, there are several strategies to reduce tax liabilities legally. Greece offers a “non-dom” tax regime, which allows foreign residents to pay a flat annual tax instead of a progressive rate, and a 50% tax break for those relocating to Greece for employment or business purposes, provided they meet certain criteria.
Additionally, freelancers working in Greece but deriving income from foreign clients can explore tax exemptions on foreign-sourced income, especially if they qualify for the remittance basis of taxation.
Greece also offers tax deductions on certain expenses for freelancers, such as office supplies, travel expenses, marketing costs, and more.
While taxes are a necessary contribution to public services, you aren’t required to pay more than legally required. By utilizing legal tax reduction methods such as retirement contributions, business expense deductions, and strategic timing, you can ensure a healthy financial future while remaining compliant.
With proactive tax planning, you protect both your finances and your future, keeping more of your hard-earned money and ensuring that you contribute fairly to the tax system.
Need help? We connect our customers to reliable tax experts in Greece to answer their tax-related questions. To find out more, book a 15-minute discovery call to learn more about our services.
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