Taxes are the worst. They’re completely necessary for society, but really they are the worst. It’s rare to find someone that actually wants to pay more to the federal government. In fact, most people are always looking for ways to pay fewer taxes. Here are ten tax loopholes that you can use to help lower your tax burden.
It’s important to remember that taxes and the associated loopholes are incredibly complicated, and this article is not advice. I’m not a tax expert, so make sure you check with someone who is before trying any of these out.
10 Saver’s Tax Credit
The Saver’s Tax Credit is a credit available to low- and moderate-income taxpayers who save for retirement. The amount of the credit is 50%, 20%, or 10% of your retirement plan or IRA contribution, up to $2,000 ($4,000 if married filing jointly).
To be eligible for the full 50% credit, your adjusted gross income must be $30,000 or less. If your AGI is between $30,000 and $40,000, you are eligible for a 20% credit. And if your AGI is $40,000 or more, you are only eligible for a 10% credit.
The great thing about this tax credit is that you can take the Saver’s Tax Credit whether you itemize deductions or take the standard deduction.
9 HSA to Pay Medical Bills
If you have a high-deductible health plan, you can use a Health Savings Account (HSA) to pay for medical bills. You can make tax-deductible contributions to your HSA. The funds can then be used to pay for qualified medical expenses tax-free.
You can withdraw money from your HSA to pay for medical expenses at any time. And if you don’t use the funds in a particular year, the money can be carried over to the next year.
An HSA might be a great account to have, but it isn’t for everyone. Are you generally in good health and want to set up more of a rainy day medical or plan for your retirement? Ask yourself this question before you decide if a Health Savings Account is the right choice for you.
Benefits of an HSA:
- Tax-deductible contributions
- Triple tax savings: contributions, interest, and earnings are all tax-free when used for qualified medical expenses
- It can be used to pay for current and future medical expenses
- No use-it-or-lose-it rule: funds can be carried over from year to year
8 Bad Debt Deduction
If you have debt that you are unable to collect, you can deduct the amount of the debt as a bad debt deduction. Originally this loophole was meant just for businesses to be able to write off any bad debt they have. But thanks to the generic wording used, anyone can deduct the cost of bad debt.
To be eligible for the deduction, the debt must be an actual debt and not a gift. And you must have made a reasonable attempt to collect the debt. To be honest, this seems like a great way to cut some of the dead weight out of your life.
Here’s how to use this deduction:
- It needs to be money that was already reported in your income or was cash you had lying around.
- Once you decide the debt is worthless, no court date is required. You can take the deduction that year.
- Report it as a short-term capital loss
If you have any questions, talk to your tax preparer or accountant, and they can help get you the proper forms and proof needed to make a claim.
7 Gambling Deduction
If you like to gamble, you can deduct your gambling losses up to the amount of your winnings. It sounds like a nice way to make up for that losing weekend in Vegas to me.
The downside is that this deduction is only available if you itemize deductions. And you will need documentation of your wins and losses. And it’s possible that the deduction won’t save you any money if you don’t have a lot of other deductions.
Keep that in mind if you are considering using this deduction. You’d need to have more than $12.5K if you are single or $25.1K if you are married filing jointly.
6 Home Office Deduction
You’re not a stay-at-home parent with an Etsy shop. You are an e-commerce company with a small national team. And because you choose to be a fully remote company, part of your home is used for business purposes. You can deduct the portion of your rent or mortgage interest, insurance, and utilities that go toward running that business.
To be eligible for the deduction, you must use the area regularly and consistently for business.
Using the home office deduction can be a great way to save money on taxes. It looks like it might be time to put that guest bedroom to work for you instead of waiting for it to be used once a year by your in-laws.
Talking to a tax expert about what your business could also open the door to many other deductions. In some circumstances, even your landscaping could be deductible.
5 Try The Ol’ Roth IRA Backdoor Switch-a-Roo
If you make too much money to contribute to a Roth IRA directly, you can still get the benefits of a Roth IRA by contributing to a traditional IRA and then converting it to a Roth IRA.
This loophole is often referred to as the Roth IRA backdoor.
To be eligible for the conversion, you must hold the traditional IRA for at least five years. And you will owe taxes on the amount that you convert. Getting the benefits after five years will be worth it, though. Remember, these are the benefits you get once it’s a Roth IRA.
- Both the growth and the withdrawals are tax-free
- Your heirs can inherit the money tax-free if you do it right
- Your contributions can be withdrawn without penalties.
- Almost anyone can contribute to a Roth IRA
- No required distributions
4 Go Ahead and Write Off That Pool for Medical Reasons
Have you always wanted to have a personal pool? This might be the way to do it. First, you need to have a doctor prescribe swimming as a way to treat either a medical condition or illness. The types of illnesses and conditions that will get you a doctor’s approval are the ones that hydrotherapy treats well. These could include the following:
- Severe Arthritis
- Fibromyalgia
- Chronic Pain
- Chronic Heart Failure
Make sure that you hold onto all of the documentation since the IRS will look into it, and you will have to prove that the pool wasn’t for general exercise or personal use. If you do manage to get a prescription, then the construction costs and the maintenance costs for your pool can be deducted.
3 A Pass-Through Business
If you are self-employed, you can set up a pass-through business to reduce your taxes. A pass-through business is where the income from the business is passed through to the owner and taxed at the owner’s personal tax rate, which is usually lower.
The most common type of pass-through business is a sole proprietorship. But there are also other types, such as S corporations and partnerships. Be sure to talk to an accountant to see if setting up a pass-through business is the right move for you.
2 Give to Charity Freely—It Helps Them and You
If you donate to charity, you can deduct all or most of the amount of your donation from your taxes. Different types of charities have varying percentages that you can deduct from your adjusted gross income. For example, if you donate cash to a public charity, you can deduct up to 50% of your adjusted gross income. But if you donate property, such as a car or a boat, you can deduct the full market value of the property.
There are some things that you need to keep in mind when giving to charity, though:
- The charity must be qualified as a tax-exempt organization by the revenue code.
- You need to document all of your contributions, and if a donation is not made in cash and worth more than $5000, you have to have it appraised
- Unless you’re itemizing, you can only deduct $300 if you’re single or $600 as a couple.
1 Got My 529 Savings—Watchout Private Schools
If you have children, you can save for their education with a 529 plan. Contributions you make to a 529 savings plan are not tax-deductible. But the earnings in the account are not taxed when you pay for any qualified education expenses. Qualified education expenses include the following:
- Tuition
- Fees
- Books
- Room and board
One of the best-kept secrets of the 529 plan is that it doesn’t have to be used solely for your kid’s college. You can also use it to pay for a private school anytime from kindergarten to 12th grade. You can take out up to $10,000 for tuition per student tax-free. That’s pretty cool!