If you’ve been wondering whether it’s possible to accrue a smaller tax bill, you’re in luck. In this article, we explore all the loopholes you could take advantage of; though Uncle Sam wouldn’t want you knowing about them.
But first, what is a tax loophole? Tax loopholes are not tax breaks, but they are provisions which drain money from the government. The loophole is a provision in the tax codes allowing you the opportunity of reducing your tax liability. They could be thought of as the domains of businesses and corporations in the business world. It appears that these loopholes extend to individual taxpayers as well.
And, even though they have interesting gaps in the tax codes, they are perfectly legal. Since these gaps appear black and white from the surface, a closer look reveals more about them. What this also means is that identifying the loopholes requires expert eyes – you need to know what you are looking for exactly to know when you’re dealing with a tax loophole.
A tax lawyer Vancouver may help you with this, but we’ve compiled some of the important ones you should know.
You also need to know that these opportunities vary depending on your financial status and your income level.
Which are some of the tax loopholes available for the low-income earners?
These tax gaps are in the form of tax credits that are specifically designed for the low-income earners. They include the refundable credits which enable taxpayers to get refunds even when they have a zero tax liability. You also have the nonrefundable credits which refer to the tax gaps that allow taxpayers to lower their amounts of tax though this doesn’t increase the tax refund given.
But, these are not the only gaps available. As a low-income earner, you could also take advantage of the following loopholes
- Saver’s Tax Credit
This was known as the retirement savings contributions credit previously. It refers to a tax credit that aims to help the low-income families to contribute towards retirement.
If the IRS deems you legible for the saver’s tax credit, it pays you to put money in your retirement account. This credit lets you write off your first $2,000 in the contributions you make to create a qualified retirement plan.
The best part is that different types of retirement account will qualify for this including the traditional IRA, Roth IRA, and 401k accounts. And, you don’t have to be a full-time student or even claimed as a dependent to qualify. But, you have to be over 18 years old.
Note that your income and your filing status will determine if you can make a claim or not. Depending on your AGI, your credit could be 10, 20, or 50 percent of your contributions to the account.
- The American Opportunity tax credit
This refers to educational tax benefits which replace and also expands the Hope credit, and you could claim at any time during the year. This gap only applies to your first four years of your college educational expenses. It gives you tax breaks for expenses like books, tuition, and educational supplies.
How much is it? You could get as much as $2,500 in credit, and the best part is that up to $1,000 out of the credit could be refundable as long as you don’t owe any taxes.
The application and the calculating process is however complicated though the IRS issues simple online and hard-copy forms you can use to file your returns. Note that to claim the whole amount of your American Opportunity Tax Credit, you require a modified adjusted gross income of about $80,000 and that the allowable credit will fall if your MAGI increases.
- Earned Income Tax Credit
This tax gap aims at helping the low-to-moderate income earning families, and single taxpayers can benefit from it too.
The only catch is that the earned income tax credit is tied or dependent on your income and the number of children in your home. And, you must have a business income or employment income to qualify.
Middle-Class and Rich Tax Loopholes
- Capital gains tax
The capital gains tax refers to the tax you owe the IRS after the sale of an asset if the selling price is higher than the cost of buying and expenses which could have contributed to the improvement of the asset or even its sale. In the sale, your profit is the difference which is reportable in form 1040.
Wondering why this is a loophole? Well, the capital gains tax rate used is lower than income tax rates, and so, you’ll pay less tax by selling your assets (investment income).
- The Home Mortgage Interest Deduction
This is a loophole that cost the government about $69 billion in 2017. With the high-income earners likely to itemize their deductions instead of taking the standard deductions by the IRS, it means that these individuals are eligible for the mortgage interest deduction. Also, these high-income earners have higher mortgage payments, and this increases the deductions. So, you can make a lot or of this.
The only catch is that the IRS has set a limit to this loophole and you can only make mortgage deductions of up to $1million. You still have a large amount in interests to deduct if paying interest on the mortgage. You also get to deduct a maximum of $100,000 of the interest you’re paying on your home equity loan. You’ll also like that you can deduct the cost of your property taxes.
- Retirement Savings Accounts
This applies to the middle-income earners. And, though all income levels can contribute towards a retirement savings account, these benefits apply to middle-income earners as they can contribute the maximum possible amount on their retirement accounts. When contributing to the retirement savings accounts, you get huge tax deductions which can reduce your overall taxable income.
Also, since the retirement accounts could offer more than immediate tax benefits as long as the money remains in the account where it grows continuously as tax-deferred. Whole ordinary brokerage accounts mean that you owe annual taxes, the retirement accounts let you pay taxes only if you withdraw money from the account.
- Employer-Paid Health Insurance Benefits
Did you know that you don’t need to claim as income the value of the health insurance paid by your employer? Yes, these insurance benefits are not part of your taxable income, and they are your compensation – tax-free.
- Child Tax Credit
This tax credit applies to the taxpayers with qualifying children. You can claim this tax credit on top of your earned income credit as well as the credit for your child’s and your dependent’s care expenses. All you need to get it is to claim that your child depends on your taxes and your baby should be a US citizen.
While the child tax credit is nonrefundable, you can get it refunded if the value of the credit exceeds the income tax you owe the IRS.
Other tax loopholes include the 529 college savings plan, Lifetime Learning Credit, and the Carried Interest Loophole.
So, your income level notwithstanding, which tax loopholes can you use to save more money? Life is hard enough, isn’t it?