Useful Tax Loopholes You May Not Know About
Educated taxpayers view IRS tax debt relief as more of a proactive strategy when armed with the right information. With knowledge of lesser known tax provisions, a taxpayer can actually lessen the amount of their taxes while deriving substantial personal benefits. People tend to ‘jargonize’ many of these tax provisions as tax loopholes.
By definition, a tax loophole is ‘A provision in the laws governing taxation that allows people to reduce their taxes.’ According to the dictionary, the term has the connotation of an unintentional omission or obscurity in the law that allows the reduction of tax liability to a point below that intended by the framers of the law. Unfortunately you won’t find any secrets of the ultra-wealthy, or insider government information in this article. However, here are a few ideas you may not have considered when employing an overall tax strategy for yourself.
Many tax provisions that lower personal IRS tax debt apply to taxpayers who itemize their allowable expenses on their returns. For the taxpayer who cannot amass ‘deductible’ expenses in excess of the government’s predetermined standard deduction, there is no benefit derived from money spent on those items. For many taxpayers, a common, disappointing, example of a useless tax deduction could be the home mortgage interest deduction. If you bought a house on the idea you would benefit from deducting the interest paid, the amount of interest would still need to be substantial enough (in combination with other things) to exceed the standard deduction for that to be true.
This article presents ideas that can benefit most any taxpayer, not just those who itemize or use the ‘long form.’ The idea is to divert the use of your personal income to not only lower your tax bill, but derive other positive benefits as well.
You will love this example. By reading this article you possess the requisite curiosity to learn more. You probably realize that from this reading will come only a little information about tax relief solutions. There is so much more to learn about, well, everything. If you have ever heard; “Pay yourself first.” The Lifetime Learning Credit is the tax-example of that phrase. Here is the perfect example of not only making an investment in yourself, but also lower your taxes.
The Lifetime Learning credit can provide up to a $2,000 per year in direct tax reduction, not income reduction. This tax credit represents 20 percent of the first $10,000 a taxpayer spends for education after high school to an eligible educational institution. This tax credit becomes unavailable to taxpayers with higher incomes that exceed certain thresholds (subject to a phase-out), but doesn’t discriminate based on age.
With today’s fast moving society, the skills employees need to stay relevant are continuously evolving. Continual education is becoming a near certainty and taxpayers may have several career skill-sets throughout their lives. Knowledge, money, finances and taxes are all intertwined; the more a taxpayer can learn, they more they can save and advance their lives. If it has been a while since you graduated high school, or even college, you likely haven’t tapped in to the Lifetime Learning Credit.
If you are not a full-time student and earn below certain income levels, you can use the Saver’s Credit to get a tax credit; another reduction in actual tax, not income, for a portion of your IRA or 401k contributions. For younger taxpayers, consider funding a Roth IRA.
Many young taxpayers files returns and obtain a refund of all of the taxes withheld from their pay. The Savers Credit is a non-refundable tax credit, which means it is available only for lowering your taxes to zero. If a taxpayer’s tax debt is eliminated by allowable deductions and personal exemptions, there is little motivation to look at tax saving ideas such as the Savers Credit. As incomes rise and the taxpayer can no longer eliminate a tax burden, tax reductions from the Savers Credit gain more attention.
The problem with the Savers Credit is many taxpayers only look at one benefit, the tax savings, and overlook the future benefits of the retirement the funding. The beauty of a Roth IRA, especially for a young taxpayer, is they are cheap and easy to set up (as little as $50). The long range benefits are nearly impossible to calculate. By law, if you have had a Roth IRA opened for over 5-years, in the future, tax free withdrawals can be taken from ANY Roth IRA account, regardless of time open. The Roth IRA is a long-ranging financial strategy piece, but for the younger taxpayer during their low income years, they can fund a valuable retirement vehicle and lower the amount they pay in taxes.
After-Tax Roth Conversions
Since you read this article years ago and funded a Roth IRA with just a few bucks, now that you are earning hiring incomes or have retirement on the horizon. As a taxpayer, you want to fill up your Roth IRA but either make too much to qualify or find the $5,500 per year limit too low. You can convert contributions made to a pre-tax 401(k) or Traditional IRA to your Roth.
The tax ramifications and benefits of a Roth conversion are really the topic of financial planning. However, all money in 401K’s and IRA’s will eventually be subject to tax and mandatory distribution; the government is in charge of insuring that occurs. A Roth conversion can give the taxpayer control of when they will recognize the retirement income and subject it to taxation. A Roth IRA is an excellent timing tool for overall tax strategy, especially if you can minimize or eliminate any ‘holding period’ requirements (account being open at least 5 years).
The Gig Economy
This may be for the enterprising taxpayer and will require competent tax expertise; getting it wrong could lead to some need for IRS tax debt solutions or conflict resolution, so getting this right is for the organized record keeper. The gig economy, such as Uber or Lyft ridesharing, allows practically anyone to be a self-employed taxpayer; essentially functioning as a business.
Taxes on business income are calculated differently than taxes on personal income. Generally speaking, a business takes in 100% of every dollar earned, reduces that income by allowable expenses, and the owners pay the tax on what remains. Most personal income has tax withheld by the payer before the taxpayer has use of the funds. If the taxpayer is fortunate, they have sufficient expenses, deductions and credits, to get back as much of what was withheld as possible; possibly only minimizing any additional amount of tax owed.
As a self-employed businessperson of the 21st century gig economy, you enjoy a mix of business and personal tax debt elimination strategies. The miles you drive your automobile that are directly related to the conduct of the self-employment significantly reduce the amount of that income subject to tax.
Self-employed business owners are able to deduct the cost of their own health insurance premiums reducing the amount of income subject to tax. Non-business owners have additional criteria to meet before enjoying any medical expense deductions.
As part of the gig economy, if something is used to benefit your unique business and you can document the reasons for it, you generally can deduct it in some fashion to reduce the amount of business income taxed. An example would be a business owner who gives free beer to prospective clients as an inducement to business. There has been a tax court case that upheld the business owner’s right to deduct the cost of the beer given away as a business expense.
Properly executed, being a self-employed individual, even in addition to other employment for others, can allow the taxpayer to get on with many aspects of their daily lives, increase earnings, and increase the amount of allowable deductible expenses against income to reduce taxes. Self-employment is an overlooked opportunity for many savvy or entrepreneurial taxpayers.
Retirement Savings Accounts
Self-employed business-people have more possibilities for retirement funding than non-business owners which is another advantage. But whether or not the taxpayer is self-employed, or employed by others, itemizes or uses the standard deduction; funding retirement accounts is the most widely recognized and accepted way for reducing your personal taxes and obtaining future tax benefits. While the amounts of contribution for retirement accounts have limitations, and higher incomes tend to negate the immediate tax credit advantages of retirement funding. Funding an IRA or contributing to a company 401K are the ‘standard’ for most taxpayers seeking a ‘loophole’ when filing their taxes.
Help Is Available
Sometimes life does not work out as we anticipate and taxpayers can find themselves looking for solutions to their IRS tax debts. No loopholes will help fix an IRS tax debt problem. If you are unable to pay your taxes, get help from trained experts immediately. Click here to find experts who will perform a comprehensive overview of your situation.
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