We can’t expect the government to offer us tax deductions. But in instances where they do, that is called a tax break. We often think a tax break is the only legal way to save on your taxes. However, there are other ways to pay less in your taxes legally. One way is through a tax loophole.
Many think that tax loopholes are some tricks that big corporations leverage so they can get away with taxes. But, tax loopholes can be used by individuals to save on taxes. If you are new to this concept, this guide will show you how tax loopholes allow you to legally pay less in certain instances.
What are Tax Loopholes and How Do They Work?
Tax loopholes are shortcomings in legislation or tax law provisions that help companies and individuals lower their tax liability. They allow assets or income to be moved with the intention of avoiding taxes, and legal loopholes are legal means to execute that.
Some individuals would just shrug off these tax-saving strategies as they would think the process is too complex and that they would go through the eye of the needle just for mere savings. Others may choose alternative sources of funding to pay their taxes, such as getting a loan like Spotloan or others.
Many taxpayers also think that tax breaks are the only way to save on taxes, but tax loopholes are a different way. If you haven’t yet figured out how tax loopholes would make sense for you, you should try to talk to a tax professional to understand how you can take advantage of them.
We’ve already emphasized how large companies benefit from tax loopholes. For example, many big American corporations are moving factories and corporate offices overseas to save money on U.S. taxes.
They are called loopholes for a reason. Many of them are unintended as the legislators or regulators of the law haven’t foreseen them. To help you legally move assets to avoid taxes, here are the three common tax loopholes you can take advantage of.
Carried Interest Loophole
For venture capitalists, hedge fund managers, or partners in a private equity firm, knowing about the carried interest loophole could save you big on your taxes. This loophole allows your compensation to be taxed lower than the regular income tax.
Those who earn as much as a hedge fund manager are taxed at the highest marginal rate, while hedge fund managers can take advantage of this loophole to be taxed at a long-term capital gains rate, which is typically much lower than the ordinary income tax rate.
The profits of hedge fund managers are considered carried interest earned over the long term, which are counted as long-term capital gains. Hedge fund managers, partners in another private investment fund, and venture capitalists’ income comes from those long-term capital gains, so their incomes are taxed at the long-term capital gains rate.
Health Insurance from your Employer
For those individuals who are provided with health coverage from their jobs, they owe no taxes on the value of this benefit. Consequently, since the value of their coverage isn’t taxable, this means they don’t have to declare it. This is where it qualifies as a tax loophole.
If you’re looking for a new job, and you are opportune to choose between a job with lower pay but offers health insurance and a job with a better salary without insurance, then you should consider the job with the benefits.
The reason is that when you accept a job with higher pay but no benefits, you will end up paying more in taxes and insurance. But with the other job offer with lower pay, you don’t have to pay anything for health insurance, and you would pay less tax because of your lower income.
You see, knowing what kind of compensation allows you to save on your taxes is important. Based on available data, taxpayers save around $150 billion with this tax loophole.
Save for Your Kid’s College Through a 529 Plan
If you’re putting money in your bank, it will be wise to use that to pay for your child’s college. However, those funds would be the money you’ve paid taxes on. Section 529 of the tax law allows individuals to save money in a 529 college account and allow it to gain value tax-free.
The general law says, “A qualified tuition program shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such program shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations).”
This means it is wise to begin saving money in a 529 college account as early as possible. Your annual contributions will earn you tax savings on your state tax return. Instead of paying the college out of your other savings, moving your funds through your 529 account will help you save big.
Wrapping Up
Tax laws are so complex and they change from time to time. Thus, it will be beneficial to engage with a tax professional to make the most of these potential legal loopholes. Besides this, a tax expert can also look into other applicable tax deductions and strategies that can help you save more on your taxes than those other means that are immediately obvious.
