Author Topic: What are your favorite US tax loopholes?  (Read 12320 times)

nawhite

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What are your favorite US tax loopholes?
« on: November 06, 2013, 10:18:56 AM »
So I know about:
1. Backdoor Roth contributions (if you are above the income cap for a Roth IRA contribution, you can make a traditional contribution and roll it over immediately)
2. IRA Rollover withdrawls (if you want to get money out of your 401k or Traditional IRA without paying income taxes, after you retire and have a low tax rate, each year you rollover whatever you can without hitting the tax caps, then wait 5 years and withdraw the contribution. Do this every year for 5 years and you are set)
3. 72t withdrawls (another way to pull money out of Traditional IRA accounts)

But I'm curious about any other exotic loopholes you use for fun and profit.

My new favorite which I call the "529 redirect" is for people paying for and attending college. After you take the American Opportunity Credit or the Lifetime learning credit, you can still save money on taxes on the rest of your school related expenses. If your state doesn't tax 529 contributions, you can put money into a 529 account and immediately withdraw it to pay for school related expenses. So when we pay tuition, rather than just writing a check from our checking account, we make a 529 deposit of that amount, then the next day a 529 withdraw to the checking account, then write the check to the school. Thus we don't need to pay state income taxes (4.3% in CO) on that money.

This also can be used to pay for "school related living expenses." The financial aid department at your school publishes a number for the expected cost of living at home while attending school. For us this is over $6000 per year. So over the course of the year, we put $6000 into the 529, then take $6000 out of the 529, then deduct the contribution on our state taxes.

What other awesome Tax loopholes do you use or wish you could use?

iamlindoro

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Re: What are your favorite US tax loopholes?
« Reply #1 on: November 06, 2013, 10:27:09 AM »
I was only exposed to it this year as I wasn't making enough consulting income prior to that to do so (and was qualified for my employer plan anyway, making me ineligible until this year), but being both the "employee" and "employer" portion of an Individual 401k when self employed, and contributing up to $51K a year (17.5k "employee", 33.5K "employer"), and the accompanying tax benefits, is pretty damn sweet (and something I'm taking big advantage of this year).  You still pay self employment taxes on the earned amount, but the whole $51K is deducted on line 28 of the 1040 as retirement contributions.

CB

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Re: What are your favorite US tax loopholes?
« Reply #2 on: November 06, 2013, 11:11:49 AM »
...being both the "employee" and "employer" portion of an Individual 401k when self employed, and contributing up to $51K a year (17.5k "employee", 33.5K "employer"), and the accompanying tax benefits, is pretty damn sweet (and something I'm taking big advantage of this year).  You still pay self employment taxes on the earned amount...

If you set yourself up as an S-corp, isn't the "employer" portion of the solo 401(k) safe from the self-employment tax?  As someone looking at moving into self-employed consulting, I had the impression this was the case but haven't done any in-depth research.  Also in the S-corp context you can pay yourself in both salary and dividends.  The latter is safe from SE tax but if you go overboard (like paying yourself $5000 in salary and $90,000 in dividends) you're almost guaranteed to get audited and penalized.

iamlindoro

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Re: What are your favorite US tax loopholes?
« Reply #3 on: November 06, 2013, 11:19:44 AM »
...being both the "employee" and "employer" portion of an Individual 401k when self employed, and contributing up to $51K a year (17.5k "employee", 33.5K "employer"), and the accompanying tax benefits, is pretty damn sweet (and something I'm taking big advantage of this year).  You still pay self employment taxes on the earned amount...

If you set yourself up as an S-corp, isn't the "employer" portion of the solo 401(k) safe from the self-employment tax?  As someone looking at moving into self-employed consulting, I had the impression this was the case but haven't done any in-depth research.  Also in the S-corp context you can pay yourself in both salary and dividends.  The latter is safe from SE tax but if you go overboard (like paying yourself $5000 in salary and $90,000 in dividends) you're almost guaranteed to get audited and penalized.

I truthfully don't know, I'm still in the midst of the learning curve in all this too.  I've worked to date as an individual rather than an S-Corp.  Top of my list of things to do is improve my management of the bookkeeping and disentangle the consulting from my personal finances next year.

catccc

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Re: What are your favorite US tax loopholes?
« Reply #4 on: November 06, 2013, 12:47:43 PM »
Not really a loophole, but there's a retirement contribution credit for those with lower incomes (less than 59K for MFJ, 29.5K for Single, and 44.25K Head of Household).  It's between 10% and 50% of your contribution of up to $2000.  So if you are MFJ with an AGI of $35.5K, and each spouse puts $2K into a roth for a total of $4K, they can get a tax credit of $2K.  Which can be pretty sweet.  Yes, the income limits are low, but if you find yourself in a situation (like mid-year ER), temporary ER, etc, it can be a nice bonus.

Also, I contributed to 401Ks when I was single with a higher tax rate to reduce my taxable income.  Then I got married and after a kid we went down to one income.  So I rolled all those old 401Ks into my Roth IRA, and paid income taxes while in a lower tax bracket.  I can't remember how much I rolled over, maybe 40K?  If so, my savings was about 4K.  (highest tax bracket was 15% when married with one income, and 25% while single.)

brewer12345

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Re: What are your favorite US tax loopholes?
« Reply #5 on: November 06, 2013, 01:17:09 PM »
Not really a loophole, but there's a retirement contribution credit for those with lower incomes (less than 59K for MFJ, 29.5K for Single, and 44.25K Head of Household).  It's between 10% and 50% of your contribution of up to $2000.  So if you are MFJ with an AGI of $35.5K, and each spouse puts $2K into a roth for a total of $4K, they can get a tax credit of $2K.  Which can be pretty sweet.  Yes, the income limits are low, but if you find yourself in a situation (like mid-year ER), temporary ER, etc, it can be a nice bonus.

Also, I contributed to 401Ks when I was single with a higher tax rate to reduce my taxable income.  Then I got married and after a kid we went down to one income.  So I rolled all those old 401Ks into my Roth IRA, and paid income taxes while in a lower tax bracket.  I can't remember how much I rolled over, maybe 40K?  If so, my savings was about 4K.  (highest tax bracket was 15% when married with one income, and 25% while single.)

Holy cow, nearly missed that one!  Sweet.  I plan to limit our MAGI next year for ACA purposes, but will have retirement account contributions somewhere along the way.  A 50% credit up to 2k is awesome.

teen persuasion

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Re: What are your favorite US tax loopholes?
« Reply #6 on: November 08, 2013, 10:46:37 AM »
Not a loophole, but increasing our contributions to DH's 401k both lowers our taxable income and makes us eligible for higher EITC (phaseout rate is something like 21%).  Our state matches EITC at 30%, too. 

So in the 10% bracket and for MFJ w/ 3 kids: Fed tax 10% + state tax 4% + EITC 21% + state EITC 6.3% = 41.3% payback for the 401k contribution.

Payroll contributions to the HSA can be even better, since they avoid 7.65% FICA, for a total of 48.95% payback, at least until we hit the zero fed taxable income level.  Then it is 38.95%.

grantmeaname

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Re: What are your favorite US tax loopholes?
« Reply #7 on: November 08, 2013, 10:51:29 AM »
If you don't make much money then your tax rate is really low. Tee hee.

oldtoyota

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Re: What are your favorite US tax loopholes?
« Reply #8 on: November 08, 2013, 11:00:37 AM »
I was only exposed to it this year as I wasn't making enough consulting income prior to that to do so (and was qualified for my employer plan anyway, making me ineligible until this year), but being both the "employee" and "employer" portion of an Individual 401k when self employed, and contributing up to $51K a year (17.5k "employee", 33.5K "employer"), and the accompanying tax benefits, is pretty damn sweet (and something I'm taking big advantage of this year).  You still pay self employment taxes on the earned amount, but the whole $51K is deducted on line 28 of the 1040 as retirement contributions.

When I was self-employed, my accountant said to be sure not to give myself a paycheck. If I did, I would then have to pay all the associated taxes. However, I was legally allowed to remove money from the business account to use for living expenses.


oldtoyota

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Re: What are your favorite US tax loopholes?
« Reply #9 on: November 08, 2013, 11:02:15 AM »
This is not a loophole, exactly, but I did not want to start a new thread.

If you have kids and work and the kids go to camp, you can use pre-tax dollars to pay for the camp. I always knew that the money could be used for daycare, but I did not know it could be used for summer camp!


seattlecyclone

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Re: What are your favorite US tax loopholes?
« Reply #10 on: November 08, 2013, 11:17:41 AM »
This is not a loophole, exactly, but I did not want to start a new thread.

If you have kids and work and the kids go to camp, you can use pre-tax dollars to pay for the camp. I always knew that the money could be used for daycare, but I did not know it could be used for summer camp!



This is only for day camps. Overnight camps do not qualify. (Link)

grantmeaname

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Re: What are your favorite US tax loopholes?
« Reply #11 on: November 08, 2013, 11:22:46 AM »
I think oldtoyota may be referring to paying for the camp out of an FSA, which is different than the child and dependent care expenses tax credit you link.

Undecided

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Re: What are your favorite US tax loopholes?
« Reply #12 on: November 08, 2013, 03:14:37 PM »
When I was self-employed, my accountant said to be sure not to give myself a paycheck. If I did, I would then have to pay all the associated taxes. However, I was legally allowed to remove money from the business account to use for living expenses.

I'm not saying this is what you did, but within what you've described there is ample room to break the law. E.g., as discussed in a Forbes article, "Payment of a small business owner’s personal expenses from the business is common.  Upon discovering it, the IRS usually responds by imposing civil penalties in addition to tax on the disallowed expenses. Interest accrues on an assessment of tax and penalties."
http://www.forbes.com/sites/stephendunn/2011/07/28/lawyer-charged-with-tax-evasion-for-paying-personal-expenses-from-firm
 

MelodysMustache

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Re: What are your favorite US tax loopholes?
« Reply #13 on: November 09, 2013, 11:02:24 AM »
The mortgage tax deduction comes in pretty handy.  Especially when you live in a high cost area like I do.

Chuck

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Re: What are your favorite US tax loopholes?
« Reply #14 on: November 09, 2013, 12:15:51 PM »

My new favorite which I call the "529 redirect" is for people paying for and attending college. After you take the American Opportunity Credit or the Lifetime learning credit, you can still save money on taxes on the rest of your school related expenses. If your state doesn't tax 529 contributions, you can put money into a 529 account and immediately withdraw it to pay for school related expenses. So when we pay tuition, rather than just writing a check from our checking account, we make a 529 deposit of that amount, then the next day a 529 withdraw to the checking account, then write the check to the school. Thus we don't need to pay state income taxes (4.3% in CO) on that money.

This also can be used to pay for "school related living expenses." The financial aid department at your school publishes a number for the expected cost of living at home while attending school. For us this is over $6000 per year. So over the course of the year, we put $6000 into the 529, then take $6000 out of the 529, then deduct the contribution on our state taxes.
Can I use this if I am going to school on the GI Bill? I know tuition won't be applicable, but what about living expenses?

Mazzinator

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Re: What are your favorite US tax loopholes?
« Reply #15 on: November 09, 2013, 01:32:29 PM »
Ours is for student loans. We contributed the max to a TSP (same as 401k but no match) and contributed (almost maxed, it's complicated) to two tIRA. Plus using the SL deduction. Lowering our AGI by $30,600 (if maxed would be $31k) We do not have FSA or HSA.

This not only saves us in income tax we owe but also made our AGI low enough that we also will get some of the "savers credit" back too. (See catccc earlier post)

This made our AGI low enough, plus 2 kids and living in Hawaii, made us eligible for IBR plan which our SL payment will be lowered to approx $50/month (according to the calculator) saving us approx $200/month in interest.* We plan to pay it off within the next 3 years, but now we can focus on our private loans first, and investing too. A win win.

http://www.mrmoneymustache.com/forum/welcome-to-the-forum/optimize-your-taxable-income/

I had originally contributed to a rIRA earlier in the year but was able to "recharacherize" it to a tIRA to lower our AGI.

http://www.mrmoneymustache.com/forum/ask-a-mustachian/should-we-change-sl-repayment-plans/msg138447/#msg138447

Love this post! Thanks

*Interest payment benefit—If your monthly IBR payment amount doesn’t cover the interest that accrues (accumulates) on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans or Subsidized Federal Stafford Loans (and on the subsidized portion of your Direct or FFEL Consolidation Loans) for up to three consecutive years from the date you began repaying your loan under IBR.
« Last Edit: November 09, 2013, 01:43:29 PM by Mazzinator »

SnackDog

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Re: What are your favorite US tax loopholes?
« Reply #16 on: November 09, 2013, 02:16:46 PM »
Most of the good ones for average people are gone (there are still 70,000 pages of tax code for special people...).  Your best bet is to start a small business and try and capture expenses that way.

Caoineag

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Re: What are your favorite US tax loopholes?
« Reply #17 on: November 09, 2013, 02:18:46 PM »
This year its going to be the contribution to my HSA after tax since I don't have payroll acccess. My $3250 contribution will save me $800 in taxes.

cdub

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Re: What are your favorite US tax loopholes?
« Reply #18 on: November 09, 2013, 10:21:28 PM »
I know if was touched upon before, but anyone who is Self Employed (i.e. 1099) should have an LLC (or other business organization) set up that elects to be taxes as an S corp. You can pay yourself a salary which is well below your actual earnings. Money paid beyond your salary is distributed as dividends that are exempt from all social security/self employment taxes. That is a hefty 15.2 percent savings.

There was also a comment about how much salary you have to pay yourself. I interviewed three CPA's on this particular question. I also spoke with a half dozen attorney's (which is easy, since I am an attorney). The most conservative CPA suggested I should pay myself a salary of at least half of my earning from the previous year. Others suggested my salary just had to be "reasonable" considering my age, experience, training, etcetera.

As an example, I decided to pay myself a salary exactly the same as a County Attorney I had lost a criminal trial to earlier in the year (After all, he did WIN the trial. So, he must be better, right?). That person is the same age as myself, he has the same experience (more actually), same education, and practices in the same field (criminal law/lawyer). I further created an internal memo outlining "cash flow" issues that an independent business can have which would favor a low salary. For example, some months I make very little (this year $1,200 was my worst so far). A bad month can justify a very low salary because you have to be able to make all your payroll and other costs.

I presume a consultant in any field could set a salary based on these types of factors that would be significantly lower than their actual earnings and save $1,520 for every $10,000 of earnings that is paid via distribution rather than salary. In case you wonder about the value of this paperwork/loophole/Mitt Romeny-esque maneuver, I paid a salary of $51,000 and have made salary and distributions of over $206,000 through today (11/9/2013). Notably, $51,000 was nearly half of my income from the year before ($109,000). Thus, so far I have saved $23,250 in taxes. In my opinion, every self employed person should be doing this. Get a CPA and never complain about how much he charges.

As an aside, I don't think I will dramatically increase my salary for next year. I'll give myself the same raise the public attorney gets. Who knows if I will have big cases again next year. Who knows if I will have more $1,200 months. Are there any CPA's who think I am not flying straight?

You might get nailed. I was told not to do such a low salary compared to the divdends otherwise the IRS will nail you declare it salary. I could be wrong. I was told a 70/30 salary dividend split would be safe.

beltim

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Re: What are your favorite US tax loopholes?
« Reply #19 on: November 09, 2013, 10:25:48 PM »
I know if was touched upon before, but anyone who is Self Employed (i.e. 1099) should have an LLC (or other business organization) set up that elects to be taxes as an S corp. You can pay yourself a salary which is well below your actual earnings. Money paid beyond your salary is distributed as dividends that are exempt from all social security/self employment taxes. That is a hefty 15.2 percent savings.

There was also a comment about how much salary you have to pay yourself. I interviewed three CPA's on this particular question. I also spoke with a half dozen attorney's (which is easy, since I am an attorney). The most conservative CPA suggested I should pay myself a salary of at least half of my earning from the previous year. Others suggested my salary just had to be "reasonable" considering my age, experience, training, etcetera.

As an example, I decided to pay myself a salary exactly the same as a County Attorney I had lost a criminal trial to earlier in the year (After all, he did WIN the trial. So, he must be better, right?). That person is the same age as myself, he has the same experience (more actually), same education, and practices in the same field (criminal law/lawyer). I further created an internal memo outlining "cash flow" issues that an independent business can have which would favor a low salary. For example, some months I make very little (this year $1,200 was my worst so far). A bad month can justify a very low salary because you have to be able to make all your payroll and other costs.

I presume a consultant in any field could set a salary based on these types of factors that would be significantly lower than their actual earnings and save $1,520 for every $10,000 of earnings that is paid via distribution rather than salary. In case you wonder about the value of this paperwork/loophole/Mitt Romeny-esque maneuver, I paid a salary of $51,000 and have made salary and distributions of over $206,000 through today (11/9/2013). Notably, $51,000 was nearly half of my income from the year before ($109,000). Thus, so far I have saved $23,250 in taxes. In my opinion, every self employed person should be doing this. Get a CPA and never complain about how much he charges.

As an aside, I don't think I will dramatically increase my salary for next year. I'll give myself the same raise the public attorney gets. Who knows if I will have big cases again next year. Who knows if I will have more $1,200 months. Are there any CPA's who think I am not flying straight?

You might get nailed. I was told not to do such a low salary compared to the divdends otherwise the IRS will nail you declare it salary. I could be wrong. I was told a 70/30 salary dividend split would be safe.

Yeah, I think an owner of a company paying himself a public employee salary is nowhere near a valid benchmark.  If someone offered to hire you for the exact job you're now doing, would you laugh at that salary? If so, it's not a valid comparison. 

SnackDog

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Re: What are your favorite US tax loopholes?
« Reply #20 on: November 10, 2013, 12:50:32 AM »

Yeah, I think an owner of a company paying himself a public employee salary is nowhere near a valid benchmark.  If someone offered to hire you for the exact job you're now doing, would you laugh at that salary? If so, it's not a valid comparison.

I would get a very creative CPA - they are worth their weight in gold.   If the IRS is not occasionally disallowing your deductions, you are probably playing it too safe.   I have a CPA friend in Texas who assisted a public prosecutor (who also had side work) in interesting deductions such as a handgun after his life was threatened by an indictee (disallowed) and a motorcycle to ease stress (allowed).

Pay yourself the very lowest salary you can credibly imagine.  It should be just a few dollars above what would make people completely incredulous.  Argue that you are a crap attorney who doesn't work hard or deserve much.

grantmeaname

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Re: What are your favorite US tax loopholes?
« Reply #21 on: November 10, 2013, 07:02:44 AM »
I would get a very creative CPA - they are worth their weight in gold.   If the IRS is not occasionally disallowing your deductions, you are probably playing it too safe.   I have a CPA friend in Texas who assisted a public prosecutor (who also had side work) in interesting deductions such as a handgun after his life was threatened by an indictee (disallowed) and a motorcycle to ease stress (allowed).

Pay yourself the very lowest salary you can credibly imagine.  It should be just a few dollars above what would make people completely incredulous.  Argue that you are a crap attorney who doesn't work hard or deserve much.
Then, cross your fingers really hard that you don't get audited and owe a huge deficiency over the last decade plus interest and penalties! What a great way to live your life!

mpbaker22

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Re: What are your favorite US tax loopholes?
« Reply #22 on: November 10, 2013, 07:30:39 AM »
Not a loophole, but I donate approximately 10% of my approximately $50K salary to various charities.  That works out to $5000/year which puts me slightly below the standard contributions.  Without a mortgage and with very few other deductions, I would always come out just below the standard deduction.  So, I stagger donations every 3 years.  I know in that odd year I'll have to make a lot of donations, but, for example, this year's tax bill will be incredibly low (just gotta make sure you don't go over any of the other limits).

grantmeaname

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Re: What are your favorite US tax loopholes?
« Reply #23 on: November 10, 2013, 07:44:13 AM »
Do you also stagger your property tax payment? Are you able to?

mpbaker22

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Re: What are your favorite US tax loopholes?
« Reply #24 on: November 11, 2013, 07:22:32 PM »
Do you also stagger your property tax payment? Are you able to?

Was that at me?  I've actually never paid property taxes.  I don't own a house and I avoided owning a car up till about 2 years ago.  The way the tax cycles go, I'm supposed to get my first bill in a month or two.

grantmeaname

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Re: What are your favorite US tax loopholes?
« Reply #25 on: November 11, 2013, 07:29:21 PM »
If you have the discretion (people here in Ohio do) pay your year x bill in January of year x+1 and your year x+1 bill in December of year x+1, where year x+1 is the year you lump your charitable contributions are in. Then you can have three years of charitable contributions and two years of property tax itemized at once and take the standard deduction for the other two. (likewise for miscellaneous employee expenses, elective surgeries that drive your medical expenses over 10% of your AGI, and so on...)

Maybe that's obvious, but I didn't grasp it until it was explicitly pointed out to me.

mpbaker22

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Re: What are your favorite US tax loopholes?
« Reply #26 on: November 11, 2013, 08:00:44 PM »
If you have the discretion (people here in Ohio do) pay your year x bill in January of year x+1 and your year x+1 bill in December of year x+1, where year x+1 is the year you lump your charitable contributions are in. Then you can have three years of charitable contributions and two years of property tax itemized at once and take the standard deduction for the other two. (likewise for miscellaneous employee expenses, elective surgeries that drive your medical expenses over 10% of your AGI, and so on...)

Maybe that's obvious, but I didn't grasp it until it was explicitly pointed out to me.

Interesting.  I never thought about taxes potentially being like that.  Maybe state income tax is similar?  I know I paid for 2 years of registration on my car last month, maybe that will help me, even if it's only $25 (and my marginal tax rate is probably going to be 15% on top of that).

grantmeaname

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Re: What are your favorite US tax loopholes?
« Reply #27 on: November 11, 2013, 08:04:41 PM »
I would think that you wouldn't know your state income tax liability until January, while property tax (here, at least) is available in December of the year before, so you can pay in January and December of the year.