Uncle Sam Says: “You Can’t Hide Your Money in a Mattress… But Maybe You Can Tuck Them Away in an IRS Tax Loophole?!
Let’s face it: tax season can feel like a visit from your eccentric Aunt Mildred: confusing forms, mysterious deductions, and enough legalese to make your head spin. And then there’s the whole “loopholes” thing. Those mythical beasts called tax codes supposedly allow the rich and famous to pay next to nothing.
But are these loopholes real tax-avoiding wormholes, or just misunderstood strategies lurking in the depths of the tax code? Buckle up, tax-paying warriors, because we’re about to separate and explore the fascinating (and sometimes hilarious) world of tax “loopholes.”
What Is An IRS Tax Loophole?
A tax loophole is a gap in the tax code that allows individuals to reduce their tax burden in such a way that was not intended by those who created the code.
Think of the tax code as a giant maze. The lawmakers designed the maze with a specific path to follow, but we all know that hidden passages and unexpected shortcuts can lead you out of a maze. Those shortcuts are the tax loopholes.
Examples of common tax loopholes include backdoor Roth IRAs, Carried interest, and life insurance.
Is tax loophole the same as other tax saving strategies? The short answer is no.
For instance, there is a big difference between Tax loopholes, which are legal but often unintended ways you can reduce your tax bill. It is entirely legal and essentially involves exploiting a technicality or ambiguity in the law.
Tax evasion, on the other hand, involves deliberately hiding assets or income to avoid paying taxes, which is considered illegal. Even while using tax loopholes can be risky and attract unwanted attention from the IRS, imagine the big trouble you’ll get into if the IRS catches you evading taxes.
How Do Tax Loopholes Fuel Your Financial Growth?
IRS tax loopholes, credits, and deductions aren’t just about putting more money in your pocket; it’s about stimulating financial growth.
Imagine the huge cost owning a business requires. If you had the opportunity to deduct your business expenses, such as equipment, employee salaries, and equipment, from your taxes, wouldn’t you jump at it? You’re essentially reducing the overall cost of running your business and giving you more leeway to invest and take risks.
How Do People Save Money With Tax Loopholes?
Over $160 billion in tax revenue. That’s how much the US Department of Treasure claims gets lost each financial year through tax loopholes implemented by rich taxpayers compared to what. Here are the top IRS tax loopholes people use to avoid taxes:
- Borrowing Money: Since lenders and banks are more likely to lend to rich people, they often take out huge loans to fund their lifestyles instead of using their finances, which could become taxable.
- Charitable Donations: If itemized, donating property and cash to qualified charity organizations are tax deductible. You can deduct 60% of your AGI (Adjusted Gross Income)
- Family Partnerships: Creating a family-limited partnership reduces your estate taxes by limiting assets considered part of the estate and putting them through a probate process. However, your loophole is only beneficial to people with huge assets to pass on.
- Investing: Investments offer tax benefits from your earned income, especially if you can hold them for over a year. However, you’ll be taxed in the long term at a capital gains rate between 0%-20%
IRS Tax Loopholes For LLCs
As a corporation, a Limited Liability Company provides limited liability protection to its owner; typically, they are protected from personal responsibility for business liabilities and debts. This also means that, like sole proprietorship and general partnerships, an LLC can be taxed as either a corporation or a partnership.
One of the biggest reasons many business owners prefer to set up an LLC is because it offers flexibility and doesn’t require corporate formalities. While there aren’t exactly specific loopholes designed for LLCs, there are tax codes that apply to businesses in general that can benefit LLC owners and essentially cut down their tax liability. Here are some loopholes you can explore:
- Pass-Through Taxation: LLCs are regarded as pass-through entities, which means the business itself isn’t required to pay income tax; rather, the profit and losses pass through to individual members of the LLC and are reported on personal tax returns, which leaves room to explore tax loopholes in many ways.
- Business Deductions: As an LLC owner, you can deduct legal business expenses from your gross income to reduce your taxable income. These deductions include salaries, rent, office supplies, marketing expenses, and more.
- Section 179 Deduction: This allows businesses to deduct the total cost of qualified equipment purchases in the year they are placed in service, significantly reducing their tax burden.
- Health Savings Account: Self-employed LLC owners who meet certain eligibility requirements are allowed to contribute to HSAs. These contributions are tax-deductible and allow your funds to grow tax-free as long as they are used for qualified medical expenses, saving you healthcare costs and potentially lowering your taxes.
IRS tax loopholes can be confusing, but they are about finding the secret tunnels to the maze of tax freedom. But you can’t exploit those loopholes without understanding tax strategies and deductions. That’s why no one is better suited than a tax expert like Tax Goddess to help you save huge tax money!
Looking for an expert tax strategist in your corner? Book a free consultation with the Tax Goddess team today!
