The Internal Revenue Service allows tax deductions to promote certain behaviors, like saving for retirement, or to make the tax code fair to all taxpayers. Because these deductions can save you money, you’ll want to take all the ones you are entitled to.
Many people think that loopholes are only for the rich, but there are tax loopholes for the poor, tax loopholes for married couples and tax loopholes for single people. Some will allow you to take a deduction that lowers the amount of money you have to pay taxes on; others are tax credits that reduce the amount of tax you have to pay.
Here are some tax loopholes you might not be aware of.
1. Yacht Deduction
A yacht deduction certainly seems like one of those tax loopholes for the rich, but it’s actually a creative use of the mortgage interest deduction anyone can take. In 2018, you can deduct the interest you pay on up to $750,000 in mortgage debt. In order to be eligible, a “home” has to have sleeping, cooking and toilet facilities, which can be a mobile home, trailer or boat. If your primary home is paid off, you could deduct the mortgage interest on that yacht instead.
2. 15 Days of Free Rental Income
The IRS allows you to rent out your home for up to 15 days without having to pay taxes on the income you earn from that rental. This might not sound like much for the average house, but some homes that are located near annual events, like the Masters Golf Tournament or big college football games, can earn a big chunk of change during those big weeks. It doesn’t matter how much you charge to rent your home — you won’t pay taxes on that money, as long as it’s for 15 days or fewer.
3. HSA Pays Medical Bills Past, Present and Future
For the 2018 tax year, your medical expenses need to exceed 7.5 percent of your income to be deductible. But, thanks to the Health Savings Account, you can effectively deduct your medical expenses from the first dollar, whether you incurred them this year, in years past or will even deduct them in the future, as long as you have a high-deductible insurance plan.
An HSA works like an IRA: You don’t have to pay taxes on the money you save and invest to pay for your future medical expenses. But funds in your HSA can be used to pay for any medical expenses that occur after you open the account, regardless of when contributions were made. In 2018, you can save up to $6,900 for a family or $3,450 for a single person. People over age 50 can add a catch-up contribution of $1,000.
4. Breast Augmentation Equals Tax Reduction
The IRS has indicated that breast implants are considered cosmetic surgery and, as such, do not qualify as a medical expense for tax purposes. But Chesty Love, a stripper and exotic dancer, argued that her size 56N breast implants were required for her employment and “unsuitable for everyday use,” which qualified them for a tax deduction.
5. Cat Food Deduction
The cost of food for the family pet is not tax deductible, but if pet food is a business expense, it could be. If a junkyard owner put out cat food to attract feral cats to their property so they would hunt the rats and snakes the business attracted, the expense would be deductible because the cats would be there exclusively for the benefit of the business.
Don’t Miss: 6 Tax Breaks for Pet Owners You Can Actually Get
6. Viva Las Vegas Tax Deduction
If you win money on a gambling trip, you can deduct any losses from the same trip before you calculate the taxes on your winnings. You can only deduct losses up to the amount of your winnings, and you will have to itemize. You’ll have to keep records of how much you won and lost and where your gambling took place.
On your 2018 return, you can also deduct reasonable expenses that you incurred in order to get that big win at the craps table. Reasonable expenses can include things like travel to the casino or racetrack. This deduction had previously been available to professional gamblers only but was expanded in the Tax Cuts and Jobs Act to include amateurs as well.
7. Deductions for Deadbeats
If you loaned someone money and they never paid it back, you might be able to deduct it from your taxes. The deduction was intended for businesses, but the loophole allows anyone to deduct a bad debt, even if the loan was made to a friend or family member.
The loan must be considered 100 percent worthless, and it must be a debt, not a gift. This means that you must have come to an understanding, preferably in writing, that the money would be paid back. It also means that there has to be no chance that you’ll ever get the money back. Often, this means the person that borrowed the money has declared bankruptcy, or that you have called, sent letters and made demands for repayment.
8. The Life Insurance Loophole
If you have a whole life insurance policy that has cash value, you can borrow against the cash value in the policy. It works a bit like an IRA because the money in your policy that doesn’t cover insurance costs grows tax-deferred. Over time, you build up cash value in the policy above and beyond the death benefit. If you die, your beneficiaries get the death benefit, which is paid to them free of federal income taxes. If your estate is large enough, they might have to pay estate tax on the proceeds.
But you can also take a loan out on your policy while you’re still alive, and this loan will also be free of income tax. You will have to pay the loan back, however, with interest. If you don’t, the life insurance company will make the payments with the cash value in the policy. At some point, the payments could exceed the cash value of the policy and lead to a lapse. At that point, you would owe taxes on the amount of the loan that’s more than the premiums you paid into the policy. If you die with a loan outstanding, the amount of the loan is subtracted from the proceeds paid to your beneficiaries.
9. The Home Office Deduction
If you use part of your home as a home office, you can deduct a percentage of your home improvements equal to the percentage of your home’s square footage the office takes up. For example, if your home office represents five percent of your home, you can deduct five percent of the cost of installing central air conditioning. If clients come to your home office and the presentation of your home is important to your business image, the IRS will even let you deduct costs like landscaping.
10. Qualify By Having a Kidnapped Child
This is a tax loophole no one wants to take, but it is there nonetheless. The IRS says that if your child has been kidnapped, and the police presume the child was not taken by a family member, they can still be named as a dependent child and are eligible for the deductions associated with that.
11. The 529 Plan Double Dip Loophole
When you use a 529 plan to pay for college expenses, you don’t have to pay taxes on the amount you earned on the money you invested. In some states, you also get a state income tax deduction for your contributions.
If you qualify based on income limits, you can also take advantage of the American Opportunity Tax Credit or the Lifetime Learning Credit. So you save by letting your college savings grow tax free and getting the credit on top.
12. The Lifetime Learning Loophole
The Lifetime Learning credit is a tax credit — not a deduction — for people who are paying tuition and related expenses for an eligible student. That person could be the taxpayer or a dependent. To be eligible for the full credit, your modified adjusted gross income must be below $56,000 if you’re a single filer, or below $112,000 if you are married and filing jointly.
13. New Mexico’s Centenarian Deduction
This is a tax loophole for the poor or the rich. When you are about to turn 100 years old, you might want to move to New Mexico. Those who have reached the century mark do not have to pay personal income taxes in the Land of Enchantment. You’ll still need to be pretty self-sufficient, though — you can’t claim the break if you are a dependent on someone else’s tax return.
See More: What Are the World’s Best Tax Havens?
14. The Backdoor Roth IRA Loophole
Some income restrictions apply for people who contribute to a Roth IRA, which allows you to set aside after-tax money for retirement and withdraw it, including gains, income tax-free in retirement. But there’s a way around those restrictions.
If you earn more than $120,000 for a single taxpayer or $186,000 as a couple, you make too much to contribute directly to a Roth IRA. But you can contribute to a traditional IRA that’s not deductible, meaning you can’t take a tax deduction on your contribution. You can then convert the regular IRA into a Roth IRA. When you retire, you can withdraw from your Roth IRA without paying income taxes on the money you take out. There are also no mandatory distributions at age 70.5 as there are with a traditional IRA.
15. Personal Pool Deduction
Install a pool for medical reasons and you could take a big tax break. A taxpayer who suffered from emphysema and bronchitis was prescribed a swimming regimen by his doctor a part of his treatment. He built a pool and was able to write off the cost, less the amount that his home increased in value due to the pool. He could also write off the costs of pool upkeep.
16. Pass-Through Business Deduction
Taxpayers who have a pass-through business can deduct 20 percent of the income from the business from their taxable income. A pass-through business is one where the business itself does not pay taxes, such as a sole proprietorship, partnership or S-corp. Income limits apply to this deduction, as well as different rules for different kinds of businesses. If you are a single taxpayer earning less than $157,500 or a couple earning less than $315,000, you can take the deduction. If you earn more than that, you’ll have to take into account the wages you pay employees and your investments like real estate.
More on Taxes
- Everything You Need to Know About Tax Changes for 2018
- These Are the Receipts to Keep for Doing Your Taxes
- Tax Loopholes and Strategies the Rich Don’t Want You to Know
- Watch: Why You Shouldn’t Assume You’re Getting a Tax Refund
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Karen Doyle contributed to the reporting for this article.
About the Author
Brian Nelson is a Denver-based writer who specializes in writing about finance, technology, and other complex topics. As a former Certified Financial Planner, Brian spent years helping people understand their finances and learned that not all successful financial planning is about numbers. Brian has written for numerous financial planning firms, personal finance websites and financial publications including Dow Jones Publications.