3 Tax Loopholes for the Merely Middle Class

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By Beth Pinsker

NEW YORK -- Former presidential candidate Mitt Romney's legendary tax deduction for his horse may sound like the ultimate boondoggle of the super rich.

Ditto for writing off the private jet, stashing money in offshore accounts and paying the nanny as a corporate employee.

Here are some other tax loopholes that might be within your reach:

1. Maximize your 529. The tax benefits of a 529 college savings plan are baked right into the plan -- you put in after-tax money and the proceeds grow tax-free, like a Roth individual retirement account. In some 34 states and the District of Columbia, you also get a tax benefit on your state taxes. But there's more to it than that.

Depending on the state, each parent can make a contribution for each child. That's why Patrick Beagle, a financial planner at WealthCrest in Springfield, Virginia, has four accounts for his two children. Beagle and his spouse each contribute the maximum of $4,000 a year for his state's tax break, for a total of $16,000.

You can also "front-load" your 529 savings by making several years of contributions at once, something President Barack Obama and his wife Michelle were able to take advantage of for their two daughters, putting $240,000 away all at once in 2007.

Depending on the state, there may be no time limit on how long your contribution has to stay in the 529 account before you get a deduction. If you have a child who is already in college, you can make your yearly contribution, get the tax credit and then withdraw it for use immediately.

2. After-tax Roth conversions. Want to fill up your Roth but either make too much to qualify or find the $5,500 a year limit too low? You can contribute after-tax money to your 401(k) and convert it to a Roth, thanks to a new Internal Revenue Service notice.

Jim McGowan, a certified financial planner with the Marshall Financial Group in Doylestown, Pennsylvania, altered his tax-planning strategies for many of his clients because of this change.

For those whose companies allow it, McGowan is having clients put aside $20,000 to $30,000 extra in their 401(k)s after they have maxed out the $18,000 allowed with pre-tax money.

The total an individual can save a year, including any matching funds, is $53,000, so there is plenty of wiggle room.

McGowan's clients are just starting to utilize Roth conversions, so nobody has rolled over funds yet. "Potentially, it could be an enormous benefit tax-wise," he says.

Not the least of which is that if you put the same amount in a brokerage account, you'd be paying capital gains every year. But with the extra in a 401(k) and then rolled into a Roth, the funds are sheltered.

Likewise, you can make a "back-door" Roth contribution, even if you are over the income level of $183,000 for singles or $193,000 for married couples.

First, you contribute after-tax dollars to an IRA, which you can do up to the regular limits of $5,500 or $6,500 for those over 55. You can then convert this "non-deductible IRA" at will to a Roth, says Harvey Bezozi, a tax accountant with his own firm in Boca Raton, Florida.

"Some people commingle the funds with a traditional pre-tax IRA, but I like to keep them separate so you can keep track of what you did," he says.

3. 'Business' income. You don't have to buy a farm, like one of Patrick Beagle's clients did, just to get some additional expenses to off-set income. Any small business will do.

Beagle has clients who sell products at home-based parties through companies like Thirty-One and Silpada. This opens up a lot of other deductions because they are using part of their home as an office or to store merchandise. There are also phone costs, office supplies and advertising costs to consider.

And all that guacamole for the handbag party? A legitimate business expense.
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