These 7 tax loopholes could save you thousands
Regardless of your income, there are money-saving tax loopholes available to you. Some loopholes apply to everyone but vary in helpfulness depending on your annual salary. Here's a list of tax loopholes by income level that can help you out.
Low-Income Tax Loopholes
"Most tax loopholes come in a form of tax credits which are geared toward the low-income earners," said Argel Sabillo, co-founder of Levee, a mobile tax app. "Credits were created to help taxpayers ease the burden of tax, especially for those who have dependents." Two types of credits exist: Refundable credits allow taxpayers to receive refunds even when they have zero tax liability. Non-refundable credits allow taxpayers to reduce their tax amount due, but cannot increase a taxpayer's refund. Low-income earners are eligible for both types, including the following three credits.
American Opportunity Tax Credit
The American Opportunity Tax Credit is an educational tax benefit; it is the replacement and expansion of the existing Hope Credit and can be claimed through tax year 2017. It applies to the first four years of college educational expenses, including tuition, books and other supplies. The credit is worth up to $2,500, but its most attractive feature for low-income families is the fact that up to $1,000 is refundable if you don't owe any taxes whatsoever.
Saver's Tax Credit
The saver's tax credit — formally known as the retirement savings contributions credit — was designed to help lower-income families contribute to retirement plans. The first $2,000 of contributions to an individual retirement account or 401k can be written off with this credit. Whether you can claim the credit depends on your income and filing status.
The rules for claiming the saver's credit are:
- If you are filing as single, the limit is $30,500 in 2015 and $30,750 in 2016.
- If you are filing as the head of household, the limit is $45,750 in 2015 and $46,125 in 2016.
- If you are married filing jointly, the limit is $61,000 in 2015 and $61,500 in 2016.
The maximum joint credit is $1,000 — $2,000 if married filing jointly — but other credits and deductions can greatly reduce the actual impact that this tax credit might have.
Earned Income Tax Credit
The earned income tax credit is designed specifically with low-income families in mind. The amount of the credit is limited based on income and the number of children in your household. The income limit ranges from $14,820 if you're single and have no children up to $53,267 if you're married filing jointly with three or more children.
For 2015, the maximum amount of earned income tax credit is:
- $6,242 with three or more qualifying children
- $5,548 with two qualifying children
- $3,359 with one qualifying child
- $503 with no qualifying children
Medium-Income Tax Loopholes
In general, phase-out rules make medium-income earners ineligible for a number of credits and deductions. "The upper-middle income earners get the shortest end of the stick when it comes to tax loopholes," Sabillo said. There are some credits and deductions available to medium-income earners, however.
Mortgage Interest Deductions
Filers should itemize mortgage interest if they will have more deductions than the standard deduction amount. "This group doesn't have a lot of deductions available to them," said Sabillo. "The most common — and the largest dollar amount — tax loophole available for this group comes when they purchase a home and claim the mortgage interest deductions, which allows them to deduct the interest portion of their mortgage by itemizing their returns," he said.
For 2015 taxes, the standard deduction amounts are as follows:
- $6,300 for single filing status
- $6,300 for married filing separately
- $9,250 for head of household
- $12,600 for married filing jointly
Lifetime Learning Credit
This educational tax credit is limited to just $2,000 over the lifetime of the claimant but comes with relatively high income caps — $130,000 if filing jointly and $65,000 if filing single. The tax credit is available regardless of age or use as long as it qualifies as an educational expense.
Child Tax Credit
The child tax credit is worth up to $1,000 per child in your household under the age of 17. The child must be claimed as a dependent on your taxes, be a U.S. citizen, and be living with you. The credit is phased-out depending on your filing status and adjusted gross income.
You might qualify for this credit if your AGI is less than the following amounts:
- $75,000 for single filing status
- $55,000 for married filing separately
- $110,000 for married filing jointly
Retirement Savings Accounts
The tax benefits found in retirement plans are huge. The most common are the pre-tax contributions made to 401k accounts and IRAs, which reduce the total taxable amount claimed. Other benefits include tax-deferred growth that allows middle-class families to save for retirement more efficiently. In the case of a Roth IRA, contributions are taxed as they are made, but withdrawals are not taxed.
High-Income Tax Loopholes
Even high-income earners can take advantage of tax loopholes. Two in particular are useful: one to help grow savings faster, and one to increase tax deductions.
Capital Gains Tax
Although the capital gains tax loophole is available for all income levels, it benefits high-income earners — filers in the 25-percent-or-higher tax bracket — the most. This loophole is among the most common — and the most controversial — for high-income earners, Sabillo said.
The capital gains tax loophole is so beneficial to high-income earners because the tax on long-term capital gains and dividend income is only 15 to 20 percent, depending on their income level — as opposed to the tax rate of at least 28 percent on ordinary income. This means that investment income is taxed at a much lower rate than earned income, which has a tax rate of at least 28 percent. Thus, the capital gains tax rate allows wealthy families to grow their investment savings at a much faster pace.
Mortgage Interest Deductions
The same deduction that is a loophole for middle-income earners can also be a boost for high-income earners when it's time to file taxes. If a filer will have more deductions than the standard amount for his filing status, he can itemize his mortgage interest and have it counted as deductible on his tax return. A taxpayer who owns a multi-million-dollar home and who pays interest on a large mortgage will be able to deduct more for their mortgage interest than a taxpayer who pays interest on a $350,000 mortgage.