10 tax loopholes that could save you thousands

Tax avoidance strategies aren’t solely for the rich — plenty of tax deductions and credits are available for middle- and low-income taxpayers, too. Here are the best tax loopholes you might be able to take advantage of to lower your tax bill.

What Is a Tax Loophole?

Tax loopholes are simply legal ways to use the tax code to save yourself money. Different loopholes exist for different levels of income, such as low-income tax loopholes that come in the form of tax credits.

Two types of credits are available:

  • Refundable credits: Enable taxpayers to receive refunds even when they have zero tax liability
  • Nonrefundable credits: Enable taxpayers to reduce their tax amounts but don’t increase a refund

Low-income earners are eligible for both types, including the following three credits. Here are 10 tax loopholes you can use to lower your tax bill:

1. American Opportunity Tax Credit

The American opportunity tax credit is an educational tax benefit that replaces and expands on the Hope credit and can be claimed through tax year 2017. It applies to the first four years of college educational expenses and provides a tax break for expenses including tuition, books and other supplies. The credit is worth up to $2,500 per eligible student, and its most attractive feature might be the fact that up to $1,000 of the credit is refundable if you don’t owe any taxes. In other words, if your tax bill is $750 but you earn $1,000 in refundable tax credits, you’re entitled to a refund of $250.

Calculating the credit can be complicated, but the IRS provides instructions both online and on the forms you’ll use to file your taxes. Essentially, you can claim 100 percent of the first $2,000 and 25 percent of the next $2,000 you spend for each eligible student as a credit, which adds up to the maximum credit of $2,500.

To claim the full amount of the credit, you must have a modified adjusted gross income of $80,000 or less, or $160,000 or less if you’re married and filing jointly. The allowable amount of the credit falls as your MAGI rises. Once you top $90,000 — or $180,000 if you’re married and filing jointly — you’re no longer eligible for the credit.

2. Savers Tax Credit

The savers tax credit — formally known as the retirement savings contributions credit — was designed to help lower-income families contribute to retirement plans. If you qualify, this credit essentially pays you to put money in your retirement account. You can write off the first $2,000 of contributions you make to a qualified retirement plan — and a wide range of retirement accounts will qualify, from a 401k to a traditional or Roth IRA.

Whether you can claim the credit depends on your income and filing status. To qualify, you must not be a full-time student or be claimed as a dependent on someone else’s tax return. You must also be 18 years of age or older.

The adjusted gross income limits for claiming the savers credit are as follows:

  • Filing as single: $31,000 in 2017
  • Filing as head of household: $46,500 in 2017
  • Married and filing jointly: $62,000 in 2017

The amount of your credit will be 10, 20 or 50 percent of your contribution, depending on your AGI. For example, for tax year 2017, if you’re married and filing jointly you can claim the 50 percent credit if your AGI is below $37,001. An AGI of $37,001 to $40,000 entitles you to a 20 percent credit and an AGI $40,001 to $62,000 nets you a 10-percent credit.

3. Earned Income Tax Credit

The earned income tax credit was designed specifically to assist low- to moderate-income families. Even single taxpayers can benefit from the credit, however.

Income and the number of children in your household determine the amount of the credit. For tax year 2017, the income limit ranges from $15,010 if you’re single and have no children to $53,930 if you’re married and filing jointly with three or more children.

For 2017, the maximum amount of earned income tax credit is:

  • $6,318 for three or more qualifying children
  • $5,616 for two qualifying children
  • $3,400 for one qualifying child
  • $510 for no qualifying children

You must qualify for the credit by having business income or income from a job. When you’re claiming a qualifying child, he must be younger than 19 unless he’s enrolled as a full-time student, in which case the age limit rises to 24.

See: Know Before You File — Tax Breaks for 2018

Tax Loopholes for the Middle Class

In general, income tax loopholes for individuals in this category are harder to come by, as phase-out rules make them ineligible for a number of credits and deductions. Many credits are designed to help out lower-income taxpayers or pertain specifically to high earners; however, some credits and deductions are available to middle-income earners. Check out these four tax breaks that might help if you fall into this category.

4. Mortgage Interest Deduction

For middle-income taxpayers, your best chance of scoring a big tax break is your home. When you buy a home, you can claim the mortgage interest deduction. You can’t write off your entire monthly payment, but with a qualifying mortgage, you can deduct the interest payments you’ve made all year.

The home mortgage interest deduction allows you to deduct the interest portion of your mortgage payment, but not the principal. The deduction can be a big tax saver, but it makes sense only for those who itemize deductions. When the amount of your mortgage interest deduction exceeds your standard deduction, you’ll save more money if you itemize.

For tax year 2017, the standard deduction amounts are:

  • $6,350 for single filing status
  • $6,350 for married filing separately
  • $9,350 for head of household
  • $12,700 for married filing jointly or qualifying widower

The IRS publishes extensive information on what a qualifying home is and who can claim the mortgage interest deduction. Most standard home mortgage loans qualify, however, as long as the loan is for your primary residence and you are the homeowner.

Explore: 7 Tax Breaks Every First-Time Homebuyer Must Know

5. Lifetime Learning Credit

The lifetime learning credit is an educational tax credit that’s similar to the American opportunity tax credit. When you claim one of these two credits, however, you cannot claim the other. Unlike the refundable American opportunity tax credit, the lifetime learning credit is nonrefundable. You can claim the LLC for an unlimited number of tax years, but the AOTC has a four-year maximum.

The lifetime learning credit lets you claim up to $2,000 to help offset the educational costs of a qualifying student. The credit comes with relatively high modified adjusted gross income caps: $130,000 if you’re married and filing jointly and $65,000 if you’re filing as single, head of household or qualifying widower. You can’t claim the credit, however, if you’re married and filing separately.

The tax credit is available regardless of your age, as long as it goes toward a qualified educational expense. Acceptable expenses include tuition, student activity fees, course-related books, supplies and equipment. 

RELATED: Check out some of the most ridiculous tax loopholes: 

10 ridiculous tax loopholes
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10 ridiculous tax loopholes

1. Alaskan Whaling Captain Deduction

Alaskan whaling captains can avoid tax on up to $10,000 of whaling-related expenses per year. Costs they can deduct include purchasing and maintaining the boat, weapons and gear, food and supplies for the crew, and storing and distributing the catch.

Oddly, whaling captains report these costs as a charitable deduction on their tax returns. Unless someone is authorized by the Alaska Eskimo Whaling Commission, however, whaling is illegal in the United States.

(marchello74 via Getty Images)

2. NASCAR Track Deduction

When a business pays for capital improvements — like building a new office or buying a new machine — it typically deducts those costs over the life of the asset, which could translate into decades. A special exception exists in the tax code for “certain motorsports entertainment complex property placed into service before Jan. 1, 2017,” which refers to NASCAR tracks and other racing facilities. The exception allows businesses to deduct the costs over seven years, which is much faster than usual.

(Onfokus via Getty Images)

3. Hawaii’s Exceptional Tree Deduction

If you take care of an “exceptional tree” in Hawaii, you can deduct up to $3,000 on your state taxes of what it costs you. A local county arborist advisory committee must declare it an exceptional tree and you’ll need an affidavit from the arborist stating the tree’s type and location and what you paid to maintain it. You can take this deduction only once every three years.

(agaliza via Getty Images)

4. Florida’s Rent-a-Cow Deduction

If you live in Florida and want to pay lower property taxes — perhaps on your second home that has a lot of open land — consider renting some cows. Under greenbelt laws, if you use your land for agricultural purposes, your real estate taxes are based on the agricultural value of the land, not its market value.

This deduction doesn’t explicitly state how many cows you have to raise or even that you have to own them. Developers often let a few dozen rented cows roam their land — sometimes even during construction — to lower their property tax bills.

5. New Mexico’s Centenarian Deduction

If you live to be 100 years old, moving to New Mexico will cut your tax bill because you will pay no tax to the state. A caveat: You cannot take the deduction if you claim someone as a dependent. Paying no state income tax might not be a huge break, but if it’s available, take it.

(gece33 via Getty Images)

6. Qualified Performing Artist Deduction

If you’re searching for a tax loophole you can use — one that doesn’t benefit only the 1 percent — the IRS allows qualified performing artists to deduct certain expenses. To qualify, you must have performed for at least two different employers during the year and received at least $200 from each, had business expenses that exceeded 10 percent of your performing arts income and claimed less than $16,000 in adjusted gross income for the year. If you’re married, that $16,000 limit applies to both your spouse’s and your incomes.

(DragonImages via Getty Images)

7. Home Landscaping Deduction

If you regularly see clients at your home office, you might be able to write off a portion of your landscaping costs. The IRS allows a deduction for the portion of your home costs that are related to your home office, so as long as you use your home office exclusively for business, you might be able to take this one. If keeping your lawn looking good for your clients is part of the job, you’re in luck.

(Elenathewise via Getty Images)

8. Personal Pool Deduction

Install a pool for medical treatments and you could be in for a big tax break. One taxpayer suffering from emphysema and bronchitis was prescribed swimming by his doctor as part of his treatment, so he built a pool and wrote off a portion of the costs as a medical expense. He could deduct only the amount by which the installation cost exceeded the home’s increase in value, but he did get to include upkeep costs.

See: 19 Medical Expenses You Can Deduct From Your taxes

(ivanastar via Getty Images)

9. Body Oil Deduction

Deducting body oil on your taxes might sound downright crazy, but you might be able to. One professional bodybuilder needed to shine a little brighter during competition so he applied body oil. When tax season rolled around, he included the cost as a business expense. At first, the IRS disallowed the deduction, but the Tax Court approved because using the oil made him more competitive.

(bekisha via Getty Images)

10. Charity Meat Deduction

Meat packers, butchers and processing plants in South Carolina can earn a $75 state tax credit for each deer carcass they process and donate. You must be licensed with the state or the U.S. Department of Agriculture and you must have a contract with a qualified nonprofit that distributes food to the needy. If you use any of the deer for commercial purposes, you will not qualify for the donation.

Up NextTax Deductions 2017 — 50 Tax Write-Offs You Don’t Know About


Find Out: Common Mistakes People Make When Filing Their Own Taxes

6. Child Tax Credit

The child tax credit is for taxpayers with qualifying children — and they can claim this on top of the earned income credit and credit for child and dependent care expenses. The child tax credit could be worth up to $1,000 per child living in your household.

To qualify, you must claim the child as a dependent on your taxes, and the child must be a U.S. citizen and have lived with you for at least half of the year. You might qualify for this credit if your MAGI is less than the following amounts:

  • $75,000 for single, head of household or qualifying widow or widower
  • $55,000 for married filing separately
  • $110,000 for married filing jointly

The child tax credit is nonrefundable, but if the amount of your credit exceeds the amount of income tax you owe, you might qualify for the additional child tax credit, which is refundable. You’re not eligible for the additional child tax credit if you already receive the full amount of the standard child tax credit.

7. Retirement Savings Accounts

Although taxpayers of all income levels are eligible to contribute to retirement savings accounts, tax benefits are typically available to middle-income earners. Low-income taxpayers often can’t afford to contribute the maximum amount to retirement accounts and high earners are ineligible for tax breaks for certain accounts.

For those who can afford to contribute to retirement savings accounts, however, the benefits can be huge. Contributions to employer-provided 401k accounts and individual retirement accounts are eligible for tax deductions that can reduce your total taxable income.

For example, if you contribute $5,000 to your company 401k plan, the amount of your taxable income drops by $5,000. If you’re in the 25 percent tax bracket, that amounts to a savings of $1,250 in federal tax.

Retirement accounts offer more than an immediate tax benefit: As long as you keep the money in the account, it grows tax-deferred. For a regular brokerage account, you’d owe taxes annually on dividends and capital gains payouts, but if you have a retirement account you pay taxes only when you make a withdrawal from the account.

Contributions to a Roth IRA don’t qualify for a tax deduction at the time you make the deposit — instead, you withdraw your earnings and contributions tax-free once you’re 59.5 years old. Roth IRA contributions come from post-tax income — you pay taxes on your income today, but not in the future.

You don’t get the tax break for Roth IRAs like you do for pretax accounts like traditional IRAs and 401k plans. Pretax retirement accounts are funded with income that hasn’t been taxed, which means you don’t pay taxes upon depositing funds — you pay when you withdraw from the account during retirement.

Tax Loopholes for the Rich

High-income taxpayers face both challenges and benefits when it comes to tax loopholes. On one hand, having a high income makes a taxpayer ineligible for a lot of tax breaks or at least reduces their benefits. On the other hand, many tax breaks are more beneficial for the wealthy because they pay a high tax rate, thereby making savings more valuable. Examine these benefits that might apply to you if you’re a high earner.

Learn AboutTax Strategies the Rich Don’t Want You to Know

8. Capital Gains Tax

Although the capital gains tax loophole is available for all income levels, it benefits high-income earners — or filers in the 25 percent or higher tax bracket — the most. The reason comes down to the progressive structure of the tax system.

The special tax rate on capital gains is beneficial to high-income earners because the tax on long-term capital gains and dividend income for most taxpayers is 15 to 20 percent, depending on their income level. Exceptions include the higher, 25 percent tax rate on unrecaptured Section 1250 gains, which is a type of depreciation-recapture income realized on the sale of depreciable real estate and the 28 percent rate on the sale of collectibles or small business stock.

Meanwhile, the tax rate on a high earner’s ordinary income can be as high as 39.6 percent for the 2017 tax year. This disparity in rates can translate to great tax savings.

For example, say you’re in the highest tax bracket and are about to receive a $100,000 windfall. When this money is taxed as ordinary income, you’ll owe as much as $39,600 in federal income tax or $100,000 times the highest rate of 39.6 percent. But if this income comes in the form of a capital gain, you’d pay only $23,800 in federal income tax or $100,000 times the 20 percent capital gains tax rate plus the 3.8 percent net investment income tax for high earners — which amounts to a savings of $15,800.

9. High-Income Mortgage Interest Deduction

The mortgage interest deduction for middle-income earners can benefit high-income earners even more at tax time. Statistically, higher-income earners are more likely to itemize deductions rather than take the standard deduction, making them more likely to be eligible for the mortgage interest deduction. Additionally, higher-income filers tend to have larger mortgage payments, which increases the amount of their potential mortgage interest deductions.

For example, you generally need a high income to get a mortgage for $1 million, but if you’re paying interest on a mortgage that large, you’ll have more interest to deduct than a taxpayer who pays interest on a $350,000 mortgage.

There’s a limit to this loophole, however. The IRS only allows mortgage deductions on up to $1 million in loans to buy or repair a home. Therefore, the super wealthy with multimillion-dollar homes won’t benefit any more than high-income taxpayers with a mortgage of $1 million or less.

In addition to the mortgage interest deduction, you can deduct up to $100,000 of interest you pay on a home equity loan. And there’s more good news: You can deduct the amount of your property taxes.

10. Carried Interest Loophole

The carried interest loophole basically applies to high-income taxpayers only. Venture capitalists, hedge fund managers and partners in private equity firms are eligible for special tax treatment based solely on their occupations.

The carried interest loophole is a variation on the capital gains tax benefit. Paid compensation in these professions is considered a distribution of investment fund profits, which is called carried interest. Because this income is regarded as an investment profit rather than a salary or wage, it’s taxed at the long-term capital gains rate instead of the regular income tax rate, which can be significant for those in high-income tax brackets.

For example, a $1 million salary would be subject to the 39.6 percent plus a 3.8 percent net investment income tax, which would come to $434,000. When salary is considered carried interest, however, that same $1 million would be subject to only the top 20 percent capital gains rate plus a 3.8 percent net investment income tax, which would come to $238,000.

Find Your Loopholes

Regardless of your income level, there are plenty of tax loopholes you can use. From educational credits to savings on retirement contributions, there are likely deductions or savings that are relevant to you. Use this list as a starting point and see how much you can save. 

Up Next: These Are the Penalties for Filing Taxes Late

This article originally appeared on GOBankingRates.com: 10 Tax Loopholes That Could Save You Thousands

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