17 ridiculous tax loopholes

Most tax loopholes stem from deliberate tax breaks, usually designed by the Internal Revenue Service to promote some sort of social good or to make the tax code fairer. And when it comes to saving money on taxes, there's no reason not to take advantage of every deduction and credit you can find.

Although you might know most of the tax loopholes that can help you save, there are some that you probably haven't discovered yet because they're a bit quirky. Before you file your next income tax return, here's what you need to know to save extra on your taxes and discover some deductions you might have missed.

Tax Loopholes That Equal Deductions and Credits

From avoiding taxes for living to be a century old to making bank after returning from a gambling trip, these tax loopholes are definitely unusual. Here are 17 tax loopholes you might qualify for...but probably don't:

The most 'ridiculous' tax loopholes to look out for
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The most 'ridiculous' tax loopholes to look out for

1. Yacht Deduction

It isn't really the yacht deduction, but that's what this loophole in the mortgage interest deduction can give you, as long as you borrow the money to buy it. According to IRS Publication 936, the home mortgage interest deduction can be used on any "qualified home." A qualified home can be a mobile home, house trailer or boat, as long as it has sleeping, cooking and toilet facilities.

To take advantage of this tax savings, you can live in your regular house and deduct the interest on that "second house" yacht down at the marina as well. The only catch is that you are allowed a maximum of $1,000,000 in total mortgage balances. 

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2. 15-Days Free Rental Income

The IRS allows you to rent out your home for up to 15 days without having to pay any taxes. Although that might not sound like much for your average house, certain houses, like those near the Masters golf course during the tournament, can earn a big chunk of change in those 15 days. Bottom line: No matter how much rent you charge, you'll owe no taxes.

Learn About: 10 Tax Loopholes That Could Save You Thousands 

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3. HSA Pays Medical Bills Past, Present and Future

Normally to deduct medical expenses on your taxes, they have to exceed 10 percent of your income in a single year. But, thanks to the Health Savings Account, you can effectively deduct your medical expenses from the first dollar, whether they happened this year, years past or even in the future as long as you have a "high-deductible" health insurance plan.

An HSA works like an IRA: You get a tax deduction for saving and investing money now to pay for future medical expenses. But thanks to this loophole, you don't have to do it that way.

Funds in your HSA can be used to pay for any medical expenses that occur after you open the account, regardless of when the contributions were made. You can even save up for years, theoretically reimbursing yourself for medical expenses that occurred decades ago. 

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4. Breast Augmentation Equals Reduction

More and more people have been questioning the U.S. Tax Center at IRS.com about whether breast implants qualify as a tax deduction. For most people, it won't work, but it did for Chesty Love, a stripper and exotic dancer.

The IRS denied the deduction at first, but she ended up winning in tax court. Before you think of following in her footsteps, however, know that to qualify, the surgery has to be both required for employment as well as "unsuitable for everyday use." Love's implants were size 56N. 

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5. Cat Food Calculation

Having a business reason for an expense can make lots of things tax deductible. In this case, a junkyard owner set out cat food to attract feral cats to the property. Once there, the cats also ate rats and snakes providing a benefit to the business.

Unfortunately, you won't be able to deduct cat food for the family pet even if you have a home-based business because, to qualify, the cat has to be exclusively for the benefit of the business. 

Photo credit: Getty

Bengal cat

6. Viva Las Vegas Tax Deduction

As long as you won money on the same trip you experienced gambling losses, the IRS allows tax deductions for gambling, but only up to the amount of your winnings. To take this deduction, you'll have to itemize your tax filing. Additionally, you'll have to keep records, including where and when you gambled and the amounts you won or lost.

To take this tax loophole even further, you'll need to go pro. Professional gamblers get to deduct not only their actual gambling losses but the reasonable cost of expenses that go with trying to earn gambling income. That means a suite at Caesar's Palace and a trip to the Bacchanal Buffet can be deducted as well.

You can't just say you're a pro gambler, though; you need to prove it with the same kind of documentation a regular business would have including receipts, business plans and profit and loss statements.

 Photo credit: Getty

7. Deductions for Deadbeats

With this tax loophole, you can get back some of the money you lent and were never paid back because the IRS allows deductions for bad debts. Although the deduction was designed for businesses who lend money, the loophole is that there is no limitation on who can claim a deduction for a bad debt, and no rules about who the loan was made to — even if it was friends or family.

To take this deduction, the debt must be considered 100 percent worthless, and it has to have been a real debt, not a gift. That means you had an understanding — usually in writing — that you would be paid back, and there is no chance the borrower will ever pay you back.

Just knowing the person won't pay you back won't work. You'll have to take steps to document that you have tried to get the debt repaid. You'll need records of letters sent, phone calls made, in-person demands and so on.

The one loophole that gets you a tax deduction with no effort is if the person declares bankruptcy and lists your loan. Then the loan becomes legally uncollectable, and you can deduct it right away. 

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8. Life Insurance Borrowing Loophole

Sometimes it takes money to benefit from a tax loophole. Certain life insurance policies, such as whole life policies, allow you to pay in money beyond the actual cost of the insurance.

First, just like in an IRA, once the money is inside your life insurance policy, it grows tax-deferred. Next, if you do die, your beneficiaries usually get the payout tax-free with no estate or probate taxes.

The best loophole, however, is that you can borrow money from your life insurance policy without having to immediately repay it. Your life insurance company will just take what they are owed when you die. But, because it's technically a loan, it doesn't count as income — no matter how you spend it. 

Photo credit: Getty

9. The Awesome Vacation Loophole

Business travel can be a drag, but thanks to this tax loophole, you can get a sweet vacation out of it. The expenses of attending a business convention held in fun locations including Las Vegas, New York, Hawaii and even the Caribbean are all tax deductible as long as the reason for the trip was to attend the conference.

Although you can deduct the cost of your airfare, lodging and meals, you can't deduct any expenses for family members you bring along. But there's no reason that they can't stay in the hotel room you already have.

Learn: 50 Easy Ways to Save for Your Next Big Vacation 

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10. Improve Your Home and Lower Your Tax Bill

Several ways exist to deduct home improvements, and one of the best is by having a home office. The IRS allows you take certain deductions, or percentages of deductions, based upon having a home office. For example, if your home office takes up 5 percent of your home's square footage, you can deduct 5 percent of most "whole house" improvements like painting and renovations.

Even better, if your clients come to your home and the presentation of the house is important to your business image, the IRS even allows you to deduct costs like landscaping. Deducting paying someone to mow your lawn is a pretty sweet tax loophole. 

Photo credit: Getty

11. Qualify By Having a Kidnapped Child

Although undeniably the most bizarre loophole on the list and not what anyone would wish for, having a child who was kidnapped qualifies. Kidnapped children count for purposes of tax deductions and as qualifying family members for various deductions and credits. To qualify, law enforcement must believe that the child was kidnapped by someone who isn't a member of the family.

Discover: Take Advantage of These 10 Little-Known Tax Deductions 

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12. The 529 College Double-Dip

Paying for college can be expensive, but some relief exists in the American opportunity tax credit and the lifetime learning credit. You can even deduct tuition and eventually student loan interest. And one tiny loophole that helps people in some states is that you might get a state income tax deduction for money invested in a 529 college savings account.

Also, all of the growth and earnings within the account are tax-free as long as you use them to pay for education. You can get a state tax deduction on the contribution and free capital gains but then still deduct the full amount on your Federal income taxes — or be eligible for the full credit amount when you withdraw and spend the funds. 

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13. Lifer Learning Credit

The lifetime learning credit is designed to help college students, but its loose qualifications leave some interesting loopholes. To qualify, you have to be paying for yourself or your qualifying child. You also have to be going to an eligible educational institution.

Here's where the loophole comes in: You can take this credit forever. There is no limit, and although you can be working toward a degree, you can also take classes to improve job skills, such as cooking classes for a chef or caterer, scuba classes to hone your skills as an instructor and more.

Find Out: 10 Best Tax Tips for Single Parents 

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14. New Mexico’s Centenarian Deduction

For those fortunate enough to live to be 100 years old, moving to New Mexico will cut your tax bill because you won't have to pay state taxes. A caveat: You cannot take the deduction if someone else can claim you as a dependent, so you might want to just say no to living with your kids during your golden years. Although sidestepping the expense of state income tax might not be a huge break, consider it a perk for sticking around for over a century. 

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15. Roth IRA Conversion Workaround

Roth IRA accounts are retirement savings accounts that let you contribute money today, with no tax benefit, in exchange for getting to withdraw all funds, including gains and interest, tax-free during retirement. Although this benefit is restricted from the wealthy by income limits that prohibit Roth IRA contributions by those making more than a certain amount per year, there is a gaping loophole that allows anyone, regardless of income, to convert a traditional IRA into a Roth IRA.

To convert, you have to pay taxes on the gains and interest. But if you convert often, it won't add up to much. In other words, this loophole lets you have a Roth IRA regardless of the income limits. Some folks go so far as to call it, a Backdoor Roth IRA. 

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16. 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. 

Photo credit: Getty

17. Save While Moving Your Pets

To deduct moving expenses, your move must be for work purposes, and it has to pass a qualifying test. First, your move must occur relatively close in time to when you start new employment, usually within one year. Second, your new main job location must be 50 miles farther away from your old home than your original job location.

Deductible expenses include moving your pet and all of its pet supplies, which can rack up savings, especially if you're flying Fido across the country.

Up Next: 6 Tax Breaks for Pet Owners

Michael Keenan contributed to the reporting for this article. 

Photo credit: Getty


This article originally appeared on GOBankingRates.com: 17 Ridiculous Tax Loopholes

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