Tax breaks aren’t the only way to save on your taxes. There are little holes in the tax rules that allow you to legally pay less in certain circumstances. This article looks at three such possibilities.
Tax breaks are obvious, legal ways in which you get to save on your taxes. A tax loophole is a legal way to save on your taxes, too — except that loopholes tend to be lacunae in the tax code that aren’t obvious. People tend to think of tax loopholes as tricks that big corporations pull to get out of paying taxes, but there are many possibilities open to individuals, as well. Your tax professional should be able to identify how these make sense for you, and help you make use of them.
What follows is a quick rundown of three different tax loopholes that you could talk to your tax professional about.
Paying capital gains tax instead of regular income tax
You owe taxes when you sell property at a profit over your basis (the sum that you pay for it to begin, together with a few select kinds of expenses). You report your profit on Form 1040. In 2020, it was taxed at 15 percent — lower than the 22 percent that regular income in the form of salary attracted. If you could change the way you made your income and switched primarily to acquiring and selling property, you would pay far less in income tax each year than you would working a regular job. According to the Joint Committee on Taxation, taxpayers collectively save about a trillion dollars in income tax through this loophole each decade.
Health insurance from your employer
If you get your health coverage from your job, you should know that you owe no taxes on the value of this benefit. This means that you don’t have to state the value of your coverage as income — it simply isn’t taxable to begin. This could present you with a tax loophole, however, if you’re looking for a new job. If you get to choose between a job with a higher pay level but no health benefits, and a job with lower level pay but with health benefits, it would make sense to consider the job with the benefits.
If you took the position with higher pay but no benefits, you would pay more taxes, and you would be out of pocket to buy your own health insurance, on top. If you took the other position, on the other hand, you wouldn’t need to spend anything on health insurance, and you would pay lower taxes on your lower income, as well. Knowing what kind of compensation allows you to pay a lower level of tax can be money in your pocket. Each year, taxpayers are collectively estimated to save about $150 billion using this loophole.
Using a 529 plan to save for your kid’s college
You could directly pay for your child’s college out of money in your bank. That, however, would be money that you’ve paid taxes on. Section 529 of the tax law lets you save money in a 529 college account to allow it to gain value tax-free. If you plan to send your child to college, you could begin to put money away in a 529 plan well in time. Your contributions each year would earn you a tax saving on your state tax return. Simply moving your money through a 529 instead of paying the college out of other savings gives you substantial tax savings.
Tax laws change from time to time. For this reason, it’s important to get in touch with a tax professional before you begin planning to take advantage of potential loopholes. These ideas, however, do help you see how there may be more to saving on your taxes than might be immediately obvious.
