22 Ridiculous Tax Loopholes
The U.S. tax code contains many overly specific deductions that can seem downright ridiculous. While complex tax loopholes allow large corporations and wealthy individuals to significantly reduce their tax bills, there are lesser-known provisions that benefit average taxpayers as well.
For example, did you know you can write off gambling losses even though gambling winnings are taxed as income? Or that clarinet lessons for your child can be deductible as a medical expense if claimed as a treatment?
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Other deductions seem silly on their face, like writing off the costs of tax preparation itself or business expenses incurred while commuting. Though they may seem absurd, filers are wise to identify every allowable deduction around tax season — no matter how small or ridiculous. That $50 deduction for job search expenses may appear laughable, but it allows taxpayers to hold onto $50 more dollars that would have otherwise gone to Uncle Sam.
Before you file, GOBankingRates is going to help you comb through the tax code and IRS publications for overlooked and obscure breaks. While the loopholes benefiting large corporations and the ultra-wealthy should be scrutinized, average taxpayers can also find ridiculous yet legal ways to reduce their tax bill.
Yacht Deduction
A yacht deduction certainly seems like one of those tax loopholes for the rich, but it’s actually a creative use of the mortgage interest deduction anyone can take. You can deduct the interest you pay on up to $750,000 in mortgage debt. (If you are married filing separately, the limit drops to $375,000.)
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To be eligible, a “home” has to have sleeping, cooking and toilet facilities, which can be a mobile home, trailer or boat. If your primary home is paid off, you could deduct the mortgage interest on that yacht instead.
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15 Days of Free Rental Income
The IRS allows you to rent out your home for up to 15 days without having to pay taxes on the income you earn from that rental.
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This might not sound like much for the average house, but some homes that are located near annual events, like the Masters Golf Tournament or big college football games, can earn a big chunk of change during those big weeks. It doesn’t matter how much you charge to rent your home — you won’t pay taxes on that money, as long as it’s for 15 days or fewer.
HSA Pays Medical Bills Past, Present and Future
Your medical expenses need to exceed 7.5% of your income to be deductible. But, thanks to the health savings account, you can effectively deduct your medical expenses from the first dollar as long as you have a high-deductible insurance plan.
An HSA works like an IRA: You don’t have to pay taxes on the money you save and invest to pay for your future medical expenses. But funds in your HSA can be used to pay for any medical expenses that occur after you open the account, regardless of when contributions were made. You can save up to $4,150 for individuals and $8,300 for families. People ages 55 and older can add a catch-up contribution of $1,000.
Breast Augmentation Equals Tax Reduction
The IRS has indicated that breast implants are considered cosmetic surgery and, as such, do not qualify as a medical expense for tax purposes. But Chesty Love, a stripper and exotic dancer, argued that her size 56N breast implants were required for her employment and “unsuitable for everyday use,” which qualified them for a tax deduction.
Cat Food Deduction
The cost of food for the family pet is not tax deductible, but if the pet food is a business expense, it could be.
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If a junkyard owner put out cat food to attract feral cats to their property so they would hunt the rats and snakes the business attracted, the expense would be deductible because the cats would be there exclusively for the benefit of the business.
Viva Las Vegas Tax Deduction
If you win money on a gambling trip, you can deduct any losses from the same trip before you calculate the taxes on your winnings. You can only deduct losses up to the amount of your winnings, and you will have to itemize. You’ll have to keep records of how much you won and lost and where your gambling took place.
On your 2024 return, you can also deduct reasonable expenses that you incurred to get that big win at the craps table. Reasonable expenses can include things like travel to the casino or racetrack.
Deductions for Deadbeats
If you loaned someone money and they never paid it back, you might be able to deduct it from your taxes. The deduction was intended for businesses, but the loophole allows anyone to deduct a bad debt, even if the loan was made to a friend or family member.
The loan must be considered 100% worthless, and it must be a debt, not a gift. This means that you must have come to an understanding, preferably in writing, that the money would be paid back. It also means that there has to be no chance that you’ll ever get the money back. Often, this means the person who borrowed the money has declared bankruptcy or that you have called, sent letters and made demands for repayment.
The Life Insurance Loophole
If you have a whole life insurance policy that has cash value, you can borrow against the cash value in the policy. It works a bit like an IRA because the money in your policy that doesn’t cover insurance costs grows tax-deferred.
Over time, you build up cash value in the policy above and beyond the death benefit. If you die, your beneficiaries get the death benefit, which is paid to them free of federal income taxes. If your estate is large enough, they might have to pay estate tax on the proceeds.
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But you can also take a loan out on your policy while you’re still alive, and this loan will also be free of income tax. You will have to pay the loan back, however, with interest. If you don’t, the life insurance company will make the payments with the cash value in the policy. At some point, the payments could exceed the cash value of the policy and lead to a lapse.
At that point, you would owe taxes on the amount of the loan that’s more than the premiums you paid into the policy. If you die with a loan outstanding, the amount of the loan is subtracted from the proceeds paid to your beneficiaries.
The Home Office Deduction
If you use part of your home as a home office, you can deduct a percentage of your home improvements equal to the percentage of your home’s square footage the office takes up.
For example, if your home office represents 5% of your home, you can deduct 5% of the cost of installing central air conditioning. If clients come to your home office and the presentation of your home is important to your business image, the IRS will even let you deduct costs like landscaping.
Qualify by Having a Kidnapped Child
This is a tax loophole no one wants to take, but it is there nonetheless. The IRS says that if your child has been kidnapped, they can still be named as a dependent child and are eligible for the deductions associated with that, such as for the Earned Income Tax Credit.
The 529 Plan Double Dip Loophole
When you use a 529 plan to pay for college expenses, you don’t have to pay taxes on the amount you earned on the money you invested. In some states, you also get a state income tax deduction for your contributions.
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If you qualify based on income limits, you can also take advantage of the American Opportunity Tax Credit or the Lifetime Learning Credit. So you save by letting your college savings grow tax-free and getting the credit on top.
The Lifetime Learning Loophole
The lifetime learning credit is a tax credit — not a deduction — for people who are paying tuition and related expenses for an eligible student. That person could be the taxpayer or a dependent.
The LLC phases out gradually if your modified adjusted gross income (MAGI) falls within a certain range. Specifically, the allowable credit amount decreases for MAGI between $80,000 and $90,000 for single filers, and between $160,000 and $180,000 for joint filers.
You can’t claim any of the low-income housing tax credits if your MAGI equals or tops $90,000 for single returns or $180,000 for joint returns.
New Mexico’s Centenarian Deduction
This is a tax loophole for the poor or the rich. When you are about to turn 100 years old, you might want to move to New Mexico. Those who have reached the century mark do not have to pay personal income taxes in the Land of Enchantment.
You’ll still need to be pretty self-sufficient, though — you can’t claim the break if you’re a dependent on someone else’s tax return.
The Backdoor Roth IRA Loophole
Some income restrictions apply for people who contribute to a Roth IRA, which allows you to set aside after-tax money for retirement and withdraw it, including gains, income-tax-free in retirement. But there’s a way around those restrictions.
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If you earn more than $138,000 to $153,000 for a single taxpayer or $218,000 to $228,000 as a couple, you make too much to contribute directly to a Roth IRA. But you can contribute to a traditional IRA that’s not deductible, meaning you can’t take a tax deduction on your contribution. You can then convert the regular IRA into a Roth IRA.
When you retire, you can withdraw from your Roth IRA without paying income taxes on the money you take out. There are also no mandatory distributions at age 72 as there are with a traditional IRA.
Personal Pool Deduction
Install a pool for medical reasons and you could take a big tax break. A taxpayer who suffered from emphysema and bronchitis was prescribed a swimming regimen by his doctor as part of his treatment. He built a pool and was able to write off the cost, less the amount that his home increased in value due to the pool. He could also write off the costs of pool upkeep.
Pass-Through Business Deduction
Taxpayers who have a pass-through business can deduct 20% of the income from the business from their taxable income. A pass-through business is one where the business itself does not pay taxes, such as a sole proprietorship, partnership or S-corp.
Income limits apply to this deduction, as well as different rules for different kinds of businesses. If you are a single taxpayer earning less than $191,950 or a couple earning less than $383,900, you can take the deduction. If you earn more than that, you’ll have to take into account the wages you pay employees and your investments like real estate.
Carried Interest Loophole
Hedge fund managers, venture capitalists and partners at private equity firms can benefit from this tax loophole.
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These individuals get their income from funds whose profits are considered carried interest realized over the long term, so their income is taxed at the long-term capital gains rate rather than at the standard income tax rate.
That means that even if they make enough to be taxed at the top tax rate — 37% — their income is only taxed at the lower, long-term capital gains rate, which is 20%.
Clarinet Lesson Deduction
Individuals who itemize their medical and dental expenses might be able to write off their child’s musical instrument lessons.
In 1962, the IRS ruled that a taxpayer could deduct their child’s clarinet lessons as a medical expense because the lessons were prescribed by an orthodontist as a way to treat the child’s congenital defect.
Hawaii’s Exceptional Tree Deduction
The state of Hawaii encourages its inhabitants to grow and take care of “exceptional trees” — trees that meet a number of criteria including cultural value, rarity and aesthetic quality. If you maintain an exceptional tree, you can claim an individual tax deduction of up to $3,000 per tree once every three years.
Florida’s Cow Deduction
Florida’s Greenbelt law allows property owners who use their land for agricultural purposes to pay taxes on the land based on its use value rather than its market value — and the use value is typically lower.
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Some developers take advantage of this tax law by temporarily converting their land into agricultural space by renting cows to keep on the land during the time of its assessment, The Atlantic reported.
Performing Artist Tax Break
Qualified performing artists can deduct performing arts-related business expenses even if they don’t itemize deductions.
To be deemed a qualified performing artist, you must have performed for at least two employers during the tax year, received wages of $200 or more from each employer and had allowable income expenses attributable to the performing arts of more than 10% of your gross income from performing and had an adjusted gross income of $16,000 or less before deducting expenses.
South Carolina’s Charitable Deer Meat Deduction
Individuals who donate deer meat to charity qualify for a tax credit under South Carolina law. To qualify for the credit, you must have a license to operate as a meatpacker, butcher or processing plant, and donate part of a contract with a nonprofit that distributes food to the needy.
If any portion of the prepared deer meat you donated was used for a commercial enterprise, you won’t qualify for the credit.
Laura Beck, Cynthia Measom, Karen Doyle and Gabrielle Olya contributed to the reporting for this article.
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