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Though controversial tax loopholes existed for years, it wasn’t until the 2016 presidential election that many Americans first heard about these loopholes. These exist as codes within the tax laws that allow businesses and individuals to deduct more money and spend less on their taxes. Even if you are a member of the middle class in America, you may find ways in which these loopholes can benefit you.
Carried Losses
Many Americans learned about the carried losses loophole during Donald Trump’s run for president. A look at his tax returns found that he took a major deduction in the early 1980s that helped his corporation benefit for several decades. The code essentially lets a business owner take a loss from one year and carry over that loss in the coming years. Even if a business turns a profit later, its previous losses can significantly reduce the amount of taxes due or wipe out a tax debt completely. It lets some use losses from past years to avoid paying taxes in the future.
Stock Options
Companies pay taxes based on the amount of income generated, but those companies can get tax breaks when they pay their employees in stock options rather than in cash. According to Dana Liebelson, this loophole may allow 12 tech companies to avoid paying taxes on more than $11 billion in the coming years. The loophole allows the company to take advantage of tax breaks when those workers sell their stocks for a larger amount later.
Student Loan Interest
When you file your taxes, the government lets you take personal and professional deductions to reduce the amount you owe or to get more back at the end of the year. Many people take the standard deduction instead because they cannot fulfill the requirements for deducting other items. If you have student loan debt from your years in college, you can actually deduct the amount that you pay in interest on those loans, even if you only made a few payments in the last year.
Home Sales
The Internal Revenue Service requires that you pay taxes on any income earned in the previous year, including payments you received from a tenant in a rental home you own and money earned from a business you operate out of your home. If you decide to sell your home and make money off that sale, you can take advantage of a loophole to avoid paying the IRS. The IRS only requires payments on capital gains of more than $250,000 for a single person or $500,000 for a couple filing jointly. Unless you sold your home and made more than this amount, you do not owe the IRS a dime.
Second Mortgage
One of the more controversial tax loopholes is the second mortgage loophole. If you own two homes and have a mortgage on both of those properties, you can actually deduct the interest that you pay on the second mortgage. This is controversial because it clearly benefits the wealthy. Those who can afford to buy homes outright might take out a mortgage instead because they can then deduct the interest and drop down to a lower tax bracket, which reduces the amount the government can take from their salaries.
Some people claim that the tax system in America benefits the wealthy because it lets them take more deductions and pay less than others pay at the end of the year. Though many of the more controversial tax loopholes do benefit the rich and powerful, other loopholes like those on home sales and student loan interest also benefit the working and middle classes.