Useful Personal Finance Loopholes

A lot of personal finance advice is straightforward applications of math: Keep expenses less than income. Pay off highest interest rate debts first. Compound growth is your friend. Then there are obvious legal requirements and benefits: Use tax-preferred retirement / HSA accounts. Keep insurance in force. Know how self-employment taxes work.

This post is about less-obvious but still interesting existing US laws to your advantage. There’s an endless number of these, but some come into play frequently enough that it makes sense to raise awareness about them.  Here are some that you may not already know about:

Tax planning loopholes

  • If you earn less than 30K single / 60k jointly, you can use the Saver’s Credit to get a tax credit for a portion of your IRA or 401k contributions, even for Roth contributions. Full-time students are not eligible. If you contribute to a retirement account (401k or IRA) at low(ish) income levels (see the link in the OP), then a portion of your contribution, up to a limit, is applied directly against your other tax liability. For example, couple making 36K jointly (even if one income) contributes $2K to one or more 401ks (to get a match, say), and now can apply an additional $1000 against their other tax liability as well, either reducing their taxes or increasing their refund in most cases. The exact benefit depends in income and phases out quickly.
  • You pay no taxes at all on long-term capital gains if your taxable income (including those gains) is less than the top of the 15% tax bracket. That could be $95,000 gross income for a married couple filing jointly. This is better than a Roth in that you can do this at any age.
  • Sales of a personal residence often have no capital gains tax as well. Various rules apply.
  • If you rent a room in your house, part of all of your housing expenses (including insurance and utilities) can be Schedule E expense deductions against your rental income (but you need to declare the rental income).
  • Take advantage of “adjustments” like student loan interest, tuition, moving costs, etc., that don’t require itemization if you are eligible.


Retirement planning loopholes

  • Employer contributions to your 401k don’t count against the 18k limit.
  • If you change you mind about making an IRA contribution, e.g. your income becomes too high for it to be allowable, you can simply remove the money before the tax filing deadline without penalty.
  • For redditors with more “life experience”, you can increase your contributions to a 401k and IRA at age 50, and your HSA contributions at age 55.
  • Self-employed people have lots of options for retirement accounts. This can apply even if you have employment retirement savings.
  • Think you make too much to contribute to Roth IRA? Think again! The ever-popular Backdoor Roth IRA may work for you. [But no, I am not adding the Mega-Backdoor Roth. There are some places even I won’t go.]
  • Retirement accounts are often protected for those filing chapter 7 or chapter 13 bankruptcy. If your medical bills or finances are getting the better of you, don’t touch your retirement accounts to pay them off.


Health insurance loopholes

  • If you change jobs and don’t have insurance coverage for a time, you have 60 days to elect continuing (COBRA) coverage. This works retroactively; you can decide to take COBRA at day 59 and be covered for the previous 59 days. Yes, we get that COBRA is expensive. But it’s free if you wait to elect it and don’t need it, but you’re still covered because you can elect it retroactively. Any other health insurance you’d have to pay for but probably still not use.
  • You won’t pay a penalty for lack of health insurance if you have a single brief coverage gap, which is defined as “less than three months.” I.e. May 1 to July 28 is OK. May 1 to July 31 is not.
  • A very important part out of COBRA “loophole” which is yes you have 60 days to apply, and it is retroactive, but you also have 30 days from the date you apply to start making payments. On the 88th day or whatever you can just call and say you know what I changed my mind and as long as you didn’t file any claims against it can cancel it free of charge. So in this scenario you have 88 days under an umbrella of emergency coverage without paying a dime.
  • HSAs -You are able to either contribute directly out of your pay check (like a 401(k)) or deposit whenever you want from a personal account (like an IRA). If you contribute out of your paycheck, you do not need to pay FICA taxes on that amount (SS or Medicare). This gives you an extra 7.65% of what you contributed. If you contribute directly from a personal account you do not get this break, as you have already paid the FICA taxes on that money and there is no provision to get it back come tax time.

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