5 Money-Saving Tax Loopholes About to Disappear

The thousands of pages of the federal tax code -- and the tens of thousands of pages of ensuing regulations and judicial rulings -- offer many ways to reduce your taxes. These arrangements are often nicknamed loopholes when they apply to only some people.
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By Lou Carlozo, Contributor

The thousands of pages of the federal tax code -- and the tens of thousands of pages of ensuing regulations and judicial rulings -- offer many ways to reduce your taxes. These arrangements are often nicknamed loopholes when they apply to only some people. Loopholes can be infamous, but they're not illegal.

And while not all good things financial come to an end -- deferred taxes on retirement accounts, for example -- certain loopholes teeter on the chopping block as though the IRS painted targets on taxpayers' backs. (To be clear: They haven't actually done that. Still, isn't it fun to blame the IRS for pretty much everything?)

Love these loopholes while you can, or learn about the 2015 changes. In the case of one retirement perk, you'd better jump on it now -- even though chances are excellent not even your accountant knows just yet.

1. IRAs: Roll Over and Die

Just a few months ago, you could roll over from one between IRA and another -- or take money out of still another IRA and repay it -- so long as you did it within 60 days. That way, you avoided any tax issues. But if you're hoping to have fun juggling multiple IRAs in 2015, the party's over. As of Jan. 1, you can only roll over once every 12 months. That's not once per account, but once, period -- no matter how many IRAs you own.

Now, here's the very temporary loophole. That 12-month restriction begins in 2015 but isn't retroactive to 2014. The new IRS guidelines for 2015 state that you can begin a second rollover in 2015, even if you completed a previous rollover in late 2014. The only qualifier in this "transition rule" is that 2015 rollover has to involve different IRAs than those you used last year.

2. Absence of Online Sales Tax: Going Out of Business?

If you're one of those shoppers who loves, loves, loves buying items online without an ounce of sales tax, take heed: Congress is bent on passing bipartisan legislation to end that loophole -- and when was the last time you heard "Congress" and "bipartisan" in the same sentence?

As of mid-March, the U.S. Senate reintroduced the Marketplace Fairness Act, a failed bill from 2013 that sought to make it easier for states to collect taxes from internet business. To be clear, online retailers are supposed to do this already. But a loophole that dates to a 1992 Supreme Court Case, Quill Corp. v. North Dakota, means that they don't always have to. Out-of-state customers are exempt from tax if the business lacks a physical presence there, such as a store or warehouse.

Experts predict the Senate bill is bound to become law at some point, since it gives small businesses a leg up. "It will remove the competitive advantage pure online retailers have held over brick-and-mortar retailers," says Scott Smith, senior director of the state and local tax practice at BDO USA in Nashville, Tenn.

Still, it's a mystery why Congress continues to fumble this bill (which collapsed in the House of Representatives as the Main Street Fairness Act). The ineptitude could continue for some time, but with the Senate's revival, you may want to cram in all the tax-free shopping you can while the e-getting's good.

3. Gifts and Bequests: Estate of Uncertainty

In his State of the Union address, President Obama took aim at a tax policy that favors those who've inherited business assets, referring to it as a "trust fund loophole." Here's how it works under current tax law: Let's say you buy $10,000 worth of stock, and it appreciates to $100,000. If you pass it on to your heirs, they will only pay tax on the $10,000 (and anything they gain over and above $100,000 once they sell the stock). Under Obama's plan, some estates would pay capital gains tax on the whole $100,000, while raising the capital gains tax rate as well.

Granted, you may only have to worry about this one if you're really, really rich. Obama's plan targets people making $2 million a year or more, according to the Institute for Policy Studies. That might not be you, but it could be a wealthy person in your family or circle of friends. So should they worry? Not yet: The proposal could be a non-starter in a Republican Congress. But the politics of federal deficits could result in some sort of compromise legislation -- or a lowering of the income threshold in the name of tax fairness. So if you've got a healthy inheritance to pass on, now's the time to explore alternative estate strategies to shield your gains.

4. Small Business Stock: Will the Big Break Come Back or Break Up Big?

Qualified small business stock (QSBS) made for a super-smart investment through 2014, as federal provisions provided for a unique tax break. Thanks to economic stimulus in the wake of the Great Recession, 100 percent of your gains from buying such stock -- yeah, all of it -- remained tax-free, so long as you held the stock for at least five years. That perk almost lapsed for 2014 until the passage of the Tax Increase Prevention Act (TIPA).

The bad news is that the TIPA provisions expired on Dec. 31, 2014; the potentially good news is that they might get revived if another extension hits the president's desk, since he signed the last one. But in the meantime, the tax exclusion has been cut to 50 percent. That translates to an overall capital gains tax of 14 percent. It's too soon to tell which way this one will go; an extension is "hardly a lock," states the CPA Practice Advisor website.

So what should you do? It depends on your viewpoint. If half a loaf is better than none, you may want to invest in QSBS (where the business has less than $50 million in assets). If you'd rather wait for the full loaf, there's no risk in the 50 percent break going away this year. And if you want to jump in as a newbie, you'd better talk to a CPA. The federal rules that surround what a QSBS is (and isn't) are complex to the point of spinning the average investor's head.

5. Roth IRAs: Shutting the Back Door?

Current tax laws pertaining to Roth IRAs leave wiggle room to get around certain income restrictions. Here's how it works: To fully or partially contribute to a Roth, your income must make less than $131,000 (for individual) or $193,000 (for married couples) But there aren't any income limits on making contributions to a traditional IRA: You can put in up to $5,500 annually or $6,500 if you are age 50, according to IRS guidelines. The twist comes through a simple rollover. You take the after-tax money in the IRA and spin it into the Roth, which has a tremendous advantage: You can withdraw money tax- and penalty-free after age 59½.

It's a common strategy, as the AARP points out. And as with the trust fund loophole, Obama has proposed some big changes; he'd shut the Roth loophole entirely, as outlined in his most recent budget. On the one hand, Congress would have to get in back of him, and once again that's a fairly dim prospect. But if it comes down to passing the budget as a whole, the change could sneak through, along with other new retirement account restrictions. So stay tuned on this budget-related battle.

Loopholes are always wonderful when you can take advantage of them legally and completely. But they can and do go away, sometimes without our noticing it. In the end, it's best to maintain an attitude of vigilance and acceptance. If you live for that loophole, keep an eye on it so you don't get caught off guard if change is in the air.

And if it does vanish, try not to get bent out of shape or throw cream pies at your congressman. Take a deep breath, call your financial advisor and look for other smart ways to turn a lamentable loss into generous gain.

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