DEDUCTIONS FOR DEADBEATS
With this tax loophole, you can get back some of the money you lent and were never paid back because the IRS allows deductions for bad debts. Although the deduction was designed for businesses who lend money, the loophole is that there is no limitation on who can claim a deduction for a bad debt, and no rules about who the loan was made to — even if it was friends or family.
To take this deduction, the debt must be considered 100 percent worthless, and it has to have been a real debt, not a gift. That means you had an understanding — usually in writing — that you would be paid back, and there is no chance the borrower will ever pay you back.
Just knowing the person won’t pay you back won’t work. You’ll have to take steps to document that you have tried to get the debt repaid. You’ll need records of letters sent, phone calls made, in-person demands and so on.
The one loophole that gets you a tax deduction with no effort is if the person declares bankruptcy and lists your loan. Then the loan becomes legally uncollectable, and you can deduct it right away.
LIFE INSURANCE BORROWING LOOPHOLE
Sometimes it takes money to benefit from a tax loophole. Certain life insurance policies, such as whole life policies, allow you to pay in money beyond the actual cost of the insurance.
First, just like in an IRA, once the money is inside your life insurance policy, it grows tax-deferred. Next, if you do die, your beneficiaries usually get the payout tax-free with no estate or probate taxes.
The best loophole, however, is that you can borrow money from your life insurance policy without having to immediately repay it. Your life insurance company will just take what they are owed when you die. But, because it’s technically a loan, it doesn’t count as income — no matter how you spend it.
THE AWESOME VACATION LOOPHOLE
Business travel can be a drag, but thanks to this tax loophole, you can get a sweet vacation out of it. The expenses of attending a business convention held in fun locations including Las Vegas, New York, Hawaii and even the Caribbean are all tax deductible as long as the reason for the trip was to attend the conference.
Although you can deduct the cost of your airfare, lodging and meals, you can’t deduct any expenses for family members you bring along. But there’s no reason that they can’t stay in the hotel room you already have.
