THE 2026 tax season, when Americans file returns for the 2025 year, is slowly creeping up on us, meaning the time will soon come for many to pay their tax bill.
However, taxpayers can take advantage of three common loopholes that legally reduce their tax liability.
American taxpayers can take advantage of three legal tax loopholes to reduce the amount of taxes they owe[/caption]
Tax loopholes are provisions or ambiguities in tax law that permit individuals and companies to legally reduce the amount of taxes they have to pay.
These loopholes allow taxpayers to move their income or assets to reduce their tax liability, such as when American companies relocate their offices and factories overseas to save money on US taxes.
Many loopholes were unintended by the regulators or legislators who drafted the law and are eventually closed over time.
They differ from tax-saving strategies such as tax deductions or credits that are intentionally made available for Americans to save money when filing their taxes.
Here are three tax loopholes that taxpayers frequently use to help lower their tax bills.
1. CARRIED INTEREST LOOPHOLE
This loophole permits certain income to be taxed at a significantly lower rate than the regular income tax rate.
Because the profit of a hedge fund is considered carried interest realized over the long term, a portion of it can be treated as long-term capital gains.
The income of a hedge fund manager, venture capitalist, or partner in a private equity firm is derived from these long-term capital gains.
Therefore, their compensation is taxed at the long-term capital gains rate rather than the highest marginal tax rate.
2. BACKDOOR ROTH IRAS
Roth IRAs are retirement savings accounts that offer unique tax advantages, such as that your money grows tax-free and qualified withdrawals during your retirement are also tax-free.
However, there are income limits.
For the 2025 tax year, single filers and heads of households bringing in a yearly income of more than $165,000 are not permitted to contribute money into a Roth IRA.
Married couples filing jointly and earning more than $246,000 this year are also unable to put funds directly into a Roth IRA.
However, high earners have been able to work around this restriction by converting a traditional IRA into a Roth IRA.
Are ‘responsible tax refunds’ on the rise?
A new survey shows taxpayers are more likely to spend their refunds on rent, groceries and other necessities, rather than luxuries.
The poll of 2,000 U.S. taxpayers found nearly two in three (64%) have either already spent their tax refund money or are planning to soon. And all agree their refunds will be spent on necessary purchases.
Commissioned by TaxSlayer and conducted by Talker Research, the two-part study compared Americans’ initial tax refund ambitions pre-Tax Day to their post-Tax Day realities.
Four in five who have already spent their refunds spent it on essentials; top spends include bills like rent (58%), groceries (48%), paying down credit card debt (29%) and home repairs (13%).
Likewise, 72% who haven’t already spent their refunds are planning to invest it all in necessities.
The study revealed that participants received more than $2,300 on average in their refunds this year — higher than the average $1,700 that was predicted when the first study on this topic was conducted in December 2024.
Six in 10 (61%) said their refunds are an important part of their budgeting plans for 2025; an increase from 52% who felt the same about the role refunds played in their 2024 budgeting.
When asked in December, only 22% of Americans believed they would receive more this year than last, and 26% believed they would receive less. When asked how much they actually received, one-third (32%) said they received more this year than last year, while 28% reportedly received less.
The primary reasons people believe they received more this year were: working more (37%), adjustment of deductions or withholdings (31%), and getting a pay raise or promotion (16%).
Meanwhile, participants who received a smaller refund amount believe it was likely due to losing work (29%), moving to a higher tax bracket (21%) and having dependents age out of eligibility (11%).
Sixty-two percent felt happy and surprised by the amount they received; another major increase from last year, when a mere 40% recalled feeling happy with their 2024 tax refund.
This loophole, called a backdoor Roth IRA, has been open since 2010.
Once a taxpayer pays their income taxes on the initial contributions and gains, their retirement savings can grow tax-free without required minimum distributions.
3. FOREIGN-DERIVED INTANGIBLE INCOME
Foreign-Derived Intangible Income, or FDII, is a tax incentive created under Trump’s 2017 Tax Cuts and Jobs Act.
The tax law created the loophole to encourage American businesses to keep their intellectual property, such as patents and trademarks, in the US.
Many US corporations would previously move their intellectual property to foreign countries with lower tax rates in order to reduce their overall tax burden.
The FDII loophole was created to counteract this trend by incentivizing American companies via a lower tax rate to domestically develop, manage, and own their intellectual property and export from the US.
The reduced tax rate applies to income from foreign sales only if it is generated from intellectual property held within the US.
As the 2026 tax season inches closer, the new IRS boss confused millions with a tax timeline mix-up that could force Americans to file late.
Meanwhile, the IRS dropped a 2025 decision that millions need to see, sparking paycheck panic.
Tax loopholes are provisions in the tax code that permit taxpayers to move their income or assets to reduce their tax liability[/caption]
