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I'm wondering how exactly using tax loopholes work? How does one find them?
USA How do tax loopholes work
- Thread starter Pisces Adonis
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A loophole is an ambiguity in a system Loophole - Wikipedia, the free encyclopedia. Because of that ambiguity a tax payer can pay a reduced amount of tax. And there are quite a few of them (depending on jurisdiction) and different loopholes work in different ways. So there is no way of saying how does a "tax loophole" work.
The most popular example of a tax loophole is where if say you operate your business in the USA and are paying 30% tax you could shift the management of the company to a country with a rate of 10% and save yourself 20% in taxes...(I saw a good diagram in a news article of how one worked in the UK a few days ago so I'll try and post the link)
How do you find them?? Some of them aren't that difficult to identify, but you have to understand the tax law (usually in several jurisdictions)....
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And the tricky thing about loopholes is that they have a way of closing just when you least expect it. Rather than trying to identify them yourself, consulting a tax professional might help you find the more durable ones.
A lot of what people refer to as "tax loopholes" are really intentional features of the taxing system that are intended to provide an incentive for taxpayers to take a certain action. For example, wealthy people can reduce their taxes by making large charitable gifts or companies can reduce their taxable income by spending money on research and development expenses. But that is because the people who wrote the laws believe that encouraging charitable giving by individuals or R&D by companies is a good thing.