Tax

Legal Tax Loopholes: 10 Little-Known IRS-Approved Strategies

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Every year, millions of Americans leave money on the table simply because they don’t know the tax breaks they’re entitled to. Beyond the standard deductions and retirement contributions lies a hidden layer of the U.S. tax system—one filled with overlooked strategies or legal IRS tax loopholes designed to reward business owners, investors, and proactive planners who seek assistance from tax professionals. These aren’t illegal—they’re IRS tax loopholes-approved opportunities that the wealthy and well-advised have been using for years to reduce tax bills legally.

Table of Contents

Here’s Profitjets recommending 10 IRS tax loopholes and strategies that could effectively shift incomes and transfer assets to take control of your finances.

irs tax loopholes

1. 401(k) Retirement Plan

A retirement plan sponsored by your employer. The contribution is capped at $23,000 if you are under 50 and $30,500 if you are 50 and older.

·        401(k) allows you to reduce your taxable income now and withdraw it on retirement.

·        It’s a standard way both employees and business owners defer large amounts of tax.

  Bonus Tip: Even self-employed individuals can take advantage of a Solo 401(k)

2. Individual Retirement Account (IRA) 

The IRA has a contribution limit of $7000 under the age of 50 and $8000 if 50 and above 

  • When paid pre-tax, it becomes tax-deductible if you are eligible for this benefit. It is taxed on withdrawal. 
  • You can opt to go through Roth and enjoy free withdrawals by paying taxes earlier. Roth IRAs are valuable for tax-free compounding and withdrawals.  

3. The  Health Savings Account (HSA)

HSA has a contribution limit of $4,300 per individual and $8,500 per family, with an additional $1,000 catch-up contribution for individuals aged 55 and above. This enables you to enjoy a triple tax advantage, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.

4.  Education Savings Plan (529 Plan)

It enables you to save for qualified education expenses, such as college, K-12 tuition, and some apprenticeship programs. Although this doesn’t allow a federal deduction, the earnings grow tax-free. The withdrawals also become tax-free when funds are used for qualified education expenses.

5. Donor Advised Fund (DAF):  

Using DAF for charitable giving is IRS-compliant and a great strategy to gain instant tax benefits while supporting a cause that you believe in. What’s better than an IRS tax loophole? You get to do it on your timeline.

·        You can donate cash, stocks, mutual funds, private business interests, crypto, or real estate.

 Bonus tip: You optimize your donation the most when you donate appreciated assets that you’ve held for over a year. This helps avoid capital gains tax and allows for the full fair market value to be realized.

·        Timeline benefit: You get a deduction in the year of contribution, even if you grant the money years later.

·        Many DAFs even offer mutual fund or ETF portfolios. These funds grow tax-free.

Important: Remember, you are legally bound to grant the committed value, and you can only donate to IRS-qualified 501(c)(3) organizations

6. Qualified Small Business Stock (QSBS) Exemption (IRC §1202) 

This is a highly valuable legal tax loophole for small businesses and startups in tech, biotech, and other sectors. You can utilize the QSBS exemption by investing in a qualified small business startup. Exemption under IRC §1202 is a powerful, and one of those ‘little-known’ ways to eliminate capital gains tax on the sale of those stocks. You could even exclude 100% of capital gains on the sale of stocks. However, the limit is capped at the greater of $10 million or 10 times your investment basis. 

Here’s how it works:

The QSBS exemption enables investors to exclude all capital gains on the sale of a qualified small business investment, provided certain conditions are met. 

Invest in a Qualified Small Business 

·        The business must be a domestic C-Corp

·        Where the gross assets should be equal to or less than $50M before and immediately after your investment

·        The company you choose to invest in must be engaged in active business (not investing or finance)

·        You must acquire original shares, not through the secondary market

·        Hold the Stock for 5 Years and sell the stock to claim the exclusion (as mentioned above)

7. You can shift Income to your children through a Family Limited Partnership or Gifting

  • Gifts are exempt up to $18,000 per year per person giving the gift. This means you can double that by having your spouse gift the same amount, making it a tax-free transfer of up to $36,000 each year.
  • There is a lifetime gift/estate exemption of $13.61 million as of 2025 that you can use to transfer wealth tax-free.
  • Research a 529 plan or UGMA/UTMA account for kids’ education and future needs—they’re taxed at lower rates as per the US Tax code.
  • Use a Family Limited Partnership:
    • In a constitution where you (a parent) hold general partner interests with control.
    • Whereas you grant the status of a limited partner to your child with interests & no control.
    • It’s perfectly legal to transfer your assets, such as real estate, business, and investments, into the FLP and gift LP shares to your children over time.
    • The trick is to shift income to children in lower brackets.
    • It also reduces your estate size while maintaining control.
    • Discounting: LP shares are simply worth less than their pro-rata asset value due to a lack of control & their marketability. Gifts also use a lower valuation for tax purposes.

Bonus tip: Consider “income-shifting” by hiring your children.  Legitimate employment of family members in your business as an admin or marketing executive and paying a reasonable wage, their income will be subject to standard deductions and will bring down your taxable income.

8. Make use of Real Estate Depreciation & 1031 Exchanges

·        If your business owns property or you’re investing business income in real estate, this is a valuable strategy, particularly for real estate investors; in simple words, a tax loophole for real estate investors. 

  • The IRS allows you to depreciate the worth of your property over time (27.5 years for residential & 39 years for commercial).
  • This is a non-cash deduction, which means it lowers your taxable income on paper even though your property may be appreciating.
  • You can use 1031 exchanges to defer capital gains tax by reinvesting proceeds in similar property.
  • By doing a 1031 exchange, you can defer all capital gains tax by selling one property and rolling proceeds into another “like-kind” investment.
  • There is no limit on the number of times you can do this (although you cannot flip properties using the scheme), as it allows your wealth to compound by postponing your capital gains liability.
  • However, remember to follow the IRS-mandated timelines, i.e., 45 days to identify and 180 days to close the deal.

9. Harvest Losses Intelligently

Tax loss harvesting is an intelligent and completely legal way to reduce your tax bill by selling investments at a loss to offset your income or capital gains. It remains highly relevant in 2025, given the ongoing market volatility and tighter IRS scrutiny of complex investments. You can:

  1. Offset capital gains from more profitable stocks, real estate & crypto.
  2. IRS allows a deduction up to $3,000 against ordinary income in case of losses
  3. You even have the option to carry forward unused losses indefinitely to future years.

Here’s how to do it with IRS compliance:

·        Look for stocks, ETFs, crypto, or funds that have dipped below the purchase price, hence loss-making

·        You ought to prioritize assets with no substantial long-term upside.

·        Square off such investments; this creates a realized capital loss that you can apply this year.

·        Remember, loss is only deductible when realized, not when it’s ‘on paper.’

·        You can’t purchase a  ‘substantially identical’ security within 30 days before or after the sale

·        Instead, if you are keen, you are free to buy a similar, not identical, asset to stay invested.

·        Use harvested losses to reduce taxes in the same tax year.  You can even carry over extra to future years.

10. Section 199A QBI Deduction

Using the Section 199A Qualified Business Income (QBI) Deduction is an effective tax strategy for small business owners in the U.S., and it remains widely prevalent in 2025.

The Section 199A deduction allows you to deduct up to 20% of your QBI on your tax return.

  • It even applies to pass-through entities, such as sole proprietorships, LLCs, S corporations, and partnerships.
  • It is a “below-the-line” deduction, which means it reduces your taxable income, not your adjusted gross income (AGI).
  • You don’t have to itemize, as it’s available even if you take the standard deduction.
  • A 20% deduction on qualified business income (QBI) can be passed through to pass-through entities.
  • There are income limits and restrictions (especially for “specified service trades”), so planning is critical.
irs tax loopholes

Conclusion

All of these rules have intricacies & details that need professional planning. You are sure to miss out on vital information when you DIY your tax strategies. Seek help from a qualified estate or tax attorney and expert tax advisors to help plan your taxes. Profitjets is a trusted tax planning & tax advisory company. We also provide outsourced accounting and bookkeeping services. Get in touch with us to optimize your taxes and file your taxes to free your funds by planning appropriate deductions and growth strategies from the IRS tax code.


Frequently Asked Questions

1. Are these tax strategies legal and IRS-approved?

 Yes! Although we address them as tax loopholes, all the strategies mentioned in the article are entirely legal and recognized by the IRS. They rely on specific sections of the tax code designed to encourage certain behaviors, like investing, saving for retirement, or supporting family-owned businesses.

2. Who can benefit from these lesser-known tax deductions?

These strategies are especially valuable for small business owners, self-employed individuals, investors, and high-income earners; however, many are also accessible to average taxpayers with proper planning. Some may require professional guidance to implement correctly.

3. Do I need a tax professional to use these strategies?

While some of the strategies (like annual gifting or 529 plan contributions) can be done on your own, others — such as setting up a Family Limited Partnership or claiming the QSBS exclusion — are best handled with the help of a CPA, tax attorney, or financial advisor to ensure compliance and maximum savings.