Interesting and Unusual Taxation Situations

Taxes are an unavoidable part of our daily lives. In a world where there is not much that you can count on, you can certainly count on taxes. Understanding the taxation system and the various types of taxes that you might experience throughout your life can be overwhelming. On top of this tax law is filled with vocabulary that seems like a foreign language. Here are some interesting and unusual taxation situations to consider.

Although taxes in general require a level of precision, creating a basic outline to make yourself feel competent will be a helpful resource throughout each tax season of your life. Sometimes the lines blur between the different areas of tax so having an idea of what that means regarding how much you must pay, and when, can help you to manage your overall finances.

Here I will detail several interesting and unusual taxation situations. You may have not even heard of them before but having this background could be helpful next time you file. 

Viatical Settlements

One of the most interesting and unusual taxation situations is in regards to viatical settlements. A viatical settlement is a form of an investment. This arrangement allows you to purchase or invest in another person’s life insurance policy. You buy in at a price that is less than the death benefit of the policy. When the seller dies, you will collect the death benefit.

For the seller, the benefit is the opportunity to receive immediate cash. They can use these funds to pay for their care and comfort in their final days. This can be a calming decision for you and your loved ones to relieve you and your family of financial hardship regarding costly medical care. 

From an investment perspective this decision can be risky. It is impossible to know when a person will pass away. Your rate of return is dependent on that unknown. If the life expectancy is long, the policy will be cheaper to purchase or invest in. However the longer the person lives, the lower your rate of return will be.

From a taxation perspective, they can be worthwhile, since when you receive a viatical settlement, the funds are tax-free. 

Rental Income

The rental market for vacation homes is booming. With travelers ranging from families and small groups to the solo adventurer looking for affordable alternatives to vacation lodging, renting out your home, or even just a room within it, can provide you with a passive stream of income that is fairly low maintenance. According to The Augusta Rule, taxpayers can rent their homes out for up to 14 days before taxation on that income occurs.  

This rule was named after Augusta, Georgia, aka the home of the Master’s Tournament. Residents of this town can rent their homes out during this annual, high-traffic event and enjoy thousands of tax-free dollars as a result.

Be sure to research the rules and caveats of this benefit though. Social media influencers have been leaking The Augusta Rule to make quick cash. You will need to possess certain credibility’s to take advantage of this loophole. 

Home Based Business 

In a post-pandemic world, work from home will likely be the rule as opposed to its former position as the exception. With many big businesses opting to provide their employees with the tools needed to work from home instead of taking up residency in large commercial real estate buildings, smaller businesses should take note as well.

COVID-19 forced many business owners to relocate their main hub as a result of necessity and lockdown protocol. While this move has its share of risks, the advantages and loopholes are worth considering. 

Sole proprietors have an opportunity to dedicate a portion of their home to their business. As a result, they can receive a tax deduction for that space. Additional items that can be added as an advantage to this method are utility bills, furniture, and supplies purchased and used for business needs. As with The Augusta Rule there are of course many regulations to be aware of. If you are considering branching out on your own you might be surprised to discover the tax advantages to doing so.

Specific State Taxes

There is a whole host of taxation situations that vary from state to state yet remain similar. However, some states have such specific taxes that residents from other parts of the country might find them comedic.

The state of New York is infamous for its bagels. Residents claim that they are the best in the world, and tourists research the best spots to enjoy them while on vacation. This self-proclaimed ‘best in the world’ title is great, considering how much you will spend to enjoy one. Part of the reason for these high costs is that the state adds an 8-cent tax to any altered bagel. Uncut bagels are exempt.

New Mexico will reward certain residents with an exemption from all state taxes. All you must do to qualify is live to be 100 years old, simple right? Rules around this tax break include residency timelines and whether you are a dependent on someone else’s tax return. But if all those factors check out, people who live to see their own personal centennial get a special gift from Uncle Sam.

Interesting and Unusual Taxation Situations – Summary

As you can see, there are definitely some interesting and unusual taxation situations. I mean who even knew you could invest in someone else’s life insurance policy tax free, basically betting on when they will die?

There are certainly more interesting and unusual taxation situations besides the ones covered here. If you want to learn more, be sure to visit the Tax Policy section of this site.