Tag Archives: IRA

10 ways Americans and US expats can minimize their Tax Liability

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By Mark Strohl

Special to the Financial Independence Hub

On your journey to financial freedom, tax season will always be an obstacle you have to deal with. However, taking advantage of the various deductions and credits provided can lead to less money owed to the government, and more money remaining in your bank account. Some incentives afforded to you are dependent on many factors, such as your status of employment, while others are universal to individuals living in the United States. In this guide, we discuss ten ways you can minimize your tax liability, allowing you to save more towards your goal of financial freedom.

Taking advantage of Tax Deductions

Tax deductions are all about lowering your taxable income. There are two types of deductions you can claim: the standard deduction, or the itemized deduction. The standard deduction is a pre-set amount provided by the IRS, and is dependent on your filing status. For the year 2020, the standard deduction amounts are [all US$]:

  • Married filing jointly – $24,800
  • Single or married filing separately – $12,400
  • Head of household – $16,650

It is estimated that around 90% of tax filers in the US take the standard deduction, including all filing statuses. However, the itemized tax deduction can still be useful, even though the passing of the 2018 Tax Cuts and Jobs Act has reduced the range of items that are counted towards deduction. The following are all items that can still be counted towards itemized deductions:

  • Interest on home mortgages that $750,00 or below
  • Medical and dental expenses that exceed 7.5% of your Adjusted Gross Income
  • Charitable contributions (donations)
  • Stale/local income, personal property, and sales taxes up to $10,000
  • Student loan interest (up to $2,500)
  • Investment interest expenses

In certain circumstances, the amount you owe could be less when deciding to take the itemized deduction. However, these requirements are very specific, and it is best if you work with a qualified CPA to discuss what deduction is best for you.

Contribute more towards your Retirement

Whether you contribute to a traditional 401k or an IRA, retirement account contributions are great for reducing the amount of income that can be taxed. Not only is the amount you contribute exempt from taxable income, but the growth the accounts generate is also not taxable until you withdraw from the accounts. However, keep in mind that only the first $6,000 that you contribute to an IRA can be deferred, and the first $19,500 contributed to a 401k. Continue Reading…

A new take on death and cross-border taxes

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By Elena Hanson

Special to the Financial Independence Hub

Many Canadians work in the United States. But what if you worked there, owned an IRA (Individual Retirement Account), came back, and died here? What happens to the beneficiaries?

It depends on your age, marital status, and who the beneficiaries are. Add to that maturity of the account itself and what type of IRA it is. Furthermore, on December 20, 2019, President Donald Trump signed into law the ‘Setting Every Community Up for Retirement Enhancement Act’ (SECURE Act), which changed some key IRA rules. This kind of scenario can easily wind up as a dog’s breakfast, especially in the hands of a lawyer, accountant or financial advisor who isn’t up to snuff on the ins and outs of an IRA.

In a traditional IRA contributions are tax-deferred, as they are with a Canadian RRSP, and income is taxed in the U.S. when the money is paid out. U.S. law is such that account owners must begin to make required minimum withdrawals when they turn 72. This is like a RRIF in Canada. But if you pass away before that withdrawal period begins, there are three options for reporting the interest, as per one’s Canadian tax responsibilities:

1.) Include the fair market value of the IRA which becomes taxable on the Canadian income tax return of the deceased for the year of death.

2.) Include the fair market value of the IRA on a separate ‘Rights or Things’ income tax return which is due one year after the date of death.

3.) Legally transfer the rights to the account to a beneficiary, but this must be done within a certain period. Such an option is available only to beneficiaries designated in the IRA. If that beneficiary is Canadian, they must include the interest on their Canadian tax return. If the beneficiary is not Canadian, the amount is not taxed here.

What if you die after withdrawal begins?

Now, what if you pass away after the withdrawal period begins? This is a whole new kettle of fish because you, or your beneficiary, are dealing directly with the Internal Revenue Service (IRS).

Let’s say the deceased person passed away in 2020 but began making withdrawals in 2015. In that situation their interest in the IRA is not regarded as ‘Rights or Things.’ The amount of any annuity payment is included in the income of the deceased for the year of death: in this case, 2018. The balance would then be reported by the beneficiaries on their income tax return when they receive the payments after inheriting the account, and this would continue for as long as they are designated as direct beneficiaries.

This is where it’s important to have a tax professional – your lawyer, accountant or financial advisor – knowledgeable about IRAs. In fact, the U.S. levies income taxes only when amounts are paid out from an IRA.

So, assume a Canadian person who owns an IRA suddenly dies before their withdrawal period commences, and their designated beneficiary is also Canadian.

In this scenario the third option may be best; legally transfer the rights to the account to a beneficiary, and when that person receives payments, they must pay a 15% U.S. tax withholding. In addition, they must report the payment on their Canadian tax return but can claim the 15% U.S. tax withholding as a foreign tax credit.

However, if your advisor isn’t familiar with how an IRA works or IRS rules, the result may be the dog’s breakfast referred to earlier. For example, with Option #1 or #2, Canada ends up double-dipping on the IRA. Canada taxes the full value of the IRA in the year of death.

IRAs aren’t taxed until distributed in the U.S.

However, in the U.S., the IRA does not get taxed until it has been distributed. So, what ends up happening is that in the year of death, Canada gets its first dip by taxing the IRA on the decedent’s tax return. Later on, when the IRA gets distributed, the U.S. will tax the same income once it is distributed to the Canadian beneficiary, and Canada dips again by taxing the same income on the beneficiary’s tax return this time around.

Therefore, option #3 is best because it prevents the IRA from being taxed in full twice. Paying tax on your interest once is enough. Who wants to pay it twice? But this can, and does, happen. Continue Reading…

5 ways Real Estate boosts Financial Independence

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By Sia Hasan

Special to the Financial Independence Hub

Gaining financial independence is one of the most difficult propositions. Life is expensive, particularly if you live in a metro area, which is where most of the higher paying jobs are located. As a result, most people save only small amounts of their paychecks or none at all. Clearly, this is not the path to financial independence (aka “Findependence.”).

Thankfully, you don’t have to make a massive salary to become financially independent. There are several methods for building wealth, including starting a business, investing in securities, and investing in real estate. Even if you do the first two already, you need to consider these five ways of increasing your financial independence through real estate.

Real estate investment offers the highest returns for the lowest risk when compared to starting a business or investing in stocks. The reason is that real estate offers five surefire ways to grow your money, known by the acronym IDEAL. By setting a long-term plan to benefit from these five methods of making money in real estate, you are on your way to financial independence.

The IDEAL investment

IDEAL stands for income, depreciation, equity growth, appreciation, and leverage. To succeed in making real estate work as an investment, you need to look beyond your principal residence. Though owning your own home provides appreciation and tax benefits, most people can’t produce income from their principal residence, owners of duplexes and people who rent out spare rooms aside.

1.) Income

When you purchase a rental property, you generate income, provided that you collect enough rent to exceed expenses. With a cash purchase, this is easy. If you finance the purchase, you need to analyze the numbers carefully. Provided you finance the right rental property, you earn a much higher rate of return on the financed property than if you purchased it with cash.

2.) Depreciation

To increase your rental income profits, you need to bone up on the IRS depreciation rules. Because the property is a business investment, you get to deduct all depreciation off of your profits. This saves thousands of dollars in income taxes every year. Continue Reading…

4 truths Business Ownership will teach you

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By Sia Hasan

Special to the Financial Independence Hub

Running your own business is equal parts exciting and stressful. No one is telling you what to do, and instead, you need to make the correct decisions if you want your company to be successful. And it won’t just be your life that’s riding on those decisions – if you have employees, they depend on your business’s success, as well.

The responsibility of business ownership brings several important life lessons with it. Here are four of the most significant.

1.) Surround yourself with the right people

This advice is applicable to business success in two ways. The first is that you need the right people around you as either employees or business partners to build and maintain your business. You can’t expect to be successful if you try to do it all. As the business owner, you can’t spend valuable time learning every skill under the sun. Instead, you’ll need to outsource certain things.

The second is that you need to hang out with the right people in your personal life. It’s said that you’re the average of the five people you spend the most time with. If those are driven individuals, they will help raise your game. If they’re unambitious and lazy, they’re just going to hold you back when you’re with them.

2.) Fast, good and cheap: you can have two out of three

So you know you need to outsource certain areas of your business, and you’re thinking of hiring either full-time help, part-time help or a freelancer to work for you on a per-project basis. When you do this, you need to decide what kind of results you want, how quickly you want them and how much you’re willing to pay.

It’s best to look for people who can provide high-quality work quickly, and then pay them what they deserve. If you try to pinch pennies, it will likely end up costing you more in the long run.

3.) Everyone has limits

You’ve probably heard a few crazy stories about famous entrepreneurs and how they work 80 or 100 hours per week. Continue Reading…