Tag Archives: tax

6 Tax mistakes every family needs to avoid

Posted By |
Photo Credit: Kelly Sikkema, Unsplash

By Sia Hasan

Special to the Financial Independence Hub

No one looks forward to filing their taxes each year. The process is time-consuming and stressful no matter how many times you’ve done it in the past. Unfortunately, even the most experienced workers make mistakes when filing their returns and those mistakes can really add up.

The last thing anyone wants to deal with is a formal audit by the IRS [or, in Canada, the CRA] and the more mistakes you make, the more likely that audit is. Believe it or not, it’s possible to avoid the most common mistakes year after year. You just need to know what they are in the first place.

Ignoring late or missing W2s

Your employer is required to send out a W2 at the end of the year [the equivalent of a T-4 in Canada.] This is your wage statement that shows your rate of pay, the amount you earned and the amount of money withheld for taxes from your paychecks. While it’s possible to file without the W2, it’s incredibly difficult and often leads to errors when reporting your income. Instead of ignoring a late, missing or lost W2, get another one reissued. Speak with your company’s HR department and get them to print a new one for you. If they can’t, they’ll be able to request a new copy from the business’s accounting department.

Not paying attention to Deadlines

It’s easy to lose track of time when you’re juggling the responsibilities of busy work and social schedules on top of filing a tax return. Unfortunately, filing late can end up earning you a hefty fine and penalty from the IRS [and the CRA]. If you’re having trouble keeping track of tax deadlines, start filling out your return as early as you can. You should be able to complete the return as soon as you receive your wage statements from your employer and any additional income statements for investments or gambling earnings. You can also set reminders on your phone to help you stay on schedule.

Forgetting to double-check your Return

There’s a lot of data entry involved with tax returns. Each number and piece of information you enter needs to be correct. If there are errors, you could end up dealing with a delay or hard inquiries from the IRS. Continue Reading…

10 ways Americans and US expats can minimize their Tax Liability

Posted By |

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…

Knowing your status is key to breaking up with the IRS through expatriation

Posted By |

By Elena Hanson

Special to the Financial Independence Hub

Giving up U.S. citizenship isn’t an easy decision to make, especially since there are benefits to having it. For example, if you are career-minded and interested in the larger, more diversified U.S. economy, or you want to find employment with a Canadian affiliate of an American company, holding the status of U.S. citizenship can be an advantage.

But when it comes to taxation, there are plenty of reasons to consider cutting ties with the Internal Revenue Service (IRS).

For starters, being a U.S. citizen can be, well, taxing. The tax obligations and restrictions of U.S. citizens, even those who are non-resident, can be onerous, to say the least, and include such things as:

  • Filing U.S. tax returns and paying U.S. income taxes.
  • Paying gift tax on gifts to any recipients, including a spouse if he/she is not an American, if the gift exceeds a certain threshold.
  • Restrictions on types of financial assets in order to avoid additional reporting or double taxation.
  • Restrictions on how to run a non-U.S. based business or on how to be part of non-U.S. family wealth.
  • Additional complexities with non-U.S. inheritance.
  • Full disclosure of a financial accounts and assets, even those received through employment, if the American has a signature authority.

These obligations apply to any U.S. citizen, no matter where they reside or where their assets are held. This includes those who are considered ‘Accidental Americans’ – people who discover for the first time that they are considered U.S. citizens.

Yes, that might be the case even if you’ve spent your entire life as a citizen and resident of Canada, so it is important to explore how to become tax compliant south of the border. Feigning ignorance will not likely save you from the long arm of the IRS, and the only thing costlier than paying and/or reporting U.S. taxes is not doing so. In fact, the fines and penalties associated with willfully ignoring obligations can be financially devastating.

So, knowing your status is the first step in changing your status.

The only way to relieve yourself of these obligations is to renounce U.S. citizenship. The legal process involves an appointment with the U.S. consulate, remitting a USD $2,345 administrative fee to receive a Certificate of Loss of Nationality, and the physical surrender of your U.S. passport.

From a tax perspective, renouncing may also require paying U.S. taxes and filing additional forms disclosing all financial aspects of your life, but it is probably the lesser of two evils over the long term; by retaining U.S. citizenship you must file lengthy tax returns with potentially hefty penalties, and possibly pay taxes annually).

Obviously, this process is more straightforward for those who are aware of their U.S. citizenship and already have a social security number. For those to whom U.S. citizenship has come as a surprise, you may have to acquire a social security number in order to file your first … and maybe shortly after that, your last U.S. tax return. Continue Reading…

RRSP deadline today: Choosing between a TFSA and an RRSP

Posted By |

By Micheal Davis, H&R Block Canada

Special to the Financial Independence Hub

The registered retirement savings plan (RRSP) contribution deadline is today!

Many Canadians may be making last-minute contributions before the deadline of midnight March 2nd  in hopes of unlocking a bigger tax return [if investing online; if at a physical branch, you need to act during business hours — editor.]

In fact, a recent survey from H&R Block reveals that 32 per cent of Canadians plan to contribute to an RRSP this year, a six per cent increase from last year where only 26 per cent of Canadians reported their intentions to contribute.

While RRSPs can offer tax advantages to help you reach your savings goals, it’s also important to note that they aren’t the only option available.

RRSPs vs. TFSAs

While RRSPs – a tax-deferred retirement savings vehicle in which contributions are tax deductible – can be a great investment, you do have to pay income taxes when you withdraw money, which makes this option a bit less flexible should a sudden need to access your funds arise.

Another investment tool to consider is the tax-free savings account (TFSA). Because TFSA contributions are made from after-tax income, the TFSA is a simpler tool in that it allows your investments to grow tax-free. And, since taking money out of it has no tax consequences, it can be much more flexible.

How to decide between these two investment options

The main differences between the RRSP and TFSA are their contribution limits, withdrawal restrictions, and how and when you pay taxes. Both are investment vehicles that can shelter taxes on your investments, but depending on your circumstances, one might suit you better than the other. Continue Reading…

A new take on death and cross-border taxes

Posted By |

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…