Be tax smart and keep more of your hard-earned cash


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Taxes can be expensive. These costs reduce your income and can have devastating effects on your quality of life, especially during times of transition. Although marketing is my main activity, I wear many hats as an entrepreneur. Learning about accounting and ways to save on taxes are valuable tools to have on hand. When families find themselves facing a new season of life, I’ve discovered ways to avoid or lessen the pressure that taxes can put on their financial situation.

In Its Beginnings: FIRPTA Detention

One of the first major investments a family usually makes is buying a first home.

Real estate can be a solid investment. Traditionally, houses go up in value. When it’s time to sell your principal residence, a capital gains tax is calculated on the profit. Most homeowners will be exempt from this tax: single homeowners pay no capital gains tax on the first $250,000 of profits. Married couples who file jointly are exempt from the first $500,000 of profit.

Real estate, like your home, is a type of real estate. If your home, or other real estate investment, is purchased from a foreign person who is a nonresident alien, the Foreign Investment in Real Estate Tax Act (FIRPTA) requires a certain percentage to be withheld from the real estate transaction at the time of purchase. The IRS will expect this to be returned to them within 20 days of the transaction.

A common exemption that applies in this situation is if the property is purchased for less than a certain price and will be used by the family as a residence. Other exemptions allow investors to reduce or eliminate the amount of withholding.

Related: How to Leverage Real Estate Tax Deferral Strategies to Grow Your Business

Preparing for retirement

Sooner or later, your family grows. Braces, college and weddings will be expenses of the past.

You will have to start preparing for your retirement for a long time before these significant events. In a recent article by Barron, Gabriel Shahin, CFP, identifies the two most important things to do for your long-term financial health: reduce debt and invest for growth. Become strategic with your investments by understanding the ups and downs of the stock market. Invest in the right mutual funds and exchange traded funds and you could get higher returns during market downturns.

Consider ways to minimize the taxes you will pay when you retire. Distributions from Roth 401(k) and Roth IRA accounts are not taxable. Treasury bills are exempt from state taxes. If you think about your retirement today, you could greatly benefit from tax-free income.

Related: 4 Ways to Manage Healthcare Costs in Retirement – NerdWallet

End of life: transfer of ownership

Most of us are familiar with the Benjamin Franklin quote, “In this world nothing can be said for certain except death and taxes.” The dreaded inheritance tax delivers the double whammy: when you die, you’ll have to pay taxes on everything you can’t take with you.

Your estate includes all your belongings: cash, stocks and bonds, real estate, art collections, boats, cars. After your death, an executor will ensure that all outstanding debts and expenses are paid. If the value of your estate at that time is worth more than a certain exemption amount, your estate will have to pay tax on that excess amount. Many states also have an estate tax.

When your heirs receive their share of the inheritance, they may also pay inheritance tax.

In order to minimize the plethora of future taxes, many families carefully consider how they purchase or transfer property. This can affect the value of the estate.

Assets, such as properties, can be transferred from your estate to a family limited partnership. You would be the general partner and the primary decision maker. The heirs are named partners with a stake in the company.

Related: Smart Estate Planning Tips for Entrepreneurs

Real estate investment trusts (REITs) allow you to invest in real estate through stocks. Because they are treated as flow-through entities (like LLCs and S-Corporations), the income is not taxed until it is paid out to shareholders. And heirs don’t pay capital gains tax on unsold shares when a parent dies.

To be fair, if you are in this situation, it would be wise to hire an estate planner to help you make these decisions. A lawyer can help you with the specific legal language used in your will or trust to protect your assets.

Taxes are daunting and can be expensive, but with proper preparation and guidance, you can manage your taxes during life’s inevitable transitions and gain financial freedom at the same time.

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