Taxes can be costly. These cuts into your income can have devastating effects on your quality of life, especially in times of transition. Although marketing is my main business, I wear many hats as an entrepreneur.  Learning some 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 strain unusual taxes can put on their financial situation.

Just starting out: FIRPTA Withholding

One of the first major investments a family usually makes is purchasing their first house.

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

Real estate, such as your home, is a type of real property. If your home, or any other real property investment, is purchased from a foreign person who is a nonresident alien, then the Foreign Investment in Real Property Tax Act (FIRPTA) requires withholding a certain percentage from the real estate transaction- at the time of purchase. The IRS will expect this to be remitted to them within 20 days of the transaction.

A common exemption that applies in this situation is if the property is purchased for under a certain price, and if it will be used by the family as their residence. Other exemptions enable investors to reduce or eliminate the withholding amount. 

Preparing for Retirement

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

You’ll need to start preparing for retirement long before these milestone events. According to XXXX, the two most important things to do for your long-term financial health are cutting down your debt and investing for growth. Become strategic with your investments by understanding the ups and downs of the stock market. Invest in suitable mutual and exchange-traded funds, and you could get higher returns during market drops.

Consider ways to minimize taxes you’ll pay when you’re retired. Distributions from Roth 401(k) and Roth IRA accounts aren’t taxable. Treasury bonds are exempt from state taxes. If you think through your retirement today, you could greatly benefit from tax-free income.

Plan your investments out first, and you will reap the rewards.

End of Life: Transferring Properties

We’re familiar with the Benjamin Franklin quote: ‘In this world nothing can be said to be certain, except death and taxes.’ Because the dreaded inheritance tax offers the double whammy: when you die, you’re going to owe taxes on all the stuff you can’t take with you.

Your estate includes all your stuff: cash, stocks and bonds, real estate, art collections, boats, cars. After you die, an executor will make sure that all outstanding debts and expenses are paid. If the value of your estate at that point is worth more than a certain exemption amount, then your estate will owe taxes on this excess amount. Many states also have an estate tax.

When your heirs receive their portion of the inheritance, they may pay an inheritance tax, too.

To minimize the plethora of future taxes, many families look carefully into how they buy or transfer property. This can affect the value of the estate.

Assets, such as properties, can be moved out of your estate and into a family limited partnership. You would be the general partner, and the main decision maker. Heirs are appointed as partners, with a stake in the company.

Real estate investment trusts (REITs) enable you to invest in real estate through stocks. Because they’re treated as pass-through entities (like LLC’s and S-Corporations,) income isn’t taxed until it’s paid to shareholders. And heirs don’t pay capital gains tax on stock that are unsold at the time of a decedent’s death.

To be fair, if you’re in this situation, it would be wise to hire an estate planner to help you navigate these decisions. An attorney can help you with the specific legal language used in your will or trust, to protect your assets.

Taxes are intimidating and can be expensive. With proper preparation and guidance, you can manage your taxes during inevitable life transitions, while gaining financial freedom.

Photo by Towfiqu barbhuiya on Unsplash