If you have kids and you celebrate Christmas, you're probably familiar with the Elf on the Shelf — a storybook and accompanying doll that help encourage your little darlings to behave themselves before the holidays. The book tells wide-eyed children how Santa marshals an army of scout elves to sneak into their houses before Christmas, then fly back to the North Pole every night to rat out the stinkers. Every day the elves return find a new place to hide, which turns this whole monstrous Fourth Amendment violation into an adorable ongoing game of hide and seek.
Parents love how the elf enforces good behavior. (Mommy says it's that or an extra glass of wine!) But not everyone is a fan. The Atlantic magazine mocks it as a "marketing juggernaut dressed up as a tradition" that bullies kids into thinking good behavior equals presents. The Washington Post condemns it as "just another nannycam in a nanny state obsessed with penal codes." And a Canadian professor argues that the elf brainwashes kids into accepting the surveillance state: "if you grow up thinking it's cool for the elves to watch me and report back to Santa, well, then it's cool for the NSA to watch me and report back to the government."
Our friends at the IRS have their own version of the Elf on the Shelf. In fact, they have several — and they're all more effective than the pointy-hatted little informant spying on your kids. Here's how the IRS knows if you've been naughty when it comes to reporting your presents throughout the year:
The first "elf" is the IRS's computerized income matching program. For example, employers report wages on Form W2, mutual funds report investment income on Form 1099-DIV, and partnerships report partners' income and expenses on Schedule K1. IRS computers cross-check these figures to your return to make sure you've reported those amount. If you haven't, you'll get a lump of coal notice calculating how much more you owe and a deadline for paying up.
If computerized matching fails, the IRS can squeeze more information out of third parties. If the IRS elves suspect mischief, they can subpoena your bank records then add up your deposits to make sure you've reported the income. If those deposits add up to more than you've reported, the IRS will assume the difference is taxable. Good luck convincing a Tax Court judge that Santa left that extra cash in your stocking!
Finally, the IRS dangles cash bounties to catch tax cheats. The IRS Whistleblower Office pays rewards of up to 30% of amounts it collects in disputes topping $2 million. Bradley Birkenfeld, who helped the IRS score an $852 million settlement with Swiss bank UBS, spent two years in jail for his part in the scheme, but walked away with a $104 million reward for his effort. We can think of an elf or two who would be happy to make that trade!
The IRS systems may not be quite as effective as what the CIA or Department of Homeland Security can put to work. But they put that stool pigeon Elf to shame, at least until they can force Santa into filing a 1099-GIFT for every present he leaves.
Here's the bottom line, for the elf and for you. Planning is the key to paying less tax, and you can do it without worrying about who's watching. So call us to pay less in 2017, and have a happy New Year!
Tuesday, December 27, 2016
Thursday, December 22, 2016
Christmas Tax Breaks for Christmas Tree Growers
'Tis the season to be jolly, and how jolly could we be without Christmas trees on display? For some of us it's the classic Pinus Sylvestris, or scotch pine. For others it's the soft-needled Abies fraserie, or Fraser fir. Still more make do with the store-bought plasticus annualensis, or "Target special." (Artificial trees can be beautiful, too!) Christmas trees are a festive symbol of holiday spirit, and most of us can't help but smile when we see one. (Unless we're at a department store in August.)
We're pretty sure that taxes are the last thing you think about when you see a gaily-decorated tree. But this is a tax column you're reading, and part of the fun is taking something you think has nothing to do with taxes, and showing how they fit behind the scenes. With that in mind, let's look at how the IRS treats your tree's trip from the stump to the stand.
Code section 631(a) states that, "For purposes of this subsection and subsection (b), the term 'timber' includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes." That makes Christmas tree farming a business and not an investment. But timber lobbyists have been busy little elves, and they've found some presents to leave under the growers' trees:
To maximize their deductions, growers need to keep careful records. This might involve separate accounts for merchantable timber (measured in thousand board feet), young growth timber, deferred forestation, and reforestation amortization assets.
Unfortunately, trees planted for ornamental purposes don't qualify for the reforestation amortization deduction. (How's that for a lump of coal in a stocking?) Instead, growers capitalize planting costs and add them to their plantation account, then recover them as they harvest the trees for sale.
On the bright side, Revenue Ruling 71-228 clarifies that pruning and shearing costs are currently deductible business expenses, not capital expenditures.
"Occasional producers" who sell on the stump might take advantage of lower capital gains rates by establishing on-site sales procedures to qualify under Section 631(b). But beware Revenue Ruling 77-229, which held that income from "choose and cut" operations are ordinary income unless the grower makes a special election to determine gain or loss under the rules of Regulations Section 1.631-1(e)(1).
Aren't you glad you've got us to worry about all this stuff?
Try thinking about it this way. The tax code itself is really just one giant Christmas tree! It starts with the trunk, branches, and needles — the sections imposing the tax and setting the rates. Then Washington tarts it up with lights, ornaments, tinsel, and candy canes — the deductions, credits, loopholes, and strategies you hang on your return to lower your bill. (Cynical scrooges might even say we have too much hanging on that tree, but that's a discussion for a different day.)
Here's wishing you and your family the happiest holiday this season, however you celebrate. We'll be back in 2017 to make sure you pay as little tax as possible, not just during the holidays, but all season long!
We're pretty sure that taxes are the last thing you think about when you see a gaily-decorated tree. But this is a tax column you're reading, and part of the fun is taking something you think has nothing to do with taxes, and showing how they fit behind the scenes. With that in mind, let's look at how the IRS treats your tree's trip from the stump to the stand.
Code section 631(a) states that, "For purposes of this subsection and subsection (b), the term 'timber' includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes." That makes Christmas tree farming a business and not an investment. But timber lobbyists have been busy little elves, and they've found some presents to leave under the growers' trees:
To maximize their deductions, growers need to keep careful records. This might involve separate accounts for merchantable timber (measured in thousand board feet), young growth timber, deferred forestation, and reforestation amortization assets.
Unfortunately, trees planted for ornamental purposes don't qualify for the reforestation amortization deduction. (How's that for a lump of coal in a stocking?) Instead, growers capitalize planting costs and add them to their plantation account, then recover them as they harvest the trees for sale.
On the bright side, Revenue Ruling 71-228 clarifies that pruning and shearing costs are currently deductible business expenses, not capital expenditures.
"Occasional producers" who sell on the stump might take advantage of lower capital gains rates by establishing on-site sales procedures to qualify under Section 631(b). But beware Revenue Ruling 77-229, which held that income from "choose and cut" operations are ordinary income unless the grower makes a special election to determine gain or loss under the rules of Regulations Section 1.631-1(e)(1).
Aren't you glad you've got us to worry about all this stuff?
Try thinking about it this way. The tax code itself is really just one giant Christmas tree! It starts with the trunk, branches, and needles — the sections imposing the tax and setting the rates. Then Washington tarts it up with lights, ornaments, tinsel, and candy canes — the deductions, credits, loopholes, and strategies you hang on your return to lower your bill. (Cynical scrooges might even say we have too much hanging on that tree, but that's a discussion for a different day.)
Here's wishing you and your family the happiest holiday this season, however you celebrate. We'll be back in 2017 to make sure you pay as little tax as possible, not just during the holidays, but all season long!
Monday, December 12, 2016
Sweet!
December is a busy month for holidays, what with Christmas, Hanukkah, and Kwanzaa all crowding calendars. But there's a lesser-known holiday that falls on December 16 that we don't want you to miss. It's not Ugly Christmas Sweater Day or Free Shipping Day (although those are both fun, too). We're talking, of course, about the obvious celebrations surrounding Chocolate Covered Anything Day. (Look it up!)
Most of us look for foods that are delicious, filling, and healthy. Chocolate-covered pretzels, chocolate-covered potato chips, chocolate-covered bacon, and chocolate-covered chili peppers are all yummy and filling, and — well, as the philosopher-poet Meat Loaf taught us, "Two out of three ain't bad." Think of Chocolate Covered Anything Day as pre-season training for the real binging that comes later in the month. (ABC News reports the average American consumes nearly 7,000 calories on Christmas Day alone.)
Just like the rest of us, tax collectors love chocolate-covered treats, too. They're not savages! But tax collectors have been plying their trade alongside candy makers and pastry chefs, for nearly as long as the rest of us have been enjoying their treats:
The Aztecs, who believed their feathered serpent deity Quetzalcoatl had received chocolate as a gift from the gods, used cocoa beans as actual currency. We're not sure what sort of taxes the Aztecs might have levied on themselves . . . but it had to make it a little easier to pay them in beans!
In 1692, France's King Louis XIV, whose wife loved drinking chocolate, levied one of the first actual cash taxes on the delicacy.
In 1847, a British chocolate company called J.S. Fry & Sons produced the first modern-day chocolate bar. Shortly thereafter, Britain lowered taxes on chocolate to encourage production of the new treats.
In Finland, taxes on chocolates and other sweets will melt away on January 1, 2017. A Finnish financial parliamentary committee decided last year that the taxes violated European Union rules on treating similar products fairly and equitably.
Today's chocolate makers are just as tempted by sweet tax breaks as the rest of us. In 2010, Kraft Foods bought British chocolatier Cadbury in a bittersweet hostile takeover for £11.5 billion ($18.9 billion). Since then, they've left a bad taste in the taxpaying public's mouth by using interest payments on the debt they used to buy the company to avoid paying tax on hundreds of millions of pounds of profits. Even worse, they changed the recipe for Cadbury creme eggs (!) and started selling them in packages of five instead of six (!!).
There's nothing sweet about paying taxes you don't have to pay. That goes for your chocolates, your income, your investments, and anything else. And we're always looking for ways to help accomplish that goal. So think about us while you're dipping a twinkie into chocolate sauce, and call us with your questions!
Most of us look for foods that are delicious, filling, and healthy. Chocolate-covered pretzels, chocolate-covered potato chips, chocolate-covered bacon, and chocolate-covered chili peppers are all yummy and filling, and — well, as the philosopher-poet Meat Loaf taught us, "Two out of three ain't bad." Think of Chocolate Covered Anything Day as pre-season training for the real binging that comes later in the month. (ABC News reports the average American consumes nearly 7,000 calories on Christmas Day alone.)
Just like the rest of us, tax collectors love chocolate-covered treats, too. They're not savages! But tax collectors have been plying their trade alongside candy makers and pastry chefs, for nearly as long as the rest of us have been enjoying their treats:
The Aztecs, who believed their feathered serpent deity Quetzalcoatl had received chocolate as a gift from the gods, used cocoa beans as actual currency. We're not sure what sort of taxes the Aztecs might have levied on themselves . . . but it had to make it a little easier to pay them in beans!
In 1692, France's King Louis XIV, whose wife loved drinking chocolate, levied one of the first actual cash taxes on the delicacy.
In 1847, a British chocolate company called J.S. Fry & Sons produced the first modern-day chocolate bar. Shortly thereafter, Britain lowered taxes on chocolate to encourage production of the new treats.
In Finland, taxes on chocolates and other sweets will melt away on January 1, 2017. A Finnish financial parliamentary committee decided last year that the taxes violated European Union rules on treating similar products fairly and equitably.
Today's chocolate makers are just as tempted by sweet tax breaks as the rest of us. In 2010, Kraft Foods bought British chocolatier Cadbury in a bittersweet hostile takeover for £11.5 billion ($18.9 billion). Since then, they've left a bad taste in the taxpaying public's mouth by using interest payments on the debt they used to buy the company to avoid paying tax on hundreds of millions of pounds of profits. Even worse, they changed the recipe for Cadbury creme eggs (!) and started selling them in packages of five instead of six (!!).
There's nothing sweet about paying taxes you don't have to pay. That goes for your chocolates, your income, your investments, and anything else. And we're always looking for ways to help accomplish that goal. So think about us while you're dipping a twinkie into chocolate sauce, and call us with your questions!
Monday, December 5, 2016
400 Cigar-Chomping Fat Cats Aren't Enough Anymore
Author F. Scott Fitzgerald, who brought us the Great Gatsby among other well-heeled characters, once said the rich are very different from you and me. To which Fitzgerald's jazz age compatriot Ernest Hemingway sarcastically retorted, "Yes, they have more money." But how much more money do they really have? Nosey parkers want to know!
Every year, the financial snoops at the IRS release a study analyzing the income and the taxes of the top 400 earners in the country. We're not talking ordinary 1%ers here — we're talking card-carrying plutocrats. If you show these people your Hamptons house, they'll raise you their bigger Hamptons house, right on the beach — plus a penthouse in Manhattan plus a ski chalet in Gstaad plus a second beach house in St. Bart's.
Last week, the IRS released their report for 2014, and revealed that the country's 400 fattest cats had gotten 20% fatter. It took $127 million of adjusted gross income to join the top group, up from $100 million in 2013. But that was just the ante — the average income was $318 million, 20% more than the previous year. The 400's total income was $128 billion, which is just a few billion shy of Nevada's Gross Domestic Product.
Where does all that money come gushing in from? It's not salaries and wages (4.47% of the total), interest and dividends (15.13%), or even closely-held businesses (11.6%). You'll have to turn to Schedule D, "Capital Gains and Losses." The average Fortunate 400 filer reported $192 million in gains. This suggests our typical tippy-top earner makes it by selling a business they spent a lifetime growing. As it turns out, 3,262 of the 4,584 Fortunate 400 who have appeared on the list in the last 23 years have made it just once, which reinforces this point.
The numbers going out are just as impressive, too. The group averaged $37 million in charitable contributions (6.9% of the country's total), $22 million in state and local taxes, $5 million in interest, and $11 million in miscellaneous itemized deductions. Sadly, the report doesn't tell us how much they spent on million-dollar watches, diamond-studded dog collars, and other essentials of over-funded lives.
As for taxes, the group's average IRS contribution was $73.5 million, which represents a 23.13% rate. Of course, those are just averages — the study revealed that nine of our super-earners paid less than 10% and 26 more paid less than 15%. (It's probably a good thing their neighbors don't know who they are!)
It's all an early Christmas for data nerds. Now here's the bad news. This year we'll be waving goodbye to our lucky 400 winners. Because of our growing population, the IRS will shift their focus to the country's top 0.001% of taxpayers, or 1,396 returns. "This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution," they say. (We told you this was data nerd stuff.)
Here's one last thing the Fortunate 400 have in common. They don't just take a shoebox full of receipts to their accountant on April 14 and say, "What do I owe?" No, these very smart people plan and plan and plan — to ensure they keep every last penny possible. It works for them, and it can work for you. So call us to take advantage of opportunities still remaining in 2016, and let's see what we can do for you!
Every year, the financial snoops at the IRS release a study analyzing the income and the taxes of the top 400 earners in the country. We're not talking ordinary 1%ers here — we're talking card-carrying plutocrats. If you show these people your Hamptons house, they'll raise you their bigger Hamptons house, right on the beach — plus a penthouse in Manhattan plus a ski chalet in Gstaad plus a second beach house in St. Bart's.
Last week, the IRS released their report for 2014, and revealed that the country's 400 fattest cats had gotten 20% fatter. It took $127 million of adjusted gross income to join the top group, up from $100 million in 2013. But that was just the ante — the average income was $318 million, 20% more than the previous year. The 400's total income was $128 billion, which is just a few billion shy of Nevada's Gross Domestic Product.
Where does all that money come gushing in from? It's not salaries and wages (4.47% of the total), interest and dividends (15.13%), or even closely-held businesses (11.6%). You'll have to turn to Schedule D, "Capital Gains and Losses." The average Fortunate 400 filer reported $192 million in gains. This suggests our typical tippy-top earner makes it by selling a business they spent a lifetime growing. As it turns out, 3,262 of the 4,584 Fortunate 400 who have appeared on the list in the last 23 years have made it just once, which reinforces this point.
The numbers going out are just as impressive, too. The group averaged $37 million in charitable contributions (6.9% of the country's total), $22 million in state and local taxes, $5 million in interest, and $11 million in miscellaneous itemized deductions. Sadly, the report doesn't tell us how much they spent on million-dollar watches, diamond-studded dog collars, and other essentials of over-funded lives.
As for taxes, the group's average IRS contribution was $73.5 million, which represents a 23.13% rate. Of course, those are just averages — the study revealed that nine of our super-earners paid less than 10% and 26 more paid less than 15%. (It's probably a good thing their neighbors don't know who they are!)
It's all an early Christmas for data nerds. Now here's the bad news. This year we'll be waving goodbye to our lucky 400 winners. Because of our growing population, the IRS will shift their focus to the country's top 0.001% of taxpayers, or 1,396 returns. "This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution," they say. (We told you this was data nerd stuff.)
Here's one last thing the Fortunate 400 have in common. They don't just take a shoebox full of receipts to their accountant on April 14 and say, "What do I owe?" No, these very smart people plan and plan and plan — to ensure they keep every last penny possible. It works for them, and it can work for you. So call us to take advantage of opportunities still remaining in 2016, and let's see what we can do for you!
Monday, November 28, 2016
Over the River and Through the Woods
Thanksgiving is a time for homecoming, and some of us are fortunate
to return to a place where we've spent decades of holidays. Who wouldn't
relish celebrating in a cozy farmhouse out of a Norman Rockwell print,
with an overstuffed chair in front of a crackling fire and a warm
kitchen smelling of pumpkin pie?
But these days, more Americans spend their Thanksgiving in a different setting. Who wants grandma's cramped parlor when they can welcome guests in a two-story foyer with dueling spiral staircases and a faux-crystal chandelier? We're talking, of course, about the design mishmash that critics have dubbed "the McMansion."
A McMansion is more than just a big, new house. It's a special breed of architectural jumble that favors sheer size and showiness over quality. You may not be able to define it, but you sure know it when you see it! Blame them, if you like, on the eager builders who sell them and the feckless zoning boards that green-light them. But there's one more more enabler that makes them possible, and that's our beloved U.S. tax code.
When Congress birthed the income tax back in 1913, they made all interest deductible. But the tax itself hit less than one percent of Americans. And most buyers in that day paid cash for their homes. So there was no specific intent to subsidize mortgage interest for the masses.
Since then, however, mortgages have become indispensable to the home buying economy and the mortgage interest deduction has become central to the tax code. In 1986, Congress eliminated tax breaks for most personal interest, but kept the deduction for interest on up to $1.1 million of mortgage debt. Today's code also lets you exclude up to $500,000 of capital gains from your income when you sell your primary residence.
Given our progressive tax system, these tax breaks tend to favor the wealthy. Mortgage interest is deductible only for the highest-earning third of Americans who itemize deductions. And the capital gains exclusion helps the most in high-cost markets clustered on the east and west coasts. One study found that just five high-cost urban areas snagged 87% of the net tax benefit, with over half going to California alone.
So . . . combine imperfect tax subsidies with the general decline of aesthetic integrity, and what do you get? Crimes against architecture. You can love stately brick courses, homey wood shingles, and even grand stone accents, without mashing them all into a single facade. You can admire the Greeks' taste in columns without slapping stick-on foam imitations on your bathroom wall like a suite at Caesars Palace. You don't need to know what a hipped roof, a gable, and a jerkin-head are to know they don't all belong on the same house.
Making fun of McMansions has even become part of popular culture. There are several web sites dedicated to mocking the form. In House of Cards, Frank Underwood gave home buyers his own brand of home buying advice: "Money is the McMansion in Sarasota that starts falling apart after ten years. Power is the old stone building that stands for centuries."
We don't care if your dream home is a suburban estate, a city loft, or a condo at the beach. Our job is to help you navigate the jumble of tax laws that make even the gaudiest McMansion look balanced and proportional. So call us when you're ready for a blueprint — we'll be here to help you build the tax shelter you need!
But these days, more Americans spend their Thanksgiving in a different setting. Who wants grandma's cramped parlor when they can welcome guests in a two-story foyer with dueling spiral staircases and a faux-crystal chandelier? We're talking, of course, about the design mishmash that critics have dubbed "the McMansion."
A McMansion is more than just a big, new house. It's a special breed of architectural jumble that favors sheer size and showiness over quality. You may not be able to define it, but you sure know it when you see it! Blame them, if you like, on the eager builders who sell them and the feckless zoning boards that green-light them. But there's one more more enabler that makes them possible, and that's our beloved U.S. tax code.
When Congress birthed the income tax back in 1913, they made all interest deductible. But the tax itself hit less than one percent of Americans. And most buyers in that day paid cash for their homes. So there was no specific intent to subsidize mortgage interest for the masses.
Since then, however, mortgages have become indispensable to the home buying economy and the mortgage interest deduction has become central to the tax code. In 1986, Congress eliminated tax breaks for most personal interest, but kept the deduction for interest on up to $1.1 million of mortgage debt. Today's code also lets you exclude up to $500,000 of capital gains from your income when you sell your primary residence.
Given our progressive tax system, these tax breaks tend to favor the wealthy. Mortgage interest is deductible only for the highest-earning third of Americans who itemize deductions. And the capital gains exclusion helps the most in high-cost markets clustered on the east and west coasts. One study found that just five high-cost urban areas snagged 87% of the net tax benefit, with over half going to California alone.
So . . . combine imperfect tax subsidies with the general decline of aesthetic integrity, and what do you get? Crimes against architecture. You can love stately brick courses, homey wood shingles, and even grand stone accents, without mashing them all into a single facade. You can admire the Greeks' taste in columns without slapping stick-on foam imitations on your bathroom wall like a suite at Caesars Palace. You don't need to know what a hipped roof, a gable, and a jerkin-head are to know they don't all belong on the same house.
Making fun of McMansions has even become part of popular culture. There are several web sites dedicated to mocking the form. In House of Cards, Frank Underwood gave home buyers his own brand of home buying advice: "Money is the McMansion in Sarasota that starts falling apart after ten years. Power is the old stone building that stands for centuries."
We don't care if your dream home is a suburban estate, a city loft, or a condo at the beach. Our job is to help you navigate the jumble of tax laws that make even the gaudiest McMansion look balanced and proportional. So call us when you're ready for a blueprint — we'll be here to help you build the tax shelter you need!
Monday, November 14, 2016
All You Need is Love
No matter who we voted for, we can all agree that this has been the nastiest presidential election since Thomas Jefferson called John Adams a hermaphroditic bastard. This week it's finally (finally!) come to an end. Whether you're elated or nauseated by the results, there's probably one emotion you share with most Americans right now: relief that the campaign is over. You've taken a long hot shower, and you got to enjoy your Sunday afternoon football with no political ads.
Now it's time for everyone to make nice. Donald Trump began his victory speech by graciously praising his rival Hillary Clinton: "Hillary has worked very long and very hard over a long period of time, and we owe her a major debt of gratitude for her service to our country." Hillary returned the favor the next day, telling her supporters we owe Trump an open mind and a chance to lead. Outgoing President Barack Obama stated we are all on the same team and we are all rooting for his success.
As the Beatles once sang, it seems that "all you need is love." Unfortunately, not everyone seems to agree. We're talking, of course, about the romantics at the Internal Revenue Service.
Our story this week starts with Joseph L. Jackson and his wife Sylvia. Joseph is the pastor at Triumph Church of God, a tiny Florida congregation with just 25 to 30 regular members. His wife sat on the board of directors. Together, the Jacksons managed the church's checking account and appeared to sign all checks jointly. As you can imagine, this won't be one of those stories involving rich people with billions of dollars or rich corporations with trillions of dollars.
Joseph told the church's board of directors that he didn't want an actual, taxable salary for his work. However, he said, he would be perfectly delighted to receive "love offerings," gifts, or loans from the church. In 2012, the couple signed $4,815 worth of checks payable to Mr. Jackson, with "love offering" or "love gift" marked on the memo line.
At the end of the year, the church issued Jackson a 1099-MISC for the income. Next year, when the Jacksons filed their return, they reported $6,478 in deductible contributions to the church. But they omitted the $4,815 the church had paid to them. Naturally, with 1099 in hand, the IRS objected, and everyone wound up in court.
Last month, Special Judge Daniel Guy issued his opinion in Jackson v. Commissioner. No one objected to the deduction for the Jacksons' gift to the church. But the love gifts were a different matter, and Judge Guy took just four sentences to conclude that Jackson's "subjective characterization of the payments as nontaxable 'love offerings' and 'love gifts' is misguided." (By "misguided," of course, what he really meant was "ridiculous" — you just don't get to say that when you're a Tax Court judge.)
When your kids were little and they got flustered, you might have looked down at them and said "use your words!" The same advice is true here. It's a common misperception that taxes and tax planning are all about numbers. But really, they're about the words we use. Can we legitimately interpret words to characterize money we receive as "nontaxable"? Can we interpret them to characterize money we spend as "deductible"? Merely calling something "nontaxable" or "deductible" isn't enough. Call us if you want to use your words to pay less. We're pretty sure you'll love the results!
Wednesday, November 9, 2016
No, They Don't Want Justin Bieber Back
Given how long the 2016 presidential election season was, you're probably in one of two camps right now: ready to move to Canada, or relieved you don't have to. Either way, it's likely more Americans have actually thought about Canada in the last year than in the entire last century. So let's take a look at how Canada's tax system works, eh? Here's what you're in for (or what you're missing) from a country that calls its money the "loonie."
At first glance, Canada's tax system looks a lot like ours. The Canada Revenue Agency is the Great White Northern equivalent of our IRS, and it collects income and payroll taxes. "Revenue Canada" also collects the Goods and Services Tax (a 5% value-added tax) and Harmonized Sales Tax, a combined federal/provincial sales tax that replaces the GST in five eastern provinces. Tempted to cheat? Just remember they've got the Mounties on their side!
Canada's federal income tax looks a lot like ours, too, only nicer. Rates start at 15% and top out at 33% on incomes over $200,000. (Right now, one dollar equals about 1.34 loonies.) Capital gains are taxable; however, you'll only include 50% of them in your income. You can defer up to 18% of your previous year's income, up to about $25,000, into a Registered Retirement Savings Account that resembles our 401(k)s. You can also put up to $5,500 per year into a Tax-Free Savings Account that resembles our Roth IRAs.
The big difference comes in the provinces and territories. Here in the US, state tax rates rarely climb above 8%. California has the top rate at 13.3% and it doesn't apply until $1 million. Canada's provincial rates generally start around 8% and climb quickly from there. Quebec has the top rate at 25.75%, and it kicks in at just $103,151. (But it sounds so much better because it's in French!)
Of course, Canadians get something for their provincial tax dollars that we don't get from our states: Canada's legendary healthcare system. Canucks love their healthcare almost as much as they love maple syrup. Doctors handle billing directly with the government for everything but prescription drugs, long-term care, eyeglasses, and dental care. It's hardly perfect, of course — critics point to long wait times for specialists and Canadians traveling to the U.S. for elective surgeries. But in the end, Canadians drop just 9% of their GNP on healthcare, versus 17% here.
And Canada has the usual collection of oddball tax rules you'd expect in any democracy. Blank CDs carry a special "private copying levy" because the government assumes you're using them to violate somebody's copyright. Geese, ducks, and turkeys are tax-free if you're going to breed them, but taxable if they're on the menu. And just this year, Alberta boosted taxes on small breweries from 10 cents to $1.25 per liter, which drinkers are finding hard to swallow.
Canadians will roll out the welcome mat if you decide to pack up your skates and take off. If you're single, visit MapleMatch.com, a dating site to match fleeing Americans with lovelorn Canadians. (Check the boxes for "bacon" and "hockey" to up your odds.) And don't forget that Canada's most recent election lasted just 78 days.
The new administration is sure to bring to change to Washington, and that probably includes changing tax laws. We'll stay on top of it all to help you pay less. Maybe you'll use some of the savings for a city weekend in Montreal, or a ski trip to Whistler? Bring us back some souvenirs, hoser!
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