Dodge the taxman with tax-free sources of income

Over the past few weeks, I’ve been writing about the five pillars of tax planning. This week I would like to talk about Pillar 5, avoidance to save taxes. Don’t worry about it. It’s not illegal. We are talking about structuring operations so that certain types of income are not taxable at all.

When I was thinking about this concept of dodging, I couldn’t help but think of the movie. dodgeball A character said, “Remember the 5 D’s of dodgeball: Dodge, Duck, Dip, Dive, Dodge.” Strange as it may seem, the five D’s in tax planning are very similar concepts: deductions, deferrals, splits, disguise and avoidance. Let’s take a look at how to dodge. tax.

Use tax-exempt FHSA. Beginning this year, first-time homebuyers will be able to open a tax-free First Home Savings Account (FHSA). Check with your financial institution for when it will be available. It should be available out of the box. Under FHSA, first-time homebuyers (who, along with their current spouse, did not own a home in the year FHSA began or in the last four years) can contribute $8,000 annually to the FHSA. Lifetime limit of 4 million yen. Contributions are deductible and you will not be taxed on your withdrawals as long as the money is used to grow your plan, earn income or buy a home. Good deal.see me article More information from August 25, 2022.

Negotiation of tax-exempt benefits. Employer-provided benefits are generally treated as taxable, but may be tax-exempt. These benefits include certain educational costs, counseling costs, certain membership fees to social or athletic clubs, relocation costs, some mobile phone service costs, employer-provided day care, gifts and prizes ( $500 or less per year), parking fees (in some cases), a loan from your employer, or an interest subsidy (i.e. your employer can arrange a mortgage or loan and pay a portion of the interest costs to the lender). increase). For these last two of her benefits, there are no taxable benefits as long as the interest paid personally is at least the rate set by tax law (currently he is 4%).

Claim tax-free death benefits. Your employer can pay up to $10,000 in tax-free cash to surviving beneficiaries at your death. Payments may be tax-free as long as they are paid posthumously in recognition of your merit as an employee.

Invest in tax-exempt life insurance. Our tax law allows investments to be accumulated within a life insurance policy, similar to a tax-free savings account. For every $1 you pay in premiums, part of it goes to death premiums (i.e. the cost of ensuring life), but part of the premiums goes to a growing investment pool. You can also Income from insurance is tax-free, and the funds accumulated at the time of death are paid tax-free. Insurance that allows for this type of accumulation is ‘whole life insurance’ or ‘universal life insurance’. Term insurance (the cheapest policy available) does not allow you to accumulate investments within the policy.

Use a second will to avoid probate fees. Probate fees are imposed by many states and territories, also known as taxes. These fees are applied when you die and are generally calculated as the percentage of your assets that pass through your will.For certain assets that do not require probate, dispose of those assets You may be able to circumvent probate by using a second separate will for your estate and using the first will to handle everything else you own. Private company stock is an example of an asset that can have a high value and can be passed to heirs by means of a separate will that does not require probate. Please consult your state or territory attorney for this type of planning.

Withdraw funds from your company tax-free. If you own a corporation, there may be ways to withdraw money from the corporation without paying taxes. Consider repaying a shareholder loan that your company owes you, borrowing from the company in certain circumstances, paying a capital dividend, or withdrawing paid-up capital from the company (see tax incentives for these ideas). Please consult an expert). All may be tax exempt. You may also consider paying the company rent for office space in your home that is used for your company’s business. Although you must report these rents as income, you have enough expenses to fully offset this income, effectively making it a tax-free withdrawal from your company.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP is the author, co-founder and CEO of Our Family Office Inc. [email protected].