Still doing tax returns for my adult children & their spouses

Every year I ask myself, should I continue to offer to do tax returns for my adult children and their spouses? All of them have university degrees and are smart enough to file their own tax returns. My daughter was willing to do it one year using tax preparation software with only a little help from me.

Part of my problem is Canadians are not even aware of how much tax they pay. Plus we keep voting for governments that buy votes using our tax dollars. The average Canadian family will pay 42.9% of their income in taxes imposed by all three levels of government in 2016. (Federal, provincial and local) Tax freedom day was June 7, 2016 if Canadians paid their total tax bill up front. Our U.S. neighbours tax freedom day was April 24th and they will only pay 31% of their income in taxes.

There are a number of reasons why I continue to offer to do tax returns for the whole family. Having worked as a financial advisor, tax planning is a key element when putting a financial plan together. My tax knowledge and skill comes from working many years with accountants and tax lawyers ensuring that my whole family pays the least amount of tax.

Plus, the Canadian tax system is very complicated and is constantly changing with every federal and provincial budget. For example: many tax credits that were given by the Conservative government have been taken away completely by a new Liberal government.

For the 2015 tax year, the Liberals cancelled income splitting for families, a maximum tax credit of $2,000 for transferring up to $50,000 of income to a spouse with a lower income if they had a child under 18 years of age.

Some changes for 2017 include the elimination of the following credits:

  1. Education and textbooks credit
  2. Children’s fitness credit
  3. Children’s arts credit
  4. Public transit tax credit

Now, most retired Canadian seniors who don’t have a pension from their former employer are not even aware of a $2,000 pension credit. It requires opening a RRIF account, transferring $2,000 from their RRSP and then taking it out. They don’t have to wait until they reach the age of 71 in order to open a RRIF account. Plus, RRIF income can be split with your spouse if both of you are 65 years of age which could potentially add up to $4,000 of income tax free per year.

The Federal Liberal government will introduce a new budget on March 22 and there are rumors of more tax increases. Three things that Canadians should worry about;

  1. Higher capital gains inclusion rate from 50% to 75%
  2. Reducing the dividend tax credit
  3. Taxing your principal residency 

I will end this post with two well known proverbs. ” In this world nothing can be said to be certain, except death and taxes.” & “A penny saved is a penny earned.”

 

Why not go crazy and spend some money, you’re earned it?

devil & Angel

After working for decades, my retirement plan will finally allow me to enjoy life with few worries. It is so tempting to buy that luxury car, travel to some exotic destinations or remodel our home. Why not spend the money, I earned it and people say that can’t take it with you.

On the other hand, the financial meltdown of 2008-09 was scary, it reminds me that unexpected events could disrupt our travel plans and lifestyle choices. Life has thrown me a number of surprised curve balls over time so I remain cautious.

Surprise Curve Ball No. 1: Ailing parents

The Canadian Alzheimer society estimates that one out of five Canadians provide some form of care to seniors with long-term health problems. What if your parents need nursing or assisted living care and they don’t have the money to pay for it. Unfortunately, elder care is not cheap and costs vary depending upon where you live. (Surprise, my elderly mother has been diagnosed with early stages of dementia.)

In my area, estimates for a private room in a nursing home is around $50,000 per year and you need to apply two years in advance just to get in. An alternative would be to hire a live in caregiver if your parents own their own home. I am not a big fan of using a reverse mortgage to pay for a caregiver but all options should be investigated.

Another option that may lessen the financial impact on your retirement nest egg is to determine if it makes more sense for you to become the caregiver. One of my friends, will an ailing mother-in-law, used an agency to hire a full-time live in caregiver from aboard. Since his children had moved out, he had two spare bedrooms, one for care giver and the other for his mother-in-law. He was lucky that all his wife’s siblings agreed to share the extra costs.

 

Surprise Curve Ball No. 2: An adult child falls on hard times.

There are a variety of reasons why a child may need some financial aid. Most common are marriage breakdown, job loss, poor saving habits or bad decision-making. There is a disturbing trend for adult children to move back in with their parents. The media refers to them as Boomerang kids.”

Parents always want to help their children out of trouble. It helps to know how much money you can afford to give before it wreaks havoc on your retirement plans. Before making any decisions, determine how long you can provide any financial assistance and make it clear to the child up front that your financial aid can only last for a certain period of time. If they move back in, give them a moving out date. (Both my adult children have solid careers and stable marriages, so far so good!)

The risk of joining the sandwich generation is increasing

The new reality is low-interest rates over the past decade and talk of negative rates in the future could escalate the number of seniors requiring financial aid from their children due to illness. Your parents are living longer, 1 in 3 seniors are dying from Alzheimer’s and Dementia. Your children are getting married much later and are deeper in debt.

I recently emailed a follow blogger if he was planning to apply for social security at 62?  His answer: Still working, my youngest will be in college”

Sometimes you just have to be aware what is happening within your extended family. Here are two posts that could be of help.

Talk to your Elderly Parents about Money

Bank of Mom & Dad, Cutting the Purse Strings

Don’t be troubled if you have to put a limited on financial aid to your family. It’s okay to look after yourself first.

Panama Papers: Tax Avoidance and Tax Evasion

panama

The recently leaked “Panama Papers” exposed the existence of thousands off shore bank accounts including some high and mighty political figures. The super-rich have been taking advantage of tax havens since World War I, paying tax lawyers to find loop holes in tax rules to avoid paying taxes isn’t something new.

Key differences between Tax Avoidance and Tax Evasion

Definition of Tax Avoidance

An arrangement made to beat the intent of the law by taking advantage of the shortcomings in the tax rules. It refers to finding out new methods or tools to avoid the payment of taxes which are within the limits of the law. The only purpose behind tax avoidance is to postpone or shift or eliminate the tax liability. This can be done investing in government schemes and offers of tax credits, tax privileges, deductions, exemptions, etc., which will result in the reduction in the tax liability without breaching any laws.

Definition of Tax Evasion

An illegal act, made to escape from paying taxes. Such illegal practices can be deliberate concealment of income, manipulation in accounts, disclosure of unreal expenses for deductions, showing personal expenditure as business expenses, overstatement of tax credits or exemptions. Tax evasion is a criminal activity and is subject to punishment under the law.

trust fund baby

A trust fund baby is the perfect example of tax avoidance by the rich. A trust fund is a legal entity that allows the rich to establishment an investment account for their children, grandchildren, nieces and nephews. The income earned in the account and the release of the funds to the beneficiaries are under specified conditions. (The U.S. Secretary of State, John Kerry married Teresa Heinz who has a trust fund valued around 500 million dollars).

I am not a tax expert but many tax filers will pay more in taxes this year than they should. It is a simple case of missing available deductions and tax credits. The problem is understanding the tax rules, knowing what is available and whether you qualify.

Some unclaimed deductions & credits for U.S. citizens

  • Tax Preparation Fees
  • Child and Dependent Care Credit- summer camps fees are eligible
  • American Opportunity Tax Credit
  • Lifetime Learning Credit
  • Energy Credits
  • Savers Credit – for people with low to moderate income who make contributions to an eligible retirement plan
  • Mortgage Points – to lower an interest rate on a home loan
  • Moving expenses

Some unclaimed deductions & credits for Canadians

  • Equivalent-To-Spouse Credit – single mothers
  • Medical expenses – any 12 month period , combine with spouse and children under 18
  • Charitable donations – spouses can pool them together to get a bigger deduction
  • Childcare Expenses – include hockey schools and summer camp fees
  • Pension Income Credit RIF payments qualify
  • Moving expenses

Tax planning in order to defer taxes, to maximize deductions & credits and divide income among family members is something that all tax payers should consider doing.

Just remember that both Tax Avoidance and Tax Evasion are meant to ultimately reduce tax liability but in the eyes of the law, avoidance is legal and evasion is not.

Does Your Debt Die With You?

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My daughter asked me this question while having dinner at her house.  It started with me complaining about how some of my boomer friends were living beyond their means and had mountains of debt. I had to reassure her that we were not in that situation. (It is not uncommon that your family dinner conversations included some financial topics)

I explained that she and her brother had nothing to worry about. Children are not responsible for any debts belonging to their parents.

Generally, the estate pays off debts, as long as there’s enough money in an estate to pay them all off. Any remaining money goes to beneficiaries. There is an order to how debts must be repaid. Funeral expenses, income & estate taxes and secured debts are the top. Unsecured debts, such as credit cards, lines of credit are near the bottom. If the estate does not have enough money to pay back all the debt, creditors are out of luck.

Remember that jewelry, antiques and other valuables must all be added to the total value of the estate. You might be forced to sell some of them in order to pay back creditors. Very important, the executor of the will could be liable if he or she pays money out to the beneficiaries from the estate before all the debts are settled, creditors could make a claim against the executor personally.

Creditors could also go after an individual’s retirement account and proceeds from a life insurance policy if no person is named as beneficiary. Those funds would automatically be included into the total value of the estate. However, in Canada, retirement accounts can to transferred tax-free to the surviving spouse.

Joint ownership or loans that have been co-signed are different. You will be responsible to pay them back. You don’t inherit your parents’ or your children’s debts unless you guaranteed them.

It is very important for young people to check their own credit report periodically to make sure you are not still holding debt for someone who isn’t in your life anymore. Credit cards that you have co-signed years back may still be active and you could be also on the hook for apartment leases even if you moved out.

Estate laws vary depending upon where you live and can be very complex. Get some good legal advice, talk to a tax specialist and pick a knowledgeable executor. You can’t take it with you! However, avoid giving it to the tax man and leave something to your love ones instead.

 

death of credit

 

 

Bank of Mom & Dad, Cutting the Purse Strings

mom & dad

It’s natural for parents to want to help and support their children. But should that help continue well into adulthood? By helping too much, parents run the risk of imperiling their own financial future and creating dependence. The reality is that you are not doing the adult kids any favors  by always bailing them out.

The Great Recession rewrote some of the rules of financial independence for many young adults. With jobs being scarce, student debt soaring and high household debt, it wasn’t uncommon for grown children to take refuge in their childhood homes.

Those were unusual circumstances when even hardworking children found themselves in financial straits. It is okay to help them if they are financially responsible but have fallen on hard times. However, an “open wallet” policy is dangerous for parents as well as children. Always coming to their rescue can jeopardize both your child’s drive and your retirement security.

Tough Love: Teaching Financial Responsibility

The best defense against dependent children is increasing financial responsibility as children grow. You need to start the process when your children are young. Counting on the school system or waiting until after they graduate college can be a costly mistake.

I strongly recommend pushing your young children to get part-time jobs. If they are driving the family car, make them pay for some gas or a portion of the car insurance. Paying for some or all of their cell phone bill is another way to teach financial responsibility. Avoid always acting as their personal taxi service, make them take public transportation once in a while.

My son never wanted to use the family van when going out with his friends while living at home. Going away to university, he spent two years taking public transportation, that experience really changed his attitude. He was so grateful that I gave him our 10-year-old van instead of trading it in.

It’s okay to say no! My eight year old daughter asked for horseback riding lessons. I honestly didn’t take her request seriously. I said that riding lessons are expensive and we didn’t have the money right now. She came back with the job section of our local newspaper. She pointed to an ad that was looking for delivery people. “Is this enough money to pay for riding lessons”? It wasn’t but we said yes to riding if she was willing to give us half her earnings from the paper route. (We invested her money and gave it back when she graduated from university).

The Right Kind of Help

  1. If your children need a car to get to work, consider giving them an old family car that is still reliable. A few repair bills can teach them some added responsibility and give them an incentive to save for a new car.
  2. If your children are paying a high rate of non-deductible interest on their student loans, loaning them money at a lower rate of interest can be helpful. Put all the details of the loan in writing and make sure that your children make regular monthly payments to you.
  3. Some assistance with a down payment for a house is okay as long as your children are willing to disclose their financial situation. Bank of Mom & Dad should ask the same questions as your local banker. Are they paying off their credit card balances every month? What are their fixed monthly debt payments? Add the estimated mortgage payments, property taxes and heating costs to those payments, if it exceed 40% of their gross income then they probably can’t afford to buy the house.
  4. Help your children save for retirement. Deposit money directly into a retirement account that generates a tax refund. The refund gives them a little extra cash but the compounding effect from investing the money early can increase the chances of a successful retirement.
  5. Some children will never be financially responsible, skip a generation and open an education plan for your grandchildren.

As a financial advisor, I encountered financial mistakes made by some of my wealthier clients. For example; a client  gave his newlywed daughter and son-in-law enough money for the entire down payment for a house.  Three years later, they got divorced and the ex-husband walked away with half the proceeds from selling the house including half of the Dad’s down payment.

As a parent, you need to protect yourself, get some legal advice when transferring large sums of money.

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Gifts vs. Loans

For U.S. citizens there is a gift tax on sums greater than $14,000 or $28,000 per couple. In Canada, there isn’t a gift tax on money given to adult children. However, transferring investments or property to your children can trigger capital gains tax which must be claim on your tax return. Be extra careful transferring investments to a minor, the parent incurs tax on any interest or dividend income from those investments until the minor turns eighteen.

Be aware that the tax man requires a minimum interest rate charge to loans made to family members. The interest rate varies from year to year. The current rate for Canadian families is only 1% with no time restriction regarding payback.

However, Internal Revenue Service rules are different, in March the Applicable Federal Rate was 0.40 percent for loans up to three years, 1.47 percent for loans of three to nine years and 2.19 percent for loans longer than that. If your children don’t pay it back, it becomes a gift.

Keep in mind that a child in their 30s or 40s has lots of options for generating income; a retiree does not.

Talk to your Elderly Parents about Money

up2 up1

I believe in planning for the worse and hoping for the best. Money conversations between parents and adult children can be difficult. Don’t wait for tragedy to strike before talking about issues such as your parents’ estate planning wishes and elder care issues.

Initiate the conversation early while both of them are healthy. Don’t be shy about bringing up detailed questions. Like “have you updated your wills lately’? How about power of attorneys for financial and medical matters?

Before going on a vacation, my wife and I would tell our kids “The will is in the safe” It was not intended to scare the kids but to let them know that we have planned ahead. We inform them that in the safe was a contact list for our insurance agent, lawyer, accountant and investment advisors. We also included an inventory of all  assets and liabilities.

Assets and liabilities to inventory could be:

  • real estate (residence, vacation home)
  • investments
  • retirement accounts
  • insurance policies
  • annuities
  • interest in a business
  • checking and savings accounts
  • safety deposit box number and location of the  keys
  • art and collectibles
  • cars
  • credit card debt
  • mortgages
  • other loans outstanding

Don’t be surprise if your parents refuse to discuss exact figures, in their minds you are still children. However, it is important that they compile the information so that the surviving spouse or children can deal with financial and medical matters.

These issues can be really difficult

  • Where will the money come from in the event of a long-term care situation?
  • Who will take over your parents’ financial affairs in the event they become unable to do so?
  • What are your parents’ wishes, including disposition of their assets upon their death, burial, staying in their home, etc.?
  • How to transfer your parents’ wealth to the next generation to avoid taxes?

If you are like me and have already lost one parent, you can not delay in having “the talk”! There are no issues with my siblings as to who does what because I am an only child. No doubt, this will be a difficult situation with siblings.  Getting everyone to agree on a course of action will take time and be prepared for some conflict.  Check your emotions at the door and do what is best for Mom and Dad.

At the end of the day, what is really at stake is the opportunity for parents to communicate their wishes to their adult children and for children to help their parents make those wishes come true.