Will Canadian residents owe more to IRS?

U.S. taxes are set to go up next year—and may become even higher than ours.

Read: U.S. stands firm on tax law changes

This means U.S. citizens living in Canada and Canadians doing business in the U.S. may soon owe more tax to the IRS, says James Gifford of Moodys Tax.

So what should clients do?

Read: Americans in Canada get tax reprieve

One option is to avoid capital gains. Clients can do this by: making long-term investments that minimize the need to sell; borrowing against appreciated securities rather than selling them; and matching gains against losses, writes Gifford.

Of course this might not always be an option, so if your client is planning to sell appreciated assets, he should consider doing so before the end of 2012, suggests Gifford.

“But remember that even if capital gains stay at 15%, the Medicare contribution tax adds 3.8% on the capital income of high-earners,” he adds.

He also advises looking at employment stock options. In Canada benefits are only 50% taxable, while the U.S. depends on the type of stock option (e.g. incentive or qualifying).

Read: Capital gains mean tax-efficient investing

And warn U.S. citizens accustomed to getting foreign tax credits. The client might have been paying more in Canadian tax, and receiving credit to cover his entire U.S. tax liability, but this may no longer be possible due to higher U.S. rates.

“Non-compliant taxpayers face not only failure-to-file penalties, but now could face failure-to-pay penalties as well,” notes Gifford.

Read: IRS offers tax amnesty to Americans in Canada

And one of biggest changes to U.S. tax in 2013 will be applied to estates and gifts. The current exemption of $5,132,000 will decrease to $1 million, and tax rates on these exemptions are rocketing from 35% to 55%.

Older U.S. taxpayers and those married to Canadians may wish to take advantage of the current low 2012 rates by gifting some assets, advises Gifford.

Read the three most likely outcomes as a result of U.S. tax changes.