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\n","featuredImage":{"id":"cG9zdDoyNzAzNDY=","databaseId":270346,"altText":"A taxpayer comparing W-8 vs. W-9 forms.","date":"2024-12-05T12:37:32","fileSize":432295,"mimeType":"image/jpeg","modified":"2024-12-05T12:40:14","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/12/iStock-1270893721.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-5","readable":"December 5, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. 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IRS forms W-8 and W-9 serve distinct purposes in the tax system and are used by different groups to fulfill their tax obligations. A W-8 form is typically required from non-U.S. individuals or businesses to certify their foreign status and can enable filers to claim full or partial exemption from certain U.S. withholding taxes. In contrast, a W-9 form is for U.S. taxpayers, such as freelancers or contractors, and is used only to provide businesses paying them with their taxpayer identification number (TIN). These two forms help ensure accurate tax reporting and compliance for those who need to clarify their residency status or tax obligations.

","

A financial advisor can help you reduce your tax liability by creating a tax plan for your portfolio.

","

What Is Form W-9?

","

Form W-9 is an official request for a taxpayer identification number (TIN) and other basic information. It may be requested from U.S. persons, including individuals, partnerships, corporations, estates or trusts.

","

Typically, businesses use this form to gather necessary details from independent contractors, freelancers or vendors. The information allows them to correctly report payments to the Internal Revenue Service (IRS). There is a threshold for when a W-9 is required. When a company pays non-employee compensation of $600 or more within a year to any individual or company, it must complete a 1099-NEC form and needs the information in the W-9 to do that.

","

The W-9 form itself is relatively brief and asks only for a few key pieces of information:

","

Name
Business name (if applicable)
Address
TIN (This can be a Social Security Number for individuals or an Employer Identification Number for businesses.)

","

There is also a certification section where the individual affirms that the information is accurate and that they are not subject to backup withholding unless indicated otherwise. Backup withholding only applies to some cases.

","

One of these cases occurs when the taxpayer fails to provide a correct TIN. Another time is if the IRS has flagged them for underreporting income. In either case, a percentage of their payments is withheld to cover potential tax liabilities. Form W-9 is not submitted to the IRS directly. It goes to the entity that requests it.

","

What Is Form W-8?

","

Form W-8 is used by foreign individuals and businesses to certify their non-U.S. status and to claim tax treaty benefits, if any are available, for income received from U.S. payers. The purpose of the form is to inform the entity making payments that the recipient is not subject to the same tax withholding requirements as a U.S. taxpayer.

","

Completing a W-8 can let non-U.S. individuals and entities reduce or eliminate U.S. withholding tax on income. Relevant income includes dividends, interest, royalties and other forms of passive income sourced in the United States.

","

Types of Form W-8

","

","

There are several versions of Form W-8, each serving a different purpose:

","

Form W-8BEN: Used by foreign individuals to certify their foreign status and claim tax treaty benefits,
Form W-8BEN-E: Used by foreign entities, such as corporations or partnerships, to claim tax treaty benefits.
Form W-8ECI: Used when income is effectively connected with the conduct of a trade or business within the United States. This may qualify income for a lower tax rate.
Form W-8EXP: Used by foreign governments, international organizations, foreign central banks or tax-exempt organizations to claim exemption from withholding.
Form W-8IMY: Used by intermediaries, such as foreign partnerships or trusts, to certify that they are receiving income on behalf of other individuals or entities.

","

The W-8 forms help ensure that income is taxed appropriately under U.S. law, while also allowing non-U.S. persons to take advantage of treaty benefits. These benefits can be significant, since many treaties call for less than the default 30% withholding rate.

","

These forms are kept on file by the withholding agent for as long as the payment relationship continues. Unlike Form W-9, W-8 forms have an expiration date and must be resubmitted every three years or whenever circumstances change. A move to the U.S. or another foreign country, for example, would require a new submission.

","

W-8 vs. W-9 Tax Form: Key Differences

","

Form W-8 and Form W-9 address distinct requirements for taxpayers based on their residency status, tax reporting obligations, withholding rates and renewal processes.

","

Residency Status

","

Form W-8 is used by foreign individuals and entities to certify that they are not U.S. residents for tax purposes. Form W-9 is used exclusively by U.S. persons—citizens, resident aliens, or domestic entities.

","

Tax Reporting Requirements

","

Form W-8 helps foreign individuals and businesses certify their eligibility for tax rate reductions or withholding exemptions under applicable tax treaties on U.S.-sourced income. Form W-9 is used by U.S. persons to provide their taxpayer identification number (TIN) to entities that pay them so that this compensation is correctly reported to the IRS.

","

Withholding Tax Rates

","

For non-U.S. persons who complete a W-8, the default withholding rate is typically 30%, although this can be reduced if a tax treaty exists. For U.S. persons completing a W-9, there is generally no withholding tax applied to most types of income. However, backup withholding at a rate of 24% may apply if the individual is flagged by the IRS or fails to provide accurate information.

","

Expiration and Renewal

","

Form W-8 expires and typically needs to be renewed at least every three years, depending on the circumstances. Form W-9 does not have an expiration date. Once submitted, it remains valid indefinitely unless the individual’s circumstances change—such as a change in residency or taxpayer identification number.

","

Bottom Line

","

","

Form W-8 and Form W-9 play distinct roles for taxpayers based on their residency status and tax obligations. Completing the relevant form can help you report income accurately and make sure that it gets taxed accordingly. This can result in tax benefits such as reduced withholding rates, while avoiding potential complications, delays and added costs.

","

Tips for Tax Planning

","$45","

Photo credit: ©iStock.com/ElenaMist, ©iStock.com/ljubaphoto, ©iStock.com/shironosov

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The IRS has clear guidelines and specific thresholds that dictate when and how U.S. persons (citizens, resident aliens or domestic trusts) must report gifts from foreign entities. With penalties for non-compliance potentially reaching staggering amounts, understanding these rules is not just a matter of financial literacy but of fiscal responsibility. If you receive a gift […]

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","

If you need help with your taxes or your entire financial picture, consider talking to a financial advisor.

","

How Reporting Foreign Gifts Works

","

The Internal Revenue Service (IRS) mandates that U.S. persons disclose certain gifts from abroad to ensure adherence to tax laws. This obligation is a critical compliance measure to prevent tax evasion and maintain transparency in international financial dealings. The threshold for reporting is quite specific: gifts from foreign entities or individuals that surpass $100,000 in aggregate value during a tax year must be reported.

","

Here are the key points to know about paying taxes on a gift from a foreign entity:

","

Gifts totaling over $100,000 from foreign entities or individuals during the year must be reported.
Amounts over $18,567 (for 2023, $19,580 for 2024) received from foreign corporations or partnerships must also be disclosed.
Reporting thresholds are adjusted annually for inflation.
Non-compliance can result in financial penalties.

","

For those who might be receiving foreign gifts, it is crucial to report them in a timely and accurate manner, as per IRS guidelines, to avoid such penalties. The specific IRS form used for reporting foreign gifts is Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” Consultation with tax professionals is highly recommended due to the complexity of tax laws, although it is not the only way to ensure correct reporting.

","

What Defines a Gift From a Foreign Entity?

","

A gift from a foreign entity is typically identified as a transfer of property that is voluntarily executed without the expectation of a return or compensation. This can occur between individuals, organizations or states across international borders. Have you ever received a gift from abroad? Here’s what you need to know about potential tax obligations.

","

Tax laws, such as those enforced by the U.S. Internal Revenue Service (IRS), have their own criteria for what constitutes a gift. The IRS defines a gift as any transfer where full consideration, quantifiable in monetary terms, is not reciprocated. While diplomatic gifts may avoid tax repercussions due to their ceremonial role, individuals may face tax implications depending on the gift’s value and its nature.

","

The relationship between the donor and recipient is also a factor, as gifts from family members might be treated differently than those from unrelated parties. Legislative changes, such as the Tax Cuts and Jobs Act of 2017, have further influenced the reporting and treatment of foreign gifts, underscoring the importance of staying informed about regulatory changes to ensure adherence to the law.

","

How to Complete Form 3520

","

","

Form 3520, officially titled the “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” has a primary function to disclose information about transactions with foreign trusts. For U.S. persons, which encompass citizens, resident aliens and domestic trusts, engaging with international financial activities, understanding and fulfilling the obligations of Form 3520 is essential. Not only does it maintain legal compliance, but it also acts as a shield against the imposition of severe penalties.

","

Completing Form 3520 involves meticulous attention to detail across its various sections. Here is what you need to know as you fill it out:

","

Part I calls for disclosures regarding any money or property transfers to foreign trusts.
In Part II, if you’re treated as the owner of any part of a foreign trust, information must be furnished accordingly.
Part III calls for disclosures regarding money or property transferred to you from foreign trusts.
The most challenging section, Part IV, pertains to reporting large gifts or bequests from foreign persons. Lines 54-56 in this section, for example, demand detailed information about the donor and the precise valuation of the gift, which can be intricate to determine.

","

Before submitting, carefully review your completed Form 3520 to ensure all information is accurate and all required sections are filled. Sign and date the form as a final step. Typically, the form should be filed by the 15th day of the fourth month following the end of the U.S. person’s tax year, which is usually April 15th for individuals. However, taxpayers should be aware of the possibility of filing extensions, which may also apply to Form 3520, to manage their filing obligations effectively.

","

Form 3520 vs. Form 3520-A

","

Two critical forms that both facilitate similar things are Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” and Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner.” These forms are essential for the IRS’s efforts to ensure transparency and compliance with tax obligations arising from international financial interactions.

","

Form 3520 is a document U.S. taxpayers must complete when specific conditions are met. For example, it is necessary when a taxpayer receives a gift or bequest from a foreign individual that exceeds $100,000 during the tax year. This form also applies when the taxpayer receives distributions from a foreign trust. When the gift or bequest comes from a foreign corporation or partnership, a lower threshold of $18,567 triggers the reporting requirement.

","

In contrast, Form 3520-A serves a specific and related function. It must be filed by the trustee of a foreign trust with at least one U.S. owner, defined under the “grantor trust” rules in sections 671-679 of the Internal Revenue Code. This form reports detailed information about the trust’s U.S. beneficiaries, its assets, and any income it has distributed during the tax year, functioning as an annual information return for the foreign trust.

","

To better understand when each form should be used, consider the following scenarios requiring Form 3520:

","

You received a gift or bequest from a foreign person that exceeds the reporting threshold.
You are the beneficiary of a foreign trust and have received distributions.
You have made a transfer to a foreign trust or have created one.

","

For Form 3520-A, the filing requirement applies if:

","

You are the trustee of a foreign trust with a U.S. owner.
The trust requires annual reporting of its activities and beneficiaries in the U.S.

","

If you’re feeling uncertain about your filing obligations or the details discussed here, it’s wise to consult with a tax professional. They can provide personalized guidance to ensure that you meet your reporting requirements and avoid potential penalties.

","

Bottom Line

","

","

Understanding the U.S. tax system requirement for filing Form 3520 and Form 3520-A can help you avoid penalties. The thresholds for reporting vary and are adjusted annually. Whether you’re receiving a gift from a foreign relative or engaging with a foreign trust, the obligation to report such interactions is clear, and the penalties for non-compliance can be severe.

","

Tips for Tax Planning

","$5d","

Photo credit: ©iStock.com/Riska, ©iStock.com/Antonio_Diaz, ©iStock.com/zamrznutitonovi

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In most cases, when selling your primary residence you can exclude $500,000 of the gain if you file as a married couple. If that’s your situation, and you meet conditions to have the gain qualify as a long-term capital gain, you likely won’t owe any tax. If you file singly while still meeting long-term capital […]

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","

However, your actual tax bill can vary widely depending on your situation and the tax-management strategies you employ. You may have to pay taxes on some, all or none of your net, depending on circumstances. If you’re evaluating tax consequences of selling your home, consider talking it over with a financial advisor.

","

Capital Gains Tax Basics

","

As a rule, any time you sell an investment for more than you paid, you owe taxes on the gain. This applies to your principal residence as well as stocks, bonds and other assets. If you owned the asset for more than a year, you’ll owe long-term capital gains taxes of 0%, 15% or 20% depending on your income. If you sold the asset after owning it for less than year, the gain is added to your ordinary income which is taxed according to the current income tax brackets.

","

When it comes making a profit by selling your primary residence, special rules apply. The main ones are the $250,000 exclusion for single filers and the $500,000 exclusion for married joint filers. The exclusion means you can deduct this amount from the net gain on the sale. You’re only taxed on what is left afterward and, if there’s nothing left, you’ll owe no tax.

","

Speak with a financial advisor to navigate the nuances of taxes in your own situation.

","

Capital Gains Tax in Action

","

Much depends on individual circumstances when it comes to taxes on sale of a residence. Here’s what could happen in four different simplified scenarios:

","

Scenario One: You are married filing jointly, owned and lived in the home for two of previous five years and haven’t used the exclusion in the last two years. In this case, all of the $480,00 gain would be covered by your $500,000 exclusion. You’d owe no taxes on the sale.

","

Scenario Two: You are single filing jointly, owned and lived in home for two of the previous five years and haven’t used the exclusion in previous two years. You can exclude $250,000 of the net, but you’ll owe long-term capital gains at the rate of 15% on $230,000 of the gain. The tax bill would be $34,500.

","

Scenario Three: You have owned the home for at least a year but you haven’t lived there for two of the previous five years or you have used the exclusion in the previous two years. You can’t exclude any of the gain and you’ll likely owe capital gains tax of 20% of the $480,000, or $96,000.

","

Scenario Four: You haven’t owned the home for at least a year. In this case, the entire $480,000 gain will be added to your ordinary income and be taxed according to the current income tax rates. Your rate will depend on your other income and your filing status. However, the added income is likely to push you into the 35% bracket at least.

","

A financial advisor can help you integrate your retirement and tax objectives. Get matched to a fiduciary advisor for free.

","

Other Strategies

","

If you find yourself owing taxes on sale of your primary home, there are some moves you can make to reduce the bill. The first is to make sure you have accurately calculated the adjusted cost basis when figuring your net. To do this, add the home’s initial purchase price to agent commissions and legal fees paid in connection with the transaction. Also add money you’ve spent for remodeling, additions or improvements. Now subtract this total from the sale price. This is your taxable net gain.

","

For instance, say as a single filer you bought the home for $300,000 15 years ago. You sold it recently for $780,000 and you’re using that to calculate your $480,000 net gain. As the seller you paid a 6% real estate agent commission of $46,800, plus $5,000 in eligible legal fees. You put in a $40,000 pool a few years ago, and replaced the roof for $15,000 a while back. These sums amounting to $106,800 can be added to the $300,000 purchase price to generate an adjusted cost basis of $406,800. Now your instead of owing taxes on $230,000, you’ll owe taxes on just $123,200.

","

If you’re an investor, you may be able to use offsetting capital losses to lower your taxable gain. For instance, if you lost $50,000 on a stock trade that was realized during the current tax year, you may be able to reduce your capital gain on the home sale by a similar amount. Some conditions apply, such as that you use short-term capital losses to offset short-term capital gains first and the same for long-term capital gains. However, you may be able to cut your tax bill if you have other capital losses.

","

Rules on taxing gains from sale of your primary home change from time to time. For instance, at one time you could defer gains. However, that option no longer exists since it was replaced by the current system of exclusions. Another gain-deferral strategy, using like-kind exchanges, only applies to investment properties.

","

You may be able to qualify for partial exclusion of the gain if you meet specific requirements, such as you or your spouse being transferred to a workplace at least 50 miles further away than your previous workplace. Health conditions, divorce and unemployment may also open the door to a partial exclusion.

","

Consider speaking with a fiduciary financial advisor if you have questions about your personal circumstances.

","

Bottom Line

","

You can avoid paying any taxes on the gain if you’re married and have lived in the home for at least two of the previous five years and haven’t used the $500,000 principal residence capital gains exclusion in at least two years. If you’re single, you’ll likely pay taxes on at least some of the gain. However, a number of factors other than marital status, length of time in the home and previous exclusion use also may come into play. Depending on the details, you could owe from zero to many thousands of dollars.

","

Tips

","$70","

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The earned income tax credit can provide substantial financial benefits for low-income working individuals and families, reducing taxes by hundreds or even thousands of dollars. Not just anyone can qualify for this tax break, however. EITC eligibility depends on your income, filing status, qualifying children and a number of other factors. You also have to be a U.S. citizen or be married to someone who is, for instance. Speak with a financial advisor to ensure that you qualify for every tax credit and deduction that you’ve earned.

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Earned Income Tax Credit Essentials

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The EITC offers eligible tax filers a refundable tax credit equal to a percentage of their total earnings up to the maximum allowed. If you qualify for the EITC, you may even get money back if no income tax was withheld from your paychecks. The EITC for 2024 ranges from a high of $7,830 (up from $7,430 in 2023) for families with at least three children down to a low of $632 (up from $600 in 2023) for taxpayers with no children.

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Instituted in 1975 and made permanent in 1978, the EITC is intended to relieve poverty by incentivizing people to work so they have earned income to make them eligible. Working taxpayers receive EITC payments of about $57 billion annually, most of it going to parents.

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EITC Qualifying

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The dollar amount of the EITC slides up and down based on your total earnings and number of children. Benefits rise with each additional qualified child, up to three or more children ($4,213 for one, $6,960 for two and $7,830 for three or more). For eligible workers without children, maximum credits stand at $632. So parents see much higher credits. But the EITC encourages labor force participation for all qualifying lower-income taxpayers.

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Basic thresholds for EITC eligibility include having income below set limits tied to your filing status and number of claimed dependents, receiving investment or interest income below $11,600 for tax year 2024 (up from $11,000 in 2023), meeting citizenship and residency requirements, having a valid Social Security number, using a permitted filing status, and earning qualifying income through work.

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Additionally, you must reside in the United States for over half the year before you can qualify without kids. Exceptions exist for military personnel, some clergy members, surviving spouses and taxpayers with disabilities.

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Filing status matters too. You can only get the EITC if you are married filing separately when you meet certain conditions. To qualify as head of household, you must be unmarried (which can include legal separation) while paying for over half of the cost of keeping up the home where you and your qualifying dependents lived.

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And, if you’re married filing jointly, only one spouse needs to satisfy the rules regarding Social Security numbers and U.S. residency. In other words, non-citizens can qualify if married to a citizen or resident alien meeting those requirements.

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EITC Earnings Limits

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The rules for determining whether your earned income allows you to claim the EITC are somewhat more complicated. Eligible earned income varies depending on your tax filing status and number of children. The table below shows the 2024 income level where this tax credit gets phased out completely. For example, a single taxpayer with two children needs earned income below $55,768 to get any portion of the credit.

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Number of Children	Maximum EITC	Earnings Level Where EITC Get Fully Phased Out
0	$632	$18,591 singles; $25,511 joint return
1	$4,213	$49,084 singles; $56,004 joint
2	$6,960	$55,768 singles; $62,688 joint
3	$7,830	$59,899 singles; $66,819 joint

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These maximum earnings figures adjust annually. In 2023, the thresholds were slightly lower. The maximum possible EITC credit also rises each year to adjust for cost of living.

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Bottom Line

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In providing substantial financial assistance to working families, the earned income tax credit aims to lift millions out of poverty annually. In 2024, taxpayers earning under $66,819 may be eligible to claim the EITC, receiving up to $7,830 depending on income, number of children and filing status. Ensuring eligibility requires satisfying earned income limits, having Social Security numbers for everyone listed on the return all dependents and meeting rules regarding filing status, citizenship and household expenses.

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Tax Planning Tips

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