35:["$","$L36",null,{"category":"$37","relatedArticles":[{"id":"cG9zdDoyMTkzMDE=","databaseId":219301,"postId":219301,"author":{"node":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":908,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":213,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$38","date":"2023-12-06T07:15:00","excerpt":"

Suppose you sell your primary home and make a $750,000 profit. Will you owe capital gains tax on that profit? The short answer is yes. Depending on a handful of factors, you may owe tens of thousands of dollars to over a hundred thousand dollars. Your exact tax liability could vary drastically, so knowing what […]

\n","featuredImage":{"id":"cG9zdDoyMjExNTY=","databaseId":221156,"altText":"","date":"2023-12-04T16:55:44","fileSize":49583,"mimeType":"image/jpeg","modified":"2023-12-04T16:55:44","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2023/12/close-up-of-a-house-sold-sign-on-a-lawn-in-front-of-a-big-modern-house-with-traditional.jpg_s1024x1024wisk20c415x9_vAki1yNJRKketotmAYVn8h7FI67ZbXos9bUIo.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-9","readable":"December 9, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMjA=","databaseId":120,"userId":120,"avatar":{"url":"https://secure.gravatar.com/avatar/9be66d92947dd5b190bf90987b5e85f2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Patrick Villanova is an editor for SmartAsset, producing comprehensive personal finance content to help consumers make better decisions with their money. His particular areas of focus include retirement, financial planning and investing. Patrick studied English at the University of New Hampshire and currently holds the Certified Educator in Personal Finance (CEPF) designation. \r\n\r\nPrior to joining SmartAsset, Patrick was a senior writer at MagnifyMoney, where he covered investing. His career began in journalism and included 11+ years at The Jersey Journal, where he covered sports and news as an editor. His work has appeared on Yahoo Finance, MSN, NJ.com, and The Star-Ledger. He lives in Portland, Oregon.","additionalMeta":{"expertise":"Retirement Planning, Social Security, Estate Planning, Taxes","__typename":"User_Additionalmeta"},"email":null,"firstName":"Patrick","fullName":"Patrick Villanova, CEPF®","lastName":"Villanova, CEPF®","name":"Patrick Villanova, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":307,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"pvillanova","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":908,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"factCheckedBy":{"id":"dXNlcjoxNjc=","databaseId":167,"userId":167,"avatar":{"url":"https://secure.gravatar.com/avatar/ddd04b792d5bd154ea791bf3a9ec0edb?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jaclyn is Director of Economic Analysis at SmartAsset. With a bachelor of arts in economics from The College of New Jersey, she evaluates data for trends that affect your financial life. As a spokesperson for SmartAsset, she has been cited by Bloomberg, CNBC, Business Insider, Fox News, The Hill and many more. \r\n\r\nJaclyn was previously an editor for CNET Money, where she covered banking, investing, credit cards and real estate. She also served as managing editor of small business content for Bizfluent, Work.Chron and AZCentral, and as a research consultant for NAPCO Media. As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":{"expertise":"Financial Planning, Investing, Taxes, Real Estate","__typename":"User_Additionalmeta"},"email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn","lastName":"DeJohn","name":"Jaclyn DeJohn","postCount":{"pageInfo":{"offsetPagination":{"total":57,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jdejohn","__typename":"User"},"secondEditor":null,"hideAuthor":true,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/taxes/sell-house-750k-for-retirement-home-capital-gains","metaDesc":"If you sell your primary residence, the IRS allows you to exempt a certain amount of profit from taxes.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":7,"title":"I'm Selling My House and Netting $750k to Buy My Retirement Home. Do I Have to Pay Capital Gains Taxes?","__typename":"PostTypeSEO"},"slug":"sell-house-750k-for-retirement-home-capital-gains","status":"publish","title":"I’m Selling My Home and Netting $750k to Downsize for Retirement. Do I Have to Pay Capital Gains Taxes?","uri":"/taxes/sell-house-750k-for-retirement-home-capital-gains","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":null,"editedBy":{"id":"dXNlcjoxMjA=","databaseId":120,"userId":120,"avatar":"$39","description":"Patrick Villanova is an editor for SmartAsset, producing comprehensive personal finance content to help consumers make better decisions with their money. His particular areas of focus include retirement, financial planning and investing. Patrick studied English at the University of New Hampshire and currently holds the Certified Educator in Personal Finance (CEPF) designation. \r\n\r\nPrior to joining SmartAsset, Patrick was a senior writer at MagnifyMoney, where he covered investing. His career began in journalism and included 11+ years at The Jersey Journal, where he covered sports and news as an editor. His work has appeared on Yahoo Finance, MSN, NJ.com, and The Star-Ledger. He lives in Portland, Oregon.","additionalMeta":"$3a","email":null,"firstName":"Patrick","fullName":"Patrick Villanova, CEPF®","lastName":"Villanova, CEPF®","name":"Patrick Villanova, CEPF®","postCount":"$3b","slug":"patrick-villanova-cepf","__typename":"User"},"reviewedBy":null,"factCheckedBy":{"id":"dXNlcjoxNjc=","databaseId":167,"userId":167,"avatar":"$3e","description":"Jaclyn is Director of Economic Analysis at SmartAsset. With a bachelor of arts in economics from The College of New Jersey, she evaluates data for trends that affect your financial life. As a spokesperson for SmartAsset, she has been cited by Bloomberg, CNBC, Business Insider, Fox News, The Hill and many more. \r\n\r\nJaclyn was previously an editor for CNET Money, where she covered banking, investing, credit cards and real estate. She also served as managing editor of small business content for Bizfluent, Work.Chron and AZCentral, and as a research consultant for NAPCO Media. As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":"$3f","email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn","lastName":"DeJohn","name":"Jaclyn DeJohn","postCount":"$40","slug":"jaclyn-dejohn","__typename":"User"},"secondEditor":null},"category":{"id":"dGVybToxMzY=","children":"$43","databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":213,"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

","

If you need additional help managing your tax liability, consider speaking with a financial advisor today.

","

How the IRS Taxes Your Profit On Home Sales

","

The IRS taxes a home sale as gains or losses on an investment. You pay capital gains rates if you owned the property for one year or more, and earned income rates if you’ve owned the home for less than 12 months.

","

You only pay taxes on your profits from this sale. This is calculated as any other investment: total sale price minus the asset’s cost basis. With a home, the IRS allows you to include improvements and some transaction costs in the adjusted cost basis. Among other things, you can include:

","

The initial purchase price of the home
Value added from interior remodeling, such as redoing your kitchen
Value added from internal updates, such as improving the furnace or windows
External additions, such as adding a new room
Some legal fees, agent fees and other sales costs

","

Repairs do not contribute to your home’s adjusted basis, nor do interest payments on the mortgage. So, for example, adding a new roof would count while fixing a hole in the roof would not.

","

To calculate your capital gain when selling your home, subtract the adjusted cost basis of the property from the sale price. The result is what constitutes your capital gain. However, you won’t necessarily pay taxes on this money.

","

Match with a financial advisor today to discuss your tax liability when selling your home.

","

Capital Gains Exemption For Primary Residences

","

","

If you sell your primary residence, the IRS allows you to exempt a certain amount of profit from taxes. Single taxpayers can exempt the first $250,000 of capital gains from the sale of their primary residence, while married taxpayers can exclude the first $500,000.

","

This is called a Section 121 exclusion. Among other requirements, to qualify, you must have both owned the home and used it as your primary residence for at least two out of the past five years (the 730 days of use do not need to be consecutive). Keep in mind that you’re ineligible if you’ve taken a Section 121 exclusion on another property within the past two years. Under some extenuating circumstances, the IRS may allow a partial exclusion even if you don’t otherwise qualify, but this is situational and you must request it.

","

If you qualify for an exemption, you first reduce your sale by the home’s adjusted basis. Then you reduce your profit by your exemption – either $250,000 or $500,000. The remainder is your taxable gain.

","

While long-term capital gain rates can be 0%, 15% or 20%, keep in mind that any gain that exceeds the exclusion limit may also be subject to the net investment income tax (NIIT), a 3.8% tax that kicks in at various income thresholds. As a result, long-term capital gain rates can top out at 23.8%. Depending on your state and other factors, you may also owe additional taxes.

","

Taxes are specific to your personal financial circumstances as well as location. Talk to a financial advisor about tax mitigation strategies today.

","

Calculating Your Capital Gains Taxes

","

","

Returning to our initial scenario, you would owe some degree of capital gains tax if you sold your home for a $750,000 profit. But before you can calculate your potential tax bill, you’ll need to answer some important questions.

","

What Is Your Exemption?

","

Based on your 121 exclusion you have a handful of possible taxable gains scenarios here:

","

No exemption: Taxable gain of $750,000
Single individual, $250,000 exemption: Taxable gain of $500,000
Married couple, $500,000 exemption: Taxable gain of $250,000

","

Can You Defer or Reinvest Profits?

","

You cannot reduce your taxes by purchasing a new home.

","

Here, you might be thinking of a process known as the “like-kind exchange.” This is when you sell one asset and use the proceeds to buy another substantially similar one. In this case, the IRS allows you to treat the transaction as neither a gain nor a loss, with no taxable event.

","

This is not allowed with your own home or other personal property. You can only do a like-kind exchange on property used for business or held solely as an investment. Unfortunately, taking the profit from this sale and using it to buy the home you’ll live in in retirement wouldn’t qualify.

","

You also cannot defer the taxes on this property. Until 1997 you could defer taxes on the sale of a home, often eliminating those taxes by purchasing a new property in an effective like-kind exchange. This law was repealed and replaced with the Section 121 exclusion.

","

What Are Your Capital Gains Taxes?

","

How much you will pay in taxes for this property depends on many factors, including:

","

Marital status: This determines your tax category
Total household income: This determines your tax rate
Duration of ownership: This determines the property’s tax status
Adjusted cost basis: This accounts for the money you invested into your home

","

For example, let’s say that you’re married filing jointly with a household income of $150,000 and you’ve owned and lived in your house for five years, with the full exemption available. You would likely be subject to the following capital gains taxes:

","

Profit from sale: $750,000
Taxable gain after exclusion: $250,000
Capital gains rate: 15%
Capital gains taxes owed: $37,500

","

These numbers will change based on your specific circumstances, but you can’t avoid paying taxes on this sale entirely. You would have made enough money on the sale to guarantee you will at least qualify for the 15% tax bracket, if not higher.

","

But suppose you and your spouse earn a combined income of $1 million per year. You would likely be subject to the following capital gains taxes:

","

Profit from sale: $750,000
Taxable gain after exclusion: $250,000
Capital gains rate: 23.8% (including NIIT)
Capital gains taxes owed: $59,500

","

Bottom Line

","

You have sold your house and made $750,000 worth of profit. This is very good news, with an important caveat: capital gains taxes. You will likely owe at least some money to the IRS, despite an exemption that allows married couples to exclude $500,000 from capital gains taxes and $250,000 for individuals.

","

Tips for Selling Your Home

","$4a","

Photo credit: ©iStock.com/gorodenkoff, ©iStock.com/Pgiam, ©iStock.com/SrdjanPav

"],"experts":{"name":"Jennifer Mansfield, CPA","topic":"Taxes","bio":"Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice.","imageUrl":"https://d31s10tn3clc14.cloudfront.net/imgs/jennifer-mansfield.png","email":"jmansfield@smartasset.com"},"link":"/taxes/sell-house-750k-for-retirement-home-capital-gains","published":{"datetime":"2023-12-6","readable":"December 6, 2023"},"shareInfo":{"title":"I’m Selling My Home and Netting $750k to Downsize for Retirement. Do I Have to Pay Capital Gains Taxes?","origin":"/taxes/sell-house-750k-for-retirement-home-capital-gains"},"isNewsArticle":false},{"id":"cG9zdDoyMjA3OTk=","databaseId":220799,"postId":220799,"author":{"node":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":908,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo5Mw==","children":{"nodes":[{"name":"401(k)","slug":"401k","__typename":"Category"},{"name":"Annuities","slug":"annuities","__typename":"Category"},{"name":"Healthcare & Living","slug":"healthcare-and-living","__typename":"Category"},{"name":"Legislation & Policy","slug":"legislation-and-policy","__typename":"Category"},{"name":"Medicaid & Long-Term Care","slug":"medicaid-and-long-term-care","__typename":"Category"},{"name":"Medicare","slug":"medicare","__typename":"Category"},{"name":"Other","slug":"other-retirement","__typename":"Category"},{"name":"Pensions & Other Retirement Accounts","slug":"pensions-and-other-retirement-accounts","__typename":"Category"},{"name":"Retirement Planning","slug":"planning-for-retirement","__typename":"Category"},{"name":"Retirement Taxes","slug":"retirement-tax","__typename":"Category"},{"name":"RMDs","slug":"rmds","__typename":"Category"},{"name":"Rollovers & Conversions","slug":"rollovers-and-conversions","__typename":"Category"},{"name":"Roth & Traditional IRAs","slug":"roth-and-traditional-iras","__typename":"Category"},{"name":"Social Security","slug":"social-security","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":93,"categoryId":93,"link":"https://smartasset.com/retirement/articles","name":"Retirement","postCount":{"pageInfo":{"offsetPagination":{"total":385,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"retirement","ancestors":null,"parent":null,"__typename":"Category"},{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":213,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$4b","date":"2023-12-04T07:00:00","excerpt":"

You can’t avoid taxes when making a Roth IRA conversion, but there are strategies to reduce your tax burden if the circumstances are right. When you convert money from a pre-tax account, such as a 401(k) or an IRA, to a post-tax Roth IRA, you must pay income taxes on the full value of the […]

\n","featuredImage":{"id":"cG9zdDoyMjExMDM=","databaseId":221103,"altText":"","date":"2023-12-04T00:48:37","fileSize":217747,"mimeType":"image/jpeg","modified":"2023-12-04T00:50:51","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2023/12/iStock-1413761479.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-12-4","readable":"December 4, 2023"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxNjc=","databaseId":167,"userId":167,"avatar":{"url":"https://secure.gravatar.com/avatar/ddd04b792d5bd154ea791bf3a9ec0edb?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jaclyn is Director of Economic Analysis at SmartAsset. With a bachelor of arts in economics from The College of New Jersey, she evaluates data for trends that affect your financial life. As a spokesperson for SmartAsset, she has been cited by Bloomberg, CNBC, Business Insider, Fox News, The Hill and many more. \r\n\r\nJaclyn was previously an editor for CNET Money, where she covered banking, investing, credit cards and real estate. She also served as managing editor of small business content for Bizfluent, Work.Chron and AZCentral, and as a research consultant for NAPCO Media. As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":{"expertise":"Financial Planning, Investing, Taxes, Real Estate","__typename":"User_Additionalmeta"},"email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn","lastName":"DeJohn","name":"Jaclyn DeJohn","postCount":{"pageInfo":{"offsetPagination":{"total":57,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jdejohn","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":908,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/taxes/roll-over-500k-to-roth-ira-how-to-avoid-taxes","metaDesc":"The advantage to converting to a Roth IRA is that withdrawals will be tax-free. But make sure the cost doesn't outweigh the benefit.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"I Want to Convert $500k in My 401(k) to a Roth IRA. How Do I Avoid Paying Taxes? - SmartReads by SmartAsset","__typename":"PostTypeSEO"},"slug":"roll-over-500k-to-roth-ira-how-to-avoid-taxes","status":"publish","title":"I Want to Convert $500k in My 401(k) to a Roth IRA. How Do I Avoid Paying Taxes?","uri":"/retirement/roll-over-500k-to-roth-ira-how-to-avoid-taxes","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":"$4c","description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":"$4d","email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":"$4e","slug":"eric-reed","__typename":"User"},"editedBy":{"id":"dXNlcjoxNjc=","databaseId":167,"userId":167,"avatar":"$51","description":"Jaclyn is Director of Economic Analysis at SmartAsset. With a bachelor of arts in economics from The College of New Jersey, she evaluates data for trends that affect your financial life. As a spokesperson for SmartAsset, she has been cited by Bloomberg, CNBC, Business Insider, Fox News, The Hill and many more. \r\n\r\nJaclyn was previously an editor for CNET Money, where she covered banking, investing, credit cards and real estate. She also served as managing editor of small business content for Bizfluent, Work.Chron and AZCentral, and as a research consultant for NAPCO Media. As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":"$52","email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn","lastName":"DeJohn","name":"Jaclyn DeJohn","postCount":"$53","slug":"jaclyn-dejohn","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybTo5Mw==","children":"$56","databaseId":93,"categoryId":93,"link":"https://smartasset.com/retirement/articles","name":"Retirement","postCount":385,"slug":"retirement","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

","

You can’t avoid taxes when making a Roth IRA conversion, but there are strategies to reduce your tax burden if the circumstances are right.

","

When you convert money from a pre-tax account, such as a 401(k) or an IRA, to a post-tax Roth IRA, you must pay income taxes on the full value of the transfer. The advantage to converting to a Roth IRA is that withdrawals will be tax-free throughout your retirement. But this may only be worth it if your tax burden on the conversion doesn’t outweigh the benefit.

","

Need help minimizing taxes and planning for retirement? Get matched with a financial advisor today.

","

Eligibility for Roth IRA Conversions

","

In general, you can move funds from any qualified retirement plan to a Roth IRA.

","

Unlike contributions, there are no household income limits on a Roth IRA conversion. This has led to what is called a “backdoor conversion,” in which high-income households contribute to a traditional IRA then convert that money to a Roth IRA. This is legal and effective, but if done repeatedly it will trigger some additional taxes known as the “pro-rata rule.”

","

While your 401(k) would incur taxes with each withdrawal made in retirement, Roth IRA withdrawals beyond age 59.5 are not taxed. Therefore, if you have time left for your assets to grow, or expect to have a higher tax rate in retirement than you do currently, converting to a Roth IRA may net you a more in retirement. However, if you are already very near retirement or expect to have a lower tax rate when you make withdrawals, the conversion may not be worth it.

","

Roth IRA conversions go one way. You can convert a pre-tax account to a Roth account, but cannot convert a Roth account to something like a traditional IRA or 401(k). This is particularly important because it means that you cannot unring this bell once you get your tax bill. Once you make a conversion, you must deal with the taxes.

","

Talk to a financial advisor to figure out a suitable strategy to maximize your retirement income.

","

How to Minimize Taxes On Your Roth Conversion

","

Here, you have $500,000 that you would like to convert to a Roth IRA.

","

If you are holding this money in a Roth 401(k), then you will not owe any taxes on that transaction. These are both post-tax accounts, so you can execute a rollover or transfer with no tax event.

","

If you are holding this money in a pre-tax account, such as a 401(k) or IRA, it gets more complicated. When you move this money, you will add the full value of the transfer to your taxable income for the year. Here, for example, you would add up to $500,000 to that year’s AGI.

","

As a result, it’s often wiser to make a large conversion in staggered, smaller amounts so as not to trigger a huge tax bill and higher tax brackets in a given year. Converting $500,000 in a single year could potentially push your total AGI into the highest federal tax bracket (37% in 2023, plus any applicable state and local taxes). However, if you have time to spread the conversion out over, say, five years, adding $100,000 each year to your AGI may keep you in a lower tax bracket. Depending on how you file taxes and the corresponding thresholds, you could save tens of thousands of dollars with this strategy.

","

A financial advisor can help you determine the best strategy for your assets.

","

Weighing Your Anticipated Retirement Date

","

Beyond that, the biggest issue is when you anticipate retiring.

","

A Roth IRA is one of the most useful tax-advantaged retirement accounts on the market, but that value depends largely on having enough time to make big, untaxed gains. If you plan on retiring in the next few years, you probably won’t see much in tax-free Roth gains to offset the tax bill from the conversion.

","

It’s also important to consider your planned retirement income and tax bracket.

","

The difference between a pre- and post-tax account is when you pay your taxes. With a Roth account you pay up front, with a 401(k) or IRA you pay when make your withdrawals. So a Roth portfolio can lose some advantages if you pay a much higher tax rate while working than you will once you have retired.

","

For example, say that you currently pay a 20% effective tax rate and anticipate a 10% effective tax rate in retirement. You might pay $100,000 on the conversion (0.2 * $500,000) vs. $50,000 over time on the withdrawals (0.1 * $500,000).

","

Now, this is just by way of example. Taxes in reality are much more complicated, but it serves to illustrate the point. If you have the time for your Roth IRA to grow significantly and you expect to be in a comparable tax bracket once retired, this might be a wise conversion. If you do not have time for this account to significantly grow and/or you expect to be in a significantly lower tax bracket in retirement, you might actually pay more on a Roth IRA conversion in the long run.

","

Remember, if you need help with taxes or a retirement strategy, you can get matched with a personal financial advisor.

","

Bottom Line

","

You cannot avoid paying taxes on a Roth IRA conversion. This is a post-tax account, so you must pay income taxes on the money you put in. For large retirement accounts, this makes a conversion complicated. It can be a good idea if you have the money to pay that bill and the time for your account to grow, but be careful not to trigger more taxes in the long run.

","

Roth IRA Management Tips

","$66","

Photo credit: ©iStock.com/Ridofranz

"],"experts":{"name":"Jim Barnash, CFP","topic":"Retirement","bio":"Jim Barnash is a Certified Financial Planner with more than four decades of experience. Jim has run his own advisory firm and taught courses on financial planning at DePaul University and William Rainey Harper Community College.","imageUrl":"","email":"jbarnash@smartasset.com"},"link":"/retirement/roll-over-500k-to-roth-ira-how-to-avoid-taxes","published":{"datetime":"2023-12-4","readable":"December 4, 2023"},"shareInfo":{"title":"I Want to Convert $500k in My 401(k) to a Roth IRA. How Do I Avoid Paying Taxes?","origin":"/retirement/roll-over-500k-to-roth-ira-how-to-avoid-taxes"},"isNewsArticle":false},{"id":"cG9zdDoyMzI3NjM=","databaseId":232763,"postId":232763,"author":{"node":{"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. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":778,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":213,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$67","date":"2024-01-10T14:18:05","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyMzQ2MDM=","databaseId":234603,"altText":"A woman calculating how much she could save on taxes by filing either as a head of household or single.","date":"2024-01-10T14:10:09","fileSize":168089,"mimeType":"image/jpeg","modified":"2024-01-10T14:11:08","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/01/iStock-1326287975-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-1-10","readable":"January 10, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDU=","databaseId":145,"userId":145,"avatar":{"url":"https://secure.gravatar.com/avatar/5ae1da874ddac2010e70c7b0a0def3f2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Michele is a practicing Certified Public Accountant with more than 20 years of experience. She has authored 15 books on topics including retirement, investing, real estate, financial recovery, budgeting, accounting, the stock market and more. She helps her clients gain financial stability and balance, navigate divorces and manage their businesses. She has taught business and accounting courses at multiple community colleges.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michele","fullName":"Michele Cagan, CPA","lastName":"Cagan, CPA","name":"Michele Cagan, CPA","postCount":{"pageInfo":{"offsetPagination":{"total":22,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcagan","__typename":"User"},"writtenBy":{"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. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":778,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/taxes/head-of-household-vs-single","metaDesc":"How you file your taxes can have a big impact on what you owe. Here's the difference between head of household and single tax filing.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"Tax Filing: Head of Household vs. Single","__typename":"PostTypeSEO"},"slug":"head-of-household-vs-single","status":"publish","title":"Tax Filing: Head of Household Versus Single","uri":"/taxes/head-of-household-vs-single","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":"$68","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. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":"$69","email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":"$6a","slug":"mark-henricks","__typename":"User"},"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$6d","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$6e","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$6f","slug":"arturo-conde-cepf","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDU=","databaseId":145,"userId":145,"avatar":"$72","description":"Michele is a practicing Certified Public Accountant with more than 20 years of experience. She has authored 15 books on topics including retirement, investing, real estate, financial recovery, budgeting, accounting, the stock market and more. She helps her clients gain financial stability and balance, navigate divorces and manage their businesses. She has taught business and accounting courses at multiple community colleges.","additionalMeta":"$73","email":null,"firstName":"Michele","fullName":"Michele Cagan, CPA","lastName":"Cagan, CPA","name":"Michele Cagan, CPA","postCount":"$74","slug":"michele-cagan-cpa","__typename":"User"},"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxMzY=","children":"$77","databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":213,"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

The choice between single and head of household tax filing status can have a sizable impact on the taxes you owe or the refund you receive. Yet many don’t realize they may qualify for the more beneficial head of household status that offers larger standard deductions and often lower tax rates. Taking the time to understand the differences could put hundreds or even thousands of extra dollars in your pocket. A financial advisor can determine if head of household, single or or another status is right for your situation.

","

Filing Status Fundamentals

","

You must select a filing status when filing your federal income taxes each year. The IRS provides five options: Single, married filing jointly, married filing separately, head of household and qualifying widow or widower with dependent child.

","

Your eligibility for each status hinges largely on your marital and dependents situation. Single filing status usually applies to unmarried taxpayers without dependents who live with them. Head of household is for unmarried taxpayers supporting dependents, like minor children, who live with them for most of the year.

","

Why Filing Status Matters

","

Opting for head of household over single status triggers two key advantages: Placing the taxpayer in lower federal income tax brackets and enabling larger standard deductions. These two factors work together to reduce both your tax rate and your taxable income.

","

For example, in tax year 2024 the head of household 12% tax bracket is $63,100 (which is up from $59,850 in 2023) of taxable income compared with just $47,150 for single filers (which is up from $44,725 in 2023). The standard deduction also rises from $14,600 for single filers to $21,900 for heads of household (in tax year 2023 it went up from $13,850 to $20,800). Bigger deductions reduce taxable income, while lower rates mean less taxes owed on remaining income.

","

Filing Status Effects in Practice

","

","

Consider a single parent earning $60,000 while providing more than half the support for two dependents who live with them for most of the year. This person qualifies for head of household filing status. Opting to use this status rather than the single filing status moves the parent into more favorable tax brackets for tax year 2023 (which they will file in 2024) and boosts their standard deduction. This combination can save them hundreds on their tax bill. Here’s how it works:

","

If they file as single, they would be able to apply a $13,850 standard deduction to their $60,000 income, leaving taxable income of $46,150. For a single filer in tax year 2023, this taxable income puts them into the 22% bracket. In this instance, taxes owed as a single filer are $5,460.

","

By filing instead as head of household, they are eligible for a much larger $20,800 standard deduction. Now taxable income is reduced to $39,200. Plus, for a head of household filer this income level falls into the 12% tax bracket, significantly below the bracket that applies to single filers with this income. Accounting for lower taxable income and a lower tax bracket, total taxes owed as a head of household filer would equal just $4,390.

","

In this example, the difference in taxes owed based strictly on filing status is the difference between $5,460 and $4,390. That is a savings of $1,070, just for selecting head of household versus single filer.

","

Making the Call

","

You can’t select a filing status based purely on which one saves you the most. You have to be eligible for the one you select.

","

When deciding on filing status, first assess marital, dependent and household support status. Unmarried taxpayers supporting a qualifying child dependent and paying for over half of household costs likely should explore head of household filing. Run comparisons to see the tax bill impact of head of household vs. single filer status based on income, deductions and tax brackets.

","

As shown in the example, simply changing status could save several hundred dollars for some typical families. Make whether you qualify based on your situation. But if you automatically default to single status, you risk leaving money on the table.

","

Bottom Line

","

","

Selecting the right tax filing status goes beyond basic marital status. For unmarried taxpayers with dependents, qualifying for head of household over single filer status can generate major tax savings through larger standard deductions and more favorable income tax rates. Yet many eligible taxpayers simply claim single status without exploring options. Avoid overpaying by first understanding the key differences in filing single versus head of household, assessing qualification criteria for each and determining the best approach for your personal tax situation. Hundreds or even thousands of dollars potentially are at stake based on what you check on one form entry box.

","

Tax Planning Tips for Beginners

","$7e","

"],"experts":"$7f","link":"/taxes/head-of-household-vs-single","published":{"datetime":"2024-1-10","readable":"January 10, 2024"},"shareInfo":{"title":"Tax Filing: Head of Household Versus Single","origin":"/taxes/head-of-household-vs-single"},"isNewsArticle":false},{"id":"cG9zdDoyMzYzMTY=","databaseId":236316,"postId":236316,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1417,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwNg==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19506,"categoryId":19506,"link":"https://smartasset.com/tax-planning/articles","name":"Tax Planning","postCount":{"pageInfo":{"offsetPagination":{"total":99,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-planning","ancestors":{"nodes":[{"name":"Taxes","slug":"taxes","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Taxes","id":"dGVybToxMzY=","slug":"taxes","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$80","date":"2024-02-16T23:38:43","excerpt":"

A graduated income tax is the same thing as a progressive income tax system, where you pay a larger percentage of tax on your income as you earn more money. This system works differently from the flat tax system, in which everyone gets taxed at the same percentage of their income. Here’s a breakdown of […]

\n","featuredImage":{"id":"cG9zdDoyMzY0NDc=","databaseId":236447,"altText":"A taxpayer reviewing the federal income tax brackets to calculate how much he owes in the graduated income tax system.","date":"2024-02-02T22:41:14","fileSize":178007,"mimeType":"image/jpeg","modified":"2024-02-16T23:35:15","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/02/iStock-1411399368.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-2-16","readable":"February 16, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMzY=","databaseId":136,"userId":136,"avatar":{"url":"https://secure.gravatar.com/avatar/1d295f71ad5f26fc505155b8d7e5e2a0?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jeff is a Writer/Editor for SmartAsset. He's an expert in a variety of personal finance topics, such as investing, banking and retirement. Jeff has received his JD and MBA and has been featured in a number of publications, such as Investopedia, The Street, Forbes, Yahoo! Finance and more. He currently resides in Utah with his wife and five children, where they cheer for the Denver Broncos and make it to the water to sail whenever given the chance. Jeff currently holds the Certified Educator in Personal Finance (CEPF®) designation.","additionalMeta":{"expertise":"Financial Planning, Small Business, Retirement, Banking","__typename":"User_Additionalmeta"},"email":null,"firstName":"Jeff","fullName":"Jeff White, CEPF®","lastName":"White, CEPF®","name":"Jeff White, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":16,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jwhite","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDU=","databaseId":145,"userId":145,"avatar":{"url":"https://secure.gravatar.com/avatar/5ae1da874ddac2010e70c7b0a0def3f2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Michele is a practicing Certified Public Accountant with more than 20 years of experience. She has authored 15 books on topics including retirement, investing, real estate, financial recovery, budgeting, accounting, the stock market and more. She helps her clients gain financial stability and balance, navigate divorces and manage their businesses. She has taught business and accounting courses at multiple community colleges.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michele","fullName":"Michele Cagan, CPA","lastName":"Cagan, CPA","name":"Michele Cagan, CPA","postCount":{"pageInfo":{"offsetPagination":{"total":22,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcagan","__typename":"User"},"writtenBy":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1417,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"hideAuthor":true,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/taxes/graduated-income-tax","metaDesc":"A graduated income tax, or progressive tax, system is one where you're taxed more if you make more taxable income. Here's how it works.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"What Is a Graduated Income Tax?","__typename":"PostTypeSEO"},"slug":"graduated-income-tax","status":"publish","title":"What Is a Graduated Income Tax?","uri":"/taxes/graduated-income-tax","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":null,"editedBy":{"id":"dXNlcjoxMzY=","databaseId":136,"userId":136,"avatar":"$81","description":"Jeff is a Writer/Editor for SmartAsset. He's an expert in a variety of personal finance topics, such as investing, banking and retirement. Jeff has received his JD and MBA and has been featured in a number of publications, such as Investopedia, The Street, Forbes, Yahoo! Finance and more. He currently resides in Utah with his wife and five children, where they cheer for the Denver Broncos and make it to the water to sail whenever given the chance. Jeff currently holds the Certified Educator in Personal Finance (CEPF®) designation.","additionalMeta":"$82","email":null,"firstName":"Jeff","fullName":"Jeff White, CEPF®","lastName":"White, CEPF®","name":"Jeff White, CEPF®","postCount":"$83","slug":"jeff-white-cepf","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDU=","databaseId":145,"userId":145,"avatar":"$86","description":"Michele is a practicing Certified Public Accountant with more than 20 years of experience. She has authored 15 books on topics including retirement, investing, real estate, financial recovery, budgeting, accounting, the stock market and more. She helps her clients gain financial stability and balance, navigate divorces and manage their businesses. She has taught business and accounting courses at multiple community colleges.","additionalMeta":"$87","email":null,"firstName":"Michele","fullName":"Michele Cagan, CPA","lastName":"Cagan, CPA","name":"Michele Cagan, CPA","postCount":"$88","slug":"michele-cagan-cpa","__typename":"User"},"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$8b","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$8c","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$8d","slug":"arturo-conde-cepf","__typename":"User"}},"category":{"id":"dGVybToxOTUwNg==","children":"$90","databaseId":19506,"categoryId":19506,"link":"https://smartasset.com/tax-planning/articles","name":"Tax Planning","postCount":99,"slug":"tax-planning","ancestors":"$92","parent":"$95","__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

","

Understanding the Graduated or Progressive Income Tax

","

The graduated or progressive income tax system is a structure where the tax rate increases as the taxable amount increases. So, taxpayers who earn more will pay more taxes.

","

The goal of this system is to distribute the tax burden more equitably among taxpayers of varying income levels. It is guided by a social equity principal: Taxpayers with a higher ability to pay should contribute more towards the public treasury.

","

Pros and Cons of a Graduated Tax

","

Advocates of the graduated or progressive income tax system argue that it can promote social justice and support targeted wealth redistribution. While critics push back, saying that it is less economically efficient than a flat tax system, does not incentive productivity and can create the potential for greater tax avoidance or tax evasion. Here’s a roundup of the most common reasons in favor and against.

","

Advantages of a Graduated Income Tax

","

Advocates of a graduated income tax system highlight several potential benefits. First, supporters argue that it plays an important role in addressing income inequality.

","

By imposing a higher tax burden on individuals with higher incomes, the system aims to redistribute wealth and foster a more equitable distribution of resources within society. This approach aligns with the “ability to pay” principle, which asserts that those with greater financial means should contribute a larger percentage of their earnings to support essential government services. These typically include education, healthcare and social welfare programs.

","

Advocates argue that the graduated income tax system not only serves as a fair means to finance public goods, but also contributes to a more just and inclusive society. Additionally, proponents contend that this type of taxation could enhance economic stability by closing the gap on income inequality, and ultimately fostering a more balanced and sustainable economy.

When it comes to revenue generation, the graduated income tax has proven to be a robust tool. According to the U.S. Department of Treasury, the graduated income tax in the U.S. has generated 51% of total federal revenue as of February in fiscal year 2024. For a comparison, Social Security and Medicare taxes made up another 34% in the same period.

","

Advocates argue that this revenue is significantly more than what a flat tax system could raise. But this is primarily due to the higher tax rates applied to higher income brackets.

","

Disadvantages of a Graduated Income Tax

","

Critics of the graduated income tax system argue several drawbacks with this approach. One of the most significant is its complexity. The U.S. tax code, which spans over 2,600 pages, can make it difficult for taxpayers to understand their obligations and could potentially lead to errors in tax calculation or filing.

","

Opponents also argue that higher tax rates on higher incomes could drive high-earning taxpayers to look for ways to avoid taxes or evade them altogether. According to the IRS, tax evasion costs the U.S. government an estimated $458 billion annually.

Furthermore, economists like Thomas Sowell argue that progressive taxation can discourage investment and economic growth. The argument is that by imposing a higher tax burden on the wealthy, the system can reduce the incentive for entrepreneurship and risk-taking, which are key drivers of economic growth.

","

Graduated Tax vs. Flat Tax

","

","

The debate between a graduated tax system and a flat tax system focuses on how you tax income. In a graduated tax system, individuals are taxed at different rates based on their income levels. Advocates argue that this approach promotes income equality by placing a higher tax burden on higher earners, redistributing wealth and addressing social and economic disparities. Critics, however, believe that higher tax rates on the wealthy can stifle economic incentives and hinder job creation, which could potentially reduce economic growth.

","

Supporters of the flat tax system, on the other hand, argue that it imposes a uniform tax rate on all income levels, which treats everyone equally regardless of their earnings. They also point out that the flat tax focuses on simplicity, as it involves a single tax rate for all income brackets, and therfore makes it easier to understand and administer.

","

Additionally, they argue that a flat tax reduces compliance costs for both individuals and government agencies, which eliminates the need for complex tax planning and reduces administrative burdens.

","

Critics, however, argue that a flat tax disproportionately impacts lower-income individuals, as a single rate can be regressive, meaning that it takes a larger percentage of income from those with lower earnings.

","

One key distinction between both systems lies in their philosophical underpinnings. Graduated tax proponents often argue for the principle of ability to pay, asserting that individuals with higher incomes should contribute a larger share of their earnings to support government services. Flat tax advocates, conversely, highlight the idea of fairness through equality and assert that a uniform tax rate treats everyone impartially.

","

Tips for Graduated Income Tax Planning

","

When planning for taxes under a graduated income tax system, you need to consider your income level, potential deductions and credits, among other factors.

","

An individual taxpayer earning $75,000, for example, would fall into the 22% federal tax bracket for tax year 2024.

","

But, with strategic tax planning that takes advantage of deductions and credits, you could lower you taxable income and potentially fall into a lower bracket.

","

Bottom Line

","

","

Graduated income tax is a system where the tax rate increases as the taxable income rises. It is designed to grow economic revenue and distribute the tax obligation to those who can afford it. But while advocates argue that the graduated income tax distributes the tax burden more evenly among taxpayers, critics say that it can potentially disincentive taxpayers and undercut economic growth.

","

Tips for Tax Planning

","$97","

"],"experts":null,"link":"/tax-planning/graduated-income-tax","published":{"datetime":"2024-2-16","readable":"February 16, 2024"},"shareInfo":{"title":"What Is a Graduated Income Tax?","origin":"/taxes/graduated-income-tax"},"isNewsArticle":false}]}]