35:["$","$L36",null,{"category":"$37","relatedArticles":[{"id":"cG9zdDoyNDkyNjY=","databaseId":249266,"postId":249266,"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":776,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__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":93,"__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":"$38","date":"2024-05-31T17:29:22","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNDk5NzU=","databaseId":249975,"altText":"Nonqualified retirement plans allow participants to defer a portion of their compensation, potentially reducing current income tax liability.","date":"2024-05-31T10:05:36","fileSize":198414,"mimeType":"image/jpeg","modified":"2024-05-31T15:11:24","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/05/iStock-1455943818-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-5-31","readable":"May 31, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxOTc=","databaseId":197,"userId":197,"avatar":{"url":"https://secure.gravatar.com/avatar/00cb0f465693d78173a61b56cc33e2fd?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Marie White is a Writer/Editor for SmartAsset. She holds an English degree from Stevenson University, with a focus on writing and communications. 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If you inherit or plan to bequeath a certificate of deposit (CD) as part of your estate, there may be tax consequences to consider. Three kinds of taxes could apply: income, estate and inheritance. While the principal amount of the CD transfers without income tax issues, any interest earned after death and before transfer will be treated as ordinary income on the tax return of the person who inherits it. Federal estate taxes won’t apply unless the size of the estate, including the CD, exceeds the generous federal exemption, and there is no federal inheritance tax to be paid by the heir. Several states have inheritance and estate taxes, and these generally have much lower thresholds for exemption, so they may come into play. Setting up the CD to transfer on death will help avoid probate, but won’t affect taxes. Let’s take a closer look at the tax consequences of inheriting a CD.

","

If you have questions, consider asking a financial advisor for help preparing your estate plan or handling any potential taxes on an inherited CD.

","

CD Inheritance Basics

","

A CD is a fixed-income savings tool offered at many banks and credit unions. It allows a saver to set aside a specific amount of money for a specific length of time ranging from weeks to years and, in return, earn a pre-set rate of interest. Federal deposit insurance makes CDs as safe as anything you can do with your money. However, CD interest rates, while often higher than a savings account, are likely to lag behind inflation. And there may be a penalty if you withdraw money before the end of the term.

","

Many savers and investors appreciate CDs for their safety and convenience. They may well be part of your estate. Or, if you’re going to inherit a CD from someone, you may be faced with the potential tax consequences. CDs can present tax complications depending on factors such as the size of the CD and where the deceased and heir reside.

","

Inherited CD Tax Considerations

","

Three types of taxes may come into play when you’re looking at the tax consequences of inheriting a CD: income, estate and inheritance taxes. The first of these is the one most likely to be encountered, but likely won’t be a major cost. The second may be relevant, but probably only to a small number of cases. The third is least likely and will be the responsibility of the heir who receives the bequest.

","

Income Tax

","

","

The IRS does not regard the value of an inherited CD as taxable. That is, if you receive a $10,000 CD, you won’t have to increase your reported income by $10,000. The interest on the CD is another matter, however. Interest earned before the deceased’s death is not considered income to the recipient of the CD. However, income earned by the deposit after the death is regarded as ordinary income taxable at the recipient’s usual tax rate. Because of the relatively modest interest rates paid by many CDs, the tax bill on interest earned is unlikely to be much except in the case of an unusually large CD inheritance.

","

It is worth noting that many banks will waive the early withdrawal penalty if the inheritor of a CD wants to withdraw funds before the term of the deposit is up. And, if the bank does charge a penalty on an inherited CD, the recipient of the bequest can likely deduct the amount of the penalty from taxable income for that year.

","

Estate Tax

","

Tax law does provide for federal estate taxes on inherited assets, but the tax only applies to estates over a certain amount. Currently, that amount is $13.61 million, so it’s only relevant to relatively few estates. There is no federal inheritance tax.

","

A handful of states also have estate taxes. Some use the same floor as the federal estate tax for their levies. However, a few have much lower thresholds. Oregon, for example, taxes estates over $1 million.

","

Inheritance Tax

","

A similarly small number of states have inheritance taxes, which the recipient of the bequest has to pay. Only Maryland has both estate and inheritance taxes. Generally speaking, due to their overall rarity and the use of thresholds below which taxes don’t apply, estate and inheritance taxes will not be concerns for most estates or heirs.

","

Transfer on Death

","

Some CD owners set them to transfer ownership automatically to a beneficiary on the owner’s death. This can be an effective way to avoid having the CD pass through probate, a process likely to add months or years to the time required to distribute funds to heirs, as well as incurring extra costs. However, transfer on death arrangements won’t affect inheritance or estate taxes on an inherited CD. Nor will they have any effect on taxes that could be due on post-death interest earned.

","

Bottom Line

","

","

Passing on a CD as part of an estate involves no major tax consequences in most situations. The most likely tax is the income tax that will be due on interest earned after the death of the person making the bequest. This tax will be paid by the inheritor of the CD. Federal estate taxes only apply on particularly large estates, and most states don’t have estate taxes. There’s no federal inheritance tax, and most states don’t tax heirs, either. However, some states have estate taxes with significantly lower thresholds than the federal level, and at least one state has both estate and inheritance taxes.

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Tax-Planning Tips

","$4f","

Photo credit: ©iStock.com/visualspace, ©iStock.com/seb_ra, ©iStock.com/AndreyPopov

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\n","featuredImage":{"id":"cG9zdDoyMzU2MzQ=","databaseId":235634,"altText":"A couple reviewing educational tax credits with a financial advisor.","date":"2024-01-24T20:04:49","fileSize":253798,"mimeType":"image/jpeg","modified":"2024-01-24T20:21:47","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/01/iStock-1478316589.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-1-24","readable":"January 24, 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. 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For students and their parents, there are two tax credits that can help with the costs of higher education. The American opportunity tax credit is a partially refundable tax credit that you can receive for qualified educational spending. The lifetime learning tax credit is a non-refundable tax credit that you can receive based on tuition and fees for higher education. Depending on your status you may be eligible for one or both, and the IRS has an interactive tool to help you determine which. Here’s what you need to know.

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A financial advisor can help you put a financial plan together to save up for your family’s education needs.

","

What Are Educational Tax Credits?

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An education tax credit is a tax break that you can get based on educational spending. For every dollar in qualified spending, you can receive up to a dollar off your final tax bill. This is as opposed to a tax deduction, which reduces your taxable income, with the final reduction of your tax bill based on your tax bracket.

","

These educational tax credits apply to post-high school education, such as university and vocational schools, not K-12 spending.

","

As a student, you can claim educational tax credits so long as you are not claimed as a dependent on someone else’s taxes. If you are claimed as a dependent, then your parent or guardian may be able to claim any eligible educational tax credits.

","

The IRS offers two educational tax credits: The American opportunity tax credit (the AOTC) and the lifetime learning credit (the LLC).

","

The American Opportunity Tax Credit

","

The American opportunity tax credit is a partially refundable tax credit for qualified education expenses. Eligible taxpayers can receive an annual credit of up to $2,500. If the full credit brings your tax bill below zero, you can potentially get a refund worth up to 40% of your remaining credit for a maximum of $1,000. For example, say that your tax bill is zero and you have an AOTC worth $1,200. You could receive a $480 refund ($1,200 * 0.4).

","

That American opportunity tax credit applies to 100% of the first $2,000 in qualified spending. Then, you can claim an additional 25% of any additional spending up to $2,000. For example, say that you spend $3,000 on books and equipment. You could claim $2,250 under the AOTC (1.0 * $2,000 + 0.25 * $1,000).

","

You can claim the AOTC for qualified educational expenses. The IRS defines this as money that you pay for tuition, fees, books, supplies, equipment and any other expenses required for enrollment or attendance. For the purposes of this tax credit, you do not have to pay these expenses directly to the institution so long as they constitute required spending. For example, required textbooks purchased from an off-campus bookstore are claimable expenses under this credit.

","

You (or your dependent) must be enrolled in a degree- or credential-granting program at a qualified educational institution, and must be enrolled at least half time during the tax year for which you are claiming the credit. You can only claim it for up to four tax years (even if the student is in school longer), although they do not have to be consecutive, and only students still in their first four years of higher education are eligible.

","

Finally, your modified gross adjusted income must be no more than $80,000/$160,000 single/married filing jointly. You can receive a partial credit if your MAGI is up to $90,000/$180,000 single/married filing jointly, after which you cannot claim this credit.

","

The Lifetime Learning Tax Credit

","

","

The lifetime learning credit (the LLC) is a nonrefundable tax credit worth up to $2,000. If your tax bill hits below zero you cannot receive any money back from this credit.

","

You can only claim the lifetime learning tax credit for tuition or other required enrollment fees. It does not apply to other costs of attendance such as books or equipment. However, unlike with the AOTC, you do not need to be enrolled in a degree-seeking program to claim the lifetime learning credit. You must be taking courses at a qualified educational institution, which can include universities and vocational programs. You must also be enrolled in one or more courses for the year in which you claim the tax credit. However you do not need to be pursuing a formal credential.

","

You can claim the LLC for the 20% of the first $10,000 you spend, up to a maximum of $2,000, on your eligible tuition and fees. You can also claim it any number of times. This credit does not fall off after a certain number of years.

","

The lifetime learning tax credit has the same income cutoffs as the American opportunity tax credit. You can claim the full credit up to an MAGI of $80,000/$160,000 single/married filing jointly. You can receive a partial credit up to $90,000/$180,000 single/married filing jointly, after which you cannot claim this credit.

","

Additional Benefits and Deductions

","

Beyond tax credits, you can find a network of resources to help you prepare and pay for a college education. These options include:

","

529 Savings Plans

","

A 529 plan is a tax-advantaged account that you can use to save for the costs of education. These are operated at a state-level, so your options will vary based on your specific jurisdiction. While contributions to a 529 plan are not tax deductible for federal tax purposes, the funds in these plans can typically grow either tax-free or tax-deferred. Depending on the nature of your plan and your spending, you might also be able to make withdrawals tax-free.

","

A 529 plan is typically either structured as a general educational savings fund or as a prepaid tuition fund.

","

Student Loan Interest Deductions

","

Most people who hold student loans can take advantage of the student loan interest deduction. This is an above-the-line tax deduction that you can take for up to $2,500 worth of student loan interest payments each year.

","

State-Level Deductions

","

Many states offer deductions to your state taxes based on qualified education spending. For example, in Massachusetts you may be able to take a tax deduction based on tuition payments that you make to a qualified two- or four-year college or university. Not every state offers education deductions, but if you live in an income tax state make sure to look this up.

","

Education Savings Bonds

","

The education savings bond program allows you to collect interest on U.S. savings bonds tax-free when you spend that money on qualified educational expenses. This isn’t a blanket grant, it has both income and spending requirements, but it can make Treasury investments a tax-advantaged way to save for college.

","

Bottom Line

","

","

There are several tax benefits available if you pay tuition or other costs associated with higher education. On the federal front, you may be able to take advantage of the Lifetime Learning and American Opportunity tax credits, or enjoy the tax benefits of Education Savings Bonds. From there, depending on where you live, your state may offer a variety of programs and deductions.

","

Tuition Spending Tips

","$67","

Photo credit: ©iStock/ljubaphoto, ©iStock/kynesher, ©iStock/insta_photos

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A net gain on a home sale of $680k potentially could lead to having to pay capital gains taxes. But in many cases, you won’t have to pay taxes on the full amount of the gain. And you may be able to shield all of it. This is due to an exclusion that protects from taxation up to $500,000 in gains when you sell your primary residence. The exact amount you can exclude will vary depending on the circumstances. And there are moves you may be able to make to reduce, delay or even eliminate taxes on a home sale. Capital gains taxes are sensitive to your specific situation, so consider consulting with a financial advisor about your course of action.

","

Capital Gains on Home Sales

","

Any time you sell an asset for more than you paid, you generate a capital gain. The IRS considers this gain to be taxable. That applies to a gain on sale of any asset, including securities and investment real estate. However, due to the Section 121 Exclusion – named after a section of the tax code – when selling a personal residence up to $500,000 of the gain may be excluded from taxation.

","

How much you will be able to shield from taxes may vary. To begin with, the $500,000 exemption is only available for taxpayers who are married and file tax returns jointly. If you’re an individual filing singly, you can exclude only up to $250,000 of your gain.

","

You may not be able to get any exclusion at all, if you have not lived in the home for at least two of the preceding five years. The years don’t have to be consecutive, but the time you’ve occupied the home must total at least two full years out of the previous five.

","

If you lived in the home for a shorter period, the entire gain would be taxable. And it’s only for a principal residence. Vacation homes, second homes and investment property don’t qualify.

","

Also, it must be at least two years since the last time you claimed the 121 exclusion. You can do it as many times as you want up to your lifetime exclusion limit, but not more often than every two years. Before 1997 there was a one-time lifetime exclusion of up to $125,000 for homeowners aged 55 or older. The Taxpayer Relief Act of 1997 made a number of changes, including scrapping the one-time lifetime exclusion and age requirement.

","

A financial advisor can help you stay on top of changes to tax law and strategize accordingly.

","

Capital Gains Tax Rates

","

The specific tax you may owe can also vary. A gain by a seller who has owned the home for less than a year is considered a short-term capital gain. This is treated like ordinary income with the tax using regular federal income tax brackets that go up to a top marginal rate of 37%.

","

If the seller has owned the home for at least one year, on the other hand, long-term capital gains tax rates apply. These are generally lower than ordinary income rates, going from zero to a maximum of 20%.

","

A Capital Gains Example

","

A married couple who netted $680,000 from selling their principal residence after living in the home at least two of the preceding five years usually would be able to exclude $500,000 the gain, assuming they have not used the Section 121 exclusion before. This means $180,000 could be subject to taxes.

","

If they had a combined income of $100,000, they would normally be in the 22% marginal federal income tax bracket and owe federal income taxes of $14,261. After selling their home, the $180,000 of non-excluded gain on their home sale would be subject to capital gains taxes.

","

","

The applicable capital gains tax rate can vary. It depends on whether the seller has owned the home for at least one year before the sale and also on the seller’s income tax bracket. A seller who has not owned the home for at least one year normally would have any gain taxed as ordinary income, in this case at the 22% income tax rate.

","

For a sale where the home was owned for more than one year, the preferred capital gains rates of 0%, 15% or 20% would apply, instead of regular income tax rates. Your capital gains tax rate is also dependent on your income.

","

This married couple of with income of $100,000 and a taxable gain of $180,000 after the $500,000 exclusion would pay taxes on the gain at a rate of 15%. This would mean capital gains taxes of $180,000 times 15% or approximately $27,000.

","

A financial advisor can help you determine whether you’ll owe taxes on your home sale depending on your specific circumstances. Get matched with a financial advisor.

","

Other Strategies

","

If it looks like you might owe capital gains taxes on part of the sale of your home, you may be able to adjust the home’s cost basis by deducting the cost of some improvements from the sale price. This reduces the amount of the gain and the resulting tax. For instance, if you had spent $20,000 to replace a roof and $40,000 to add a bathroom, you might be able to increase the cost basis by $60,000 and reduce the taxable gain by a similar amount.

","

Another method to consider is a like-kind exchange, or a 1031 exchange, after another tax code section. To do this, you essentially trade one investment property for a lower-priced one. Done correctly, you won’t owe any taxes on the difference in the prices of the two properties until you sell the lower-priced one.

","

Like-kind exchanges can’t be done with a principal residence, however. It’s only for investment property. To meet the restrictions, you would have to convert your home into an investment property by renting it for at least two years before the sale. Then you would have to rent out the home being purchased a similar period after the sale. Only then could it be used as the retiree’s principal residence.

","

Tax-loss harvesting may also be helpful to reduce your tax bill. This works by applying a loss on the sale of another asset to reduce the capital gain on the sale of your home. Say you sold stocks for a loss of $60,000. By applying this loss on a stock transaction to the gain on your home sale, you could reduce the capital gain on the home transaction. Specific rules apply, so it may be prudent to speak with a fiduciary financial advisor about your strategy.

","

Bottom Line

","

You can often shield from taxes all or part of the gain when selling a home. To use this, you have lived in the home for two years before the sale. You can $250,000 if you are a single filer and $500,000 if you file jointly. If your gain is more than that, or if you can’t exclude any at all, the tax will depend on how long you owned the home. The gain is likely to be taxed as ordinary income if you owned it for less than a year. For a home owned longer, the lower long-term capital gains rate is used.

","

Tips

","$7a","

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Each year, you can make a tax-free charitable gift from your IRA or certain other pre-tax retirement account. This is known as a qualified charitable distribution or a QCD. These distributions allow you to meet your annual required minimum distribution without paying taxes on that amount. To do so, you must transfer the assets from your […]

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","

A financial advisor can help you find tax-efficient ways to support favorite causes.

","

What Is a Qualified Charitable Distribution?

","

For individuals age 70 1/2 or older, the IRS allows a form of charitable giving called “qualified charitable distributions.” This gift is a transfer from a pre-tax retirement account that you own, such as an IRA or a 401(k), to an eligible charity (according to the IRS) of your choice. Eligible gifts are then treated as tax-free transfers, meaning that you do not include the value of this gift in your annual taxable income.

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Eligible gifts also apply toward your required minimum distributions for the year. The result is that individuals who do not need the withdrawal can use qualified charitable distributions to take their required minimum distribution tax-free.

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To make a QCD, you must use a tax advantaged retirement account. In most cases this means a pre-tax account, and all forms of pre-tax IRA allow this type of giving. Under some circumstances you can also use a Roth IRA, but this is unusual. You must meet the age requirements for QCDs, and the recipient must be a legally qualified charity. Finally, you must transfer the assets directly from the IRA to the charity in question. The IRS will not consider this an eligible distribution if you transfer the assets to yourself and then gift them in turn.

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A QCD applies to your taxes in the tax year that the gift is received. Given the requirement that you must make the transfer directly, in most cases the giving and receiving should be contemporaneous.

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You can use any form of transfer to make a QCD. This includes direct electronic transfers or checks made payable to the charity, so long as this transfer draws directly on the IRA account. You can transfer cash or securities, based on the preferences of the recipient. The charity must provide you with a receipt or other written confirmation of the gift, and you cannot receive anything in return (like tickets to a charity event).

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Why Make a Qualified Charitable Distribution?

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A qualified charitable distribution has two key advantages. First, an eligible transfer is entirely tax-free. You do not count it as part of that year’s taxable income.

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Second, a qualified charitable distribution counts towards your required minimum distribution for the year. For example, say that you have a $7,500 RMD for 2024. If you donate $10,000 to charity directly from your IRA, you will have met the required minimum distribution for the year. This allows you to take your RMD tax-free while giving to charity at the same time.

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However, excess qualified charitable distributions do not roll over from year to year. In the case above, for example, you would not receive a $2,500 credit toward 2025’s required minimum distributions.

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You can give tax-free each year up to the QCD cap. In recent years, this has been set at $100,000. However, effective as of 2024, this cap will be indexed upward each year. For tax year 2024, each individual can give up to $105,000 from their pre-tax retirement account tax-free. Married couples filing jointly can combine this for up to $210,000 in giving.

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This is not a tax strategy that will benefit households that need the withdrawals from their IRAs. It requires you to make a unilateral gift, which means that you will almost always give away more money than you save in taxes. However for households interested in philanthropy, it’s an excellent way to engage, while also reducing the tax impact of their required minimum distributions.

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Bottom Line

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Qualified charitable deductions, or “QCDs,” are a way to give money tax-free from your pre-tax retirement account. As long as you follow the rules, you can give away up to $105,000 to eligible charities without including that money in your taxable income.

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Tips for Charitable Tax Deductions

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