35:["$","$L36",null,{"category":"$37","relatedArticles":[{"id":"cG9zdDoyNzA0NDU=","databaseId":270445,"postId":270445,"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":"dGVybToxOTUwNw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19507,"categoryId":19507,"link":"https://smartasset.com/tax-filing/articles","name":"Tax Filing","postCount":{"pageInfo":{"offsetPagination":{"total":100,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-filing","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":"2024-12-05T20:39:23","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNzA0NDk=","databaseId":270449,"altText":"A taxpayer researching the consequences of back taxes.","date":"2024-12-05T20:30:17","fileSize":705030,"mimeType":"image/jpeg","modified":"2024-12-05T20:34:45","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/12/iStock-2171685620.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-5","readable":"December 5, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo3Ng==","databaseId":76,"userId":76,"avatar":{"url":"https://secure.gravatar.com/avatar/ff1d12e3cebfaa1fe2b25aef26174d63?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Becca Stanek is a graduate of DePauw University. Becca is an experienced writer/editor who serves as a retirement expert for SmartAsset. She's passionate about helping people understand the sometimes daunting ins and outs of personal finance. Becca is a member of the Society for Advancing Business Editing and Writing, and her work has appeared in Time, The Week, Lending Tree and the Mic. Becca grew up in the Midwest and now lives in New York.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Becca","fullName":"Becca Stanek","lastName":"Stanek","name":"Becca Stanek","postCount":{"pageInfo":{"offsetPagination":{"total":19,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"bstanek","__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/back-taxes","metaDesc":"Addressing back taxes promptly is essential to avoid escalating penalties, interest and potential legal action from the IRS.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":7,"title":"What Are Back Taxes? Meaning and Consequences","__typename":"PostTypeSEO"},"slug":"back-taxes","status":"publish","title":"What Are Back Taxes? Meaning and Consequences","uri":"/taxes/back-taxes","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":null,"editedBy":{"id":"dXNlcjo3Ng==","databaseId":76,"userId":76,"avatar":"$39","description":"Becca Stanek is a graduate of DePauw University. Becca is an experienced writer/editor who serves as a retirement expert for SmartAsset. She's passionate about helping people understand the sometimes daunting ins and outs of personal finance. Becca is a member of the Society for Advancing Business Editing and Writing, and her work has appeared in Time, The Week, Lending Tree and the Mic. Becca grew up in the Midwest and now lives in New York.","additionalMeta":"$3a","email":null,"firstName":"Becca","fullName":"Becca Stanek","lastName":"Stanek","name":"Becca Stanek","postCount":"$3b","slug":"becca-stanek","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDU=","databaseId":145,"userId":145,"avatar":"$3e","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":"$3f","email":null,"firstName":"Michele","fullName":"Michele Cagan, CPA","lastName":"Cagan, CPA","name":"Michele Cagan, CPA","postCount":"$40","slug":"michele-cagan-cpa","__typename":"User"},"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$43","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":"$44","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$45","slug":"arturo-conde-cepf","__typename":"User"}},"category":{"id":"dGVybToxOTUwNw==","children":"$48","databaseId":19507,"categoryId":19507,"link":"https://smartasset.com/tax-filing/articles","name":"Tax Filing","postCount":100,"slug":"tax-filing","ancestors":"$4a","parent":"$4d","__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

Back taxes refer to unpaid taxes that remain outstanding from previous years, either due to missed payments, underreporting of income or adjustments in tax filings after an audit. These unpaid balances can accrue penalties and interest over time, which may significantly increase the amount owed. Individuals or businesses with back taxes may face consequences from the IRS, such as wage garnishments, tax liens or even property seizures, depending on the severity and duration of the debt. A financial advisor or a tax professional could help you create a plan to avoid back taxes and manage your liability.

","

What Are Back Taxes?

","

Back taxes are taxes that remain unpaid after the original due date, typically resulting from underreporting income, omitting earnings from a tax return, underpayment or making errors in a tax filing.

","

Often, back taxes occur when taxpayers miscalculate deductions, credits or income, causing them to underpay unknowingly. They may also arise when a taxpayer fails to file altogether, due to oversight or the inability to pay the owed amount. When these issues are identified, either by the taxpayer or the IRS, the discrepancy leads to a back tax liability.

","

For example, imagine an independent contractor who earned additional income but forgot to report a portion of that amount on their tax return. If the IRS later audits the contractor’s account and discovers the missing income, they will adjust the tax return to include this income. The contractor would then owe back taxes on the unreported amount, plus any interest or penalties that had accrued since the original filing.

","

How Do You Know If You Owe Back Taxes?

","

Taxpayers can find out they owe back taxes through several channels, most commonly through official IRS notifications. The agency regularly reviews filed tax returns and, if discrepancies are found, will mail a notice detailing the amount owed, including any interest or penalties. These letters often include deadlines and specific instructions on how to settle the debt. You should note that the IRS will never make first contact by phone, email, or social media.

","

Individuals who suspect they may owe back taxes but haven’t received a notice can check their tax status by accessing their IRS account online. The IRS website provides a secure portal where taxpayers can view past returns, see balances and identify any outstanding amounts. You can also call the IRS to find out at 800-829-1040.

","

Additionally, consulting past tax filings or contacting a tax professional can help uncover missed payments or overlooked income that might have led to an unpaid balance. Sometimes, state tax agencies may also notify individuals of back taxes, including property taxes, owed for state income taxes.

","

Consequences of Back Taxes

","

When a person owes back taxes, the IRS and, in some cases, state tax authorities can take actions to recover the debt. These consequences vary depending on the amount owed, the duration of the unpaid balance and whether the taxpayer has taken steps to address the debt.

","

Here are five possible repercussions of unpaid back taxes:

","$4f","

What to Do If You Owe Back Taxes

","

","

If you owe back taxes, taking proactive steps to address the debt can prevent the situation from worsening and may reduce some of the financial strain. Here are six general steps to help you manage back taxes effectively.

","

1. Verify Your Tax Balance

","

Begin by confirming the amount you owe. You can do this through your IRS online account, which provides a detailed breakdown of taxes, penalties and interest.

","

2. File Any Unsubmitted Returns

","

If you have unfiled tax returns, submit them immediately, even if you cannot pay the full amount owed. Filing can reduce late-filing penalties and also gives the IRS a record of your outstanding balance, which may facilitate future resolution options.

","

3. Explore Payment Plans

","

The IRS offers flexible payment options to help you manage your debt. Short-term payment plans allow up to 180 days to pay in full, while long-term installment agreements extend payments over months or years. The long-term plan requires a setup fee, but both options make it easier to budget your payments and avoid more severe IRS actions.

","

4. Request Penalty Abatement

","

In some cases, taxpayers can apply for penalty relief. The IRS may reduce or waive penalties if you can demonstrate reasonable cause, such as a medical crisis or natural disaster, or if this was your first time incurring a tax penalty. This can lessen the total debt burden, especially if penalties have accrued over time.

","

5. Consider an Offer in Compromise

","

For those experiencing serious financial hardship, the IRS provides an option to settle the debt for less than the full amount owed through an offer in compromise (OIC). To be eligible, you must meet certain criteria, such as having filed all legally required tax returns, not being in an open bankruptcy proceeding and having made all required estimated tax payments for the current year.

","

If approved, an OIC can provide substantial relief, but it’s generally granted in limited circumstances.

","

6. Seek Professional Help If Needed

","

If your tax situation is complex, a tax professional, such as a certified public accountant (CPA) or tax attorney, can help you navigate the process. They can negotiate with the IRS on your behalf, file necessary documents and ensure that you take advantage of all available relief options.

","

Bottom Line

","

","

Addressing back taxes promptly is essential to avoid escalating penalties, interest and potential legal action from the IRS. By filing any past-due tax returns and paying owed amounts, you can mitigate additional charges and regain control over your financial situation. The IRS offers options such as payment plans or offers in compromise to assist taxpayers in settling their debts.

","

Tips for Planning Taxes

","$50","

Photo credit: ©iStock.com/shapecharge, ©iStock.com/LaylaBird, ©iStock.com/skynesher

"],"experts":null,"link":"/tax-filing/back-taxes","published":{"datetime":"2024-12-5","readable":"December 5, 2024"},"shareInfo":{"title":"What Are Back Taxes? Meaning and Consequences","origin":"/taxes/back-taxes"},"isNewsArticle":true},{"id":"cG9zdDoyMzM3ODQ=","databaseId":233784,"postId":233784,"author":{"node":{"id":"dXNlcjoxNDk=","databaseId":149,"userId":149,"avatar":{"url":"https://secure.gravatar.com/avatar/cddecd76c8cb633cdb25bbaffb1431d5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":null,"additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Brian J.","fullName":"Brian J. O'Connor","lastName":"O'Connor","name":"Brian J. O'Connor","postCount":{"pageInfo":{"offsetPagination":{"total":153,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"brianjoconnor","__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":224,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$51","date":"2024-01-10T07:30:00","excerpt":"

If there’s one thing you can depend on when it comes to taxes, it’s that at least some of the rules, exemptions and deductions are sure to change every year. This year was no exception, as many things have changed for 2023 taxes being filed by April 2024. So before you start pulling together the […]

\n","featuredImage":{"id":"cG9zdDoyMzQ1MDc=","databaseId":234507,"altText":"","date":"2024-01-09T15:04:48","fileSize":53802,"mimeType":"image/jpeg","modified":"2024-01-09T15:04:48","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/01/asian-woman-planning-budget-and-using-calculator-on-smartphone.jpg_s1024x1024wisk20cWhBF7Km1ML9nETKD5gNuDSQ7zcQNaQii4Gw6dY-t4gs.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-1-9","readable":"January 9, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo3Mw==","databaseId":73,"userId":73,"avatar":{"url":"https://secure.gravatar.com/avatar/a315ec8e032d3b1a0d5e36b7e0cde587?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Chris Thompson is Senior Managing Editor of SEO at SmartAsset. He's an expert in many areas of personal finance, including retirement, estate planning, savings, taxes and financial planning. He has worked in the personal finance industry for nearly a decade as both an editor and writer. Chris studied communications in Austria and ultimately graduated with a journalism degree from Montclair State University, where he also received the coveted Journalism Achievement Award.","additionalMeta":{"expertise":"Retirement, Estate Planning, Savings, Taxes","__typename":"User_Additionalmeta"},"email":null,"firstName":"Chris","fullName":"Chris Thompson","lastName":"Thompson","name":"Chris Thompson","postCount":{"pageInfo":{"offsetPagination":{"total":75,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"cthompson","__typename":"User"},"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/taxes/important-tax-changes-for-2024","metaDesc":"Are you aware of all of the changes for tax season 2023? Consider this list before you actually start filing.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"Important Tax Changes to Know Before You File in 2024","__typename":"PostTypeSEO"},"slug":"important-tax-changes-for-2024","status":"publish","title":"Important Tax Changes to Know Before You File in 2024","uri":"/taxes/important-tax-changes-for-2024","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoxNDk=","databaseId":149,"userId":149,"avatar":"$52","description":null,"additionalMeta":"$53","email":null,"firstName":"Brian J.","fullName":"Brian J. O'Connor","lastName":"O'Connor","name":"Brian J. O'Connor","postCount":"$54","slug":"brian-j-oconnor","__typename":"User"},"editedBy":{"id":"dXNlcjo3Mw==","databaseId":73,"userId":73,"avatar":"$57","description":"Chris Thompson is Senior Managing Editor of SEO at SmartAsset. He's an expert in many areas of personal finance, including retirement, estate planning, savings, taxes and financial planning. He has worked in the personal finance industry for nearly a decade as both an editor and writer. Chris studied communications in Austria and ultimately graduated with a journalism degree from Montclair State University, where he also received the coveted Journalism Achievement Award.","additionalMeta":"$58","email":null,"firstName":"Chris","fullName":"Chris Thompson","lastName":"Thompson","name":"Chris Thompson","postCount":"$59","slug":"chris-thompson","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxMzY=","children":"$5c","databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":224,"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

","

Do you have questions about tax planning? Speak with a financial advisor who serves your area today.

","

Deadlines for Filing Returns and Extensions

","

Tax filing day in 2024 falls on Monday, April 15.

","

For residents of Maine and Massachusetts, there’s some extra time available to file. If you live in either of these states, you’ll have until April 17 to file, as April 15 and April 16 are both state holidays.

","

If you file for a tax extension, the deadline for both individual and self-employed filers is October 15. However, an extension gives you more time to file, not more time to pay. You’ll still need to make at least an estimated tax payment by April 15 or face significant penalties.

","

‘Tax Season’ vs. ‘Tax Year’: What’s the Difference?

","

What’s called “tax season” is the time of year for preparing and filing your return for the previous calendar year. This typically runs from early January to April 15. Now is when you’ll also receive W2s, 1099s and other income statements needed for filing your return.

","

On the other hand, the “tax year” is the calendar year in which you earn your taxable income, despite the fact that you file it the following year. In turn, tax year 2023 would be paid by April 15, 2024. This will involve any income earned and other financial transactions during the tax year covered in the return you file during the “tax season.”

","

Inflation-Adjusted Tax Brackets

","

The IRS automatically adjusts tax brackets each year to account for inflation. Otherwise, you’d be paying an increasingly higher marginal tax rate every year. In 1978, for example, a married couple making $11,200 found themselves in the 22% bracket, while they’d need to earn $89,450 to hit that rate for 2023.

","

Here’s a breakdown of the new brackets for the 2023 tax year for both single and joint filers:

","$63","

Inflation-Adjusted Standard Deductions

","

The standard deduction saw a big increase several years ago, which makes itemizing deductions unnecessary for many filers. For the 2023 tax year, the adjusted standard deductions are as follows:

","

$13,850 for single filers
$27,700 for married couples filing jointly
$13,850 for married couples filing separately
$20,800 for heads of household

","

Taxes for Restarted Student Loan Payments

","

","

The interest on most student loans is tax-deductible, so if you resumed making loan payments after the pandemic pause ended, remember to total the amount of interest you paid up until Dec. 31, 2023.

","

Up to $2,500 of student loan interest is deductible every year and you don’t have to itemize to claim it. Instead, the deduction is taken as an income adjustment on Schedule 1. Those adjustments result in a dollar-for-dollar cut to your tax bill, which could be very valuable depending on how much you paid.

","

Electric Vehicle Credits

","

Automakers call EVs the car of the future. If you purchased an EV in the past 12 months, you can claim a federal tax credit of up to $7,500 for a new electric vehicle, or up to $4,000 for a used EV. Because it’s free money – like the student loan interest deduction – that reduces your total tax bill, there are restrictions of course.

","

First, your modified adjusted gross income (MAGI, for short) must be below the following thresholds:

","

$300,000 for married couples filing jointly
$225,000 for heads of household
$150,000 for all other filing statuses

","

The individual vehicle also must qualify for the deduction, which you can check here.

","

Tips for Filing Your Taxes

","$64","

Photo credits: ©iStock.com/staticnak1983, ©iStock.com/FG Trade Latin

"],"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/important-tax-changes-for-2024","published":{"datetime":"2024-1-10","readable":"January 10, 2024"},"shareInfo":{"title":"Important Tax Changes to Know Before You File in 2024","origin":"/taxes/important-tax-changes-for-2024"},"isNewsArticle":false},{"id":"cG9zdDoyMTk3MTU=","databaseId":219715,"postId":219715,"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":"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":224,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$65","date":"2023-12-07T15:36:46","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyMjEzMTA=","databaseId":221310,"altText":"A teenager discussing with parent what he will be working on as an employee for the family business.","date":"2023-12-07T15:31:25","fileSize":194245,"mimeType":"image/jpeg","modified":"2023-12-07T15:32:33","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2023/12/iStock-1463773444.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-12-7","readable":"December 7, 2023"},"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":776,"__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/can-you-hire-your-child-as-an-employee","metaDesc":"If you, as a parent, owns a business then you can hire your child, no matter the age, and actually see some tax benefits. Here's what you need to know.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"How to Hire Your Child As an Employee and Save on Taxes","__typename":"PostTypeSEO"},"slug":"can-you-hire-your-child-as-an-employee","status":"publish","title":"How to Hire Your Child as an Employee and Save on Taxes","uri":"/taxes/can-you-hire-your-child-as-an-employee","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":"$66","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":"$67","email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":"$68","slug":"mark-henricks","__typename":"User"},"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$6b","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":"$6c","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$6d","slug":"arturo-conde-cepf","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDU=","databaseId":145,"userId":145,"avatar":"$70","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":"$71","email":null,"firstName":"Michele","fullName":"Michele Cagan, CPA","lastName":"Cagan, CPA","name":"Michele Cagan, CPA","postCount":"$72","slug":"michele-cagan-cpa","__typename":"User"},"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxMzY=","children":"$75","databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":224,"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

Hiring your child to work for your family business opens the door to potential tax savings for both you and your child. Paying your child a salary allows you to deduct their wages as a business expense, reducing the business’ taxable income. Meanwhile, your child can earn up to the standard deduction amount tax-free. The two-way tax break can make this a solid win for parent-employer as well as child-employee. As is usually the case with taxes, some rules have to be followed for this to work. A financial advisor can help determine if hiring your child as an employee makes sense for your personal tax situation and small business needs.

","

Family Employees and Taxes

","

Tax regulations offer attractive tax benefits to owners of small businesses who hire their children to work for the family firm. The child’s earnings are also likely to qualify for favorable tax treatment.

","

As a small business owner, you can pay each child you hire up to $13,850 in 2023 (and $14,600 in 2024) without them owing any federal income tax. That’s because this amount matches the standard deduction for single filers. Your business also gets to deduct your child’s wages as a business expense.

","

You can’t just hand your kid cash and claim it as a deduction, however. The IRS requires you follow rules to make the most of this tax play. To properly hire your child and unlock tax savings, keep these guidelines in mind:

","$7c","

As long as you closely follow the rules, the IRS lets your business deduct your child’s pay. Your child, meanwhile, can earn up to the standard deduction tax-free.

","

Hiring Your Child in Action

","

","

An example may clarify how this could work in practice. Say you run a small social media consulting business as a sole proprietorship. You decide to hire your 16-year-old daughter to manage your company Instagram account for $12 per hour. She works 10 hours per week for 12 weeks during the summer, earning $1,200 total.

","

You pay her wages and get to deduct the $1,200 on your business tax return. You withhold income tax from her paychecks, but that pay is not subject to Social Security or Medicare taxes since she’s under 18.

","

At tax time, your daughter files her own tax return. If you don’t claim her as a dependent, she can take the standard deduction for single filers. If she is a dependent for tax purposes, she can claim a standard deduction of $1,250 or her earned income plus $400, up to the full standard deduction for single filers. This protects her $1,200 in wages from any federal income tax.

","

By properly hiring your minor child, you save 7.65% in payroll taxes (Social Security and Medicare). On $1,200, that comes to $91.80. Your child, meanwhile, saves 10% of $1,200, or $120, in federal income taxes. Similarly, the more she earns from working for your business, the greater her tax savings, up to the standard deduction amount.

","

Restrictions on Hiring a Child

","

While hiring your child can be a financial winner, this is not a solution suitable for every taxpayer. If you are considering it, keep these limitations in mind:

","

You need self-employment or business income to qualify for the deduction. It won’t work for wage earners.
Your child must be under age 18 for wages to be exempt from Social Security and Medicare taxes.
Once your child reaches age 21, you have to pay federal unemployment taxes on their wages.
The IRS may flag high pay rates for children as unreasonable if it exceeds the norm for their duties.
You and your child must follow all documentation and reporting requirements. Failing to do so could nullify the tax benefits and possibly incur IRS penalties.

","

The IRS is not likely to give you much leeway if you violate these rules. But the requirements are not particularly burdensome and tax savings can be substantial if everything is done correctly

","

Bottom Line

","

","

When done right, hiring your child to work for your company can legally benefit you both come tax time. Just be sure to dot your i’s and cross your t’s by following employment laws and IRS rules. Report the earnings as required and, if any taxes are due, pay them in full. Most importantly, make sure your child takes on real duties vital to your business success and is paid a fair wage.

","

Tax Planning Tips

","$7d","

"],"experts":"$7e","link":"/taxes/can-you-hire-your-child-as-an-employee","published":{"datetime":"2023-12-7","readable":"December 7, 2023"},"shareInfo":{"title":"How to Hire Your Child as an Employee and Save on Taxes","origin":"/taxes/can-you-hire-your-child-as-an-employee"},"isNewsArticle":false},{"id":"cG9zdDoyNDc3ODk=","databaseId":247789,"postId":247789,"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":907,"__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":224,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$7f","date":"2024-05-31T17:05:37","excerpt":"

If you sell your home for a profit, the IRS considers this a taxable capital gain. This rule applies to all home sales, including vacation or investment properties. However if you sell your primary residence, you may be able to exclude $250,000 of gain per individual from your taxes. As a result, in most cases, […]

\n","featuredImage":{"id":"cG9zdDoyNTAwNzY=","databaseId":250076,"altText":"A woman calculating capital gains tax on the sale of a home.","date":"2024-05-31T17:00:12","fileSize":215849,"mimeType":"image/jpeg","modified":"2024-05-31T17:01:02","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/05/iStock-1385092066-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-5-31","readable":"May 31, 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":"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":907,"__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/capital-gains-on-real-estate","metaDesc":"Capital gains tax is levied by the IRS on the sale of investments. Here is how that tax works for the sale of real estate.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"How Capital Gains Tax on Home Sales Works","__typename":"PostTypeSEO"},"slug":"capital-gains-on-real-estate","status":"publish","title":"How Capital Gains Tax on Home Sales Works","uri":"/taxes/capital-gains-on-real-estate","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":"$80","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":"$81","email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":"$82","slug":"eric-reed","__typename":"User"},"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$85","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":"$86","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$87","slug":"arturo-conde-cepf","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDU=","databaseId":145,"userId":145,"avatar":"$8a","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":"$8b","email":null,"firstName":"Michele","fullName":"Michele Cagan, CPA","lastName":"Cagan, CPA","name":"Michele Cagan, CPA","postCount":"$8c","slug":"michele-cagan-cpa","__typename":"User"},"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxMzY=","children":"$8f","databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":224,"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

","

A financial advisor can help you create a tax plan to maximize your investments.

","

What Are Capital Gains Taxes?

","

Capital gains are the profits that you receive from selling an asset. When you sell an asset, your capital gains or losses are calculated as:

","

Sale Price – (Purchase Price + Additional Investment) = Capital Gain (Loss)

","

Your capital gains or losses are based on the original cost of your underlying investment, otherwise known as your tax basis. So, for example, say that you buy a bundle of stocks for $1,000. Later, you buy an additional bundle for another $500. This combined investment of $1,500 would be your tax basis. Then, you sell the entire portfolio for $2,500. Your capital gains would be:

","

$2,500 – ($1,000 + $500) = $1,000

","

Since capital gains are a form of income, they are subject to taxation. However Congress has established a special, lower rate for long-term capital gains called the capital gains tax. In 2024, there are three long-term capital gains tax brackets:

","

0% – Up to $47,025 Single/$94,050 Joint
15% – Between $47,026 – $518,900 Single/Between $94,051 – $583,750 Joint
20% – Above $518,900 Single/$583,750 Joint

","

So, for example, say that your job pays you $45,000 per year. This earned income is subject to both income and payroll taxes, for a minimum rate of 17.65% (10% income + 7.65% payroll). But, say that you are an investor who makes $45,000 off the sale of stocks. This is a capital gain subject to the capital gains tax, which is 0% for those earnings.

","

Long-term capital gains rates apply only to assets that you have held for more than a year. If you hold assets for 12 months or less, they are taxed at the rate of ordinary income. As with all taxed income, capital gains are cumulative. At the end of each year, you pay taxes on all of your combined gains from various sources.

","

Real Estate Sales and Capital Gains

","

","

Real estate sales are considered capital gains, so when you sell a property you account for any profits or losses on your capital gains taxes. As always, your capital gain from selling the house is your sale price less the tax basis of the property.

","

Calculating the tax basis for a home sale can get fairly complicated. In general, the IRS allows you to consider any improvements and updates that you’ve made to the property as part of your overall investment, as well as many of the costs involved with marketing and selling the property. However, you cannot include costs for maintenance and repairs, nor can you claim financing costs. So as you own a property over the years, it’s worth keeping a record of any money you spend upgrading and improving it.

","

In broadest strokes, the IRS defines this difference by classifying improvements as spending that will “add to the value of your home, prolong its useful life, or adapt it to new uses.”

","

So, for example, say that you sell your home for $500,000. Over the years, you spent the following money on the property:

","

Purchase Price – $350,000
Interest on the mortgage – $25,000
New windows – $3,000
Deck repairs – $750
Listing and marketing fees – $1,000

","

You can include your purchase price, the new windows and the marketing fees in your property’s tax basis. You cannot include the deck repairs, since that’s maintenance, nor can you include your interest payments. So, your capital gains here are:

","

$500,000 – $354,000 = $146,000

","

You would have $146,000 of capital gains. If your total taxable income puts you in the 15% capital gains rate bracket (which is the most common), you would pay $21,900 on that gain (15% x $146,000).

","

These are the rules that will apply to most property sales. So, for example, say that you have a vacation house or a rental property. If you sell that home, you will calculate your tax basis, then determine your capital gains, then pay taxes on those gains based on your overall tax rates.

","

Home Sale Exclusion

","

For the most part, the rules around real estate and capital gains don’t change based on the nature of the underlying property. If you sell a house and make money, that profit is considered a taxable capital gain.

","

However, there is a broad exclusion for the sale of your primary residence. When you sell your main home, you are allowed to exclude the first $250,000 single/$500,000 joint of the profits from your taxes. Importantly, this exclusion applies to your gains so you apply the exclusion after you adjust for the property’s tax basis. So, your math here is:

","

Sale Price – (Purchase Price + Qualified Spending) – Exclusion = Taxable Gains

","

To qualify for the home sale exclusion, otherwise known as the Section 121 Exclusion, you must meet what is known as the “ownership and use” test. This means that you must have owned the property and lived in it as your primary residence for at least 2 out of the past 5 years. This time can be nonconsecutive, but it must apply to the five year period directly before the sale. The purpose of this test is to limit the home sale exclusion to a primary residence, rather than investments, vacation properties or flips.

","

For individuals or couples, this exclusion means that you will typically pay little, if any, taxes on all but the most lucrative sales.

","

Bottom Line

","

","

If you sell a home, or any other piece of real estate, any profits you make from the sale will be considered capital gains. For any house other than your primary residence, you will pay capital gains taxes on the entire amount. For your primary residence, you can exempt $250,000 per person from your taxes.

","

Tips on Selling Your House

","$96","

"],"experts":"$7e","link":"/taxes/capital-gains-on-real-estate","published":{"datetime":"2024-5-31","readable":"May 31, 2024"},"shareInfo":{"title":"How Capital Gains Tax on Home Sales Works","origin":"/taxes/capital-gains-on-real-estate"},"isNewsArticle":false}]}]