30:["$","$L31",null,{"category":"$32","relatedArticles":[{"id":"cG9zdDoyMzQ2OTc=","databaseId":234697,"postId":234697,"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":"dGVybToxOTUwNw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19507,"categoryId":19507,"link":"https://smartasset.com/tax-filing/articles","name":"Tax Filing","postCount":{"pageInfo":{"offsetPagination":{"total":102,"__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":"$33","date":"2024-01-30T18:28:41","excerpt":"

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A 1031 exchange allows certain real estate investors to defer capital gains taxes when selling one investment property and reinvesting proceeds from the sale into another similar property. Taxes are only postponed, not eliminated, and investors still need to properly report 1031 exchanges to the IRS. Multiple deadlines for enacting and reporting exchanges apply, and investors also need to use specific tax forms depending on the characteristics of an individual exchange. Work with a financial advisor to craft an optimal long-term strategy leveraging 1031 exchanges to keep growing your investment real estate portfolio’s pre-tax basis and compound gains over multiple cycles.

","

1031 Exchange Essentials

","

Internal Revenue Code Section 1031 specifies rules that allow investors to do tax-deferred swaps of like-kind investment real estate. To qualify as allowable, the disposition of one relinquished property and acquisition of a replacement property must be parts of an integrated exchange transaction. Both the property sold and newly purchased one need to be held for business or investment use. This means primary residences or vacation homes cannot be exchanged. The relinquished and replacement properties must also be similar enough to count as like-kind.

","

Exchanges can take different forms. In a basic simultaneous swap, an investor trades one property for another directly. Another option, a deferred exchange, allows more time and flexibility to dispose of one property first, then subsequently obtain one or more replacement investment real estate assets. Reverse exchanges start with acquiring the new property, then disposing of the old one. Investors generally need assistance from exchange facilitators, who can help ensure full compliance with the multitude and variety of 1031 requirements when doing deferred or reverse exchanges.

","

Reporting a 1031 Exchange

","

Even though taxes are being deferred, 1031 exchanges must be reported to the IRS. The exchange must be reported in the tax year when the investor relinquishing the property begins the exchange. That remains the case even if the transaction finishes the following tax year.

","

Investors have 45 days from when they sell the relinquished property to identify potential replacement properties in writing. Then replacement property must be received and the exchange completed within the earlier of 180 days of the sale of the exchanged property that is being given up or by the due date of the tax return including extensions. Failing to meet either deadline will invalidate the deferral and require taxes to be paid as if the transaction were an ordinary sale.

","

It’s also possible to do partial exchanges involving some cash or other property that is not like-kind. In these cases, only some tax obligation might fall due currently. If the investor relinquishes property in a 1031 exchange but is unable to acquire replacement property in time, any profits could potentially still get treated as an installment sale with the gain spread over future years. Various states also have their own reporting requirements.

","

The deadline for reporting 1031 exchanges normally is the same as the deadline for filing federal returns, typically April 15 for individuals. If the exchange is not completed by then, an automatic extension may be requested, delaying the required filing date until October 15. In the event of a delay, projected taxes should still be paid by April 15.

","

1031 Exchange Forms

","

","

Taxpayers report exchanges on Form 8824, like-kind exchanges, attaching it to their returns. The form asks for:

","

Descriptions of properties sold and purchased
Key dates including when the sold property was originally acquired and when the replacement property was identified and acquired
Any connections between the exchanging parties (either direct or indirect)
Value and basis details on properties exchanged
Calculations for any realized and recognized gains or losses

","

If the property exchanged is depreciable real estate, some taxes may have to be paid now rather than deferred. This is due to depreciation recapture rules and occurs when there are significant differences between the properties exchanged. Trading unimproved land for improved, income-generating real estate is one example of such an exchange.

","

When depreciation recapture is triggered, any gains get taxed at ordinary income rates rather than the typically lower long-term capital gains rates. The amount recaptured reflects the depreciation previously deducted on the older property. In most cases, this recapture tax obligation would need to be reported on Form 4797, Sales of Business Property, if the relinquished property was used for business purposes.

","

In some cases where the exchanged property was held just for investment, not business use, the depreciation recapture and other gains may instead get reported on Schedule D. The correct type of form, either Form 4797 or Schedule D, depends on complex factors, so consult a tax professional before filing.

","

Getting these forms right matters, because the IRS separately also gets notification of the relinquished property’s sale via Form 1099-S from the facilitator of the exchange. Form 8824 shows the tax authorities the transaction qualified for deferral through a valid 1031 exchange.

","

In any case, taxes are only deferred, not eliminated. When you later sell the replacement property in a non-exchange transaction, the original deferred gain plus any added gain gets taxed. The cost basis, which is used to determine the gain, carries over from the old property to the new property.

","

Bottom Line

","

","

Reporting 1031 exchanges properly requires tracking dates, filling out Form 8824 detailing information on properties traded and calculating any recognized gain. While taxes are postponed on these transactions, they aren’t excused forever. The tax liability on any gains is only deferred to a later sale. Keeping the right records on exchanges is critical to maintaining this deferral. If reporting isn’t done correctly, tax deferral could be canceled so that taxes are due on your next return. Since these transactions and their tax effects are so complex, consult an experienced tax professional before filing your return.

","

Tax Planning Tips

","$4a","

Photo credit: ©iStock/andresr, ©iStock/Thicha Satapitanon, ©iStock/nuttapong punna

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Approximately 40% of households pay taxes on their Social Security benefits, according to the Social Security Administration. If you do owe taxes on your benefits, managing them effectively could save you a lot of money. If you need help planning for Social Security or taxes in retirement, consider working with a financial advisor. However, there […]

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","

If you need help planning for Social Security or taxes in retirement, consider working with a financial advisor.

","

However, there aren’t many ways to do that. Social Security taxes are based on a rather straightforward income formula. The only real ways to reduce how much of your benefits are taxable is to reduce your taxable income or qualify for a lower marginal tax rate.

","

For example, say that you expect to earn $3,300 per month from Social Security. Here’s how your taxes will work and how you may be able to reduce taxes on those payments.

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How Are Social Security Benefits Taxed?

","

","

Depending on your income, a percentage of your Social Security benefits may be included in your taxable income. This usually applies when you have additional income beyond your Social Security benefits, although particularly high-earners can trigger taxes based on their benefits alone.

","

Benefits taxes are calculated using two separate figures: combined income and taxable income. Your combined income is used to determine the amount of Social Security benefits subject to taxation. Your taxable income is a separate figure used to determine your actual taxes.

","

Combined Income

","

First, you calculate your combined income:

","

Combined Income = adjusted gross income + nontaxable Interest + half of our Social Security benefits

","

So, in our example, you have $39,600 per year in Social Security income. Absent any other income, that gives you a starting combined income of $19,800.

","

If your combined income is less than $25,000 as an individual or $32,000 as a married couple, you will not pay taxes on your Social Security benefits. If your combined income is between $25,000 and $34,000 as an individual or between $32,000 and $44,000 as a married couple, you pay taxes on up to 50% of your benefits. This can be a sliding scale. Your exact rate will be determined using IRS Publication 915.

","

If your combined income is above $34,000 as an individual or above $44,000 as a married couple, you pay taxes on up to 85% of your Social Security benefits. Again, this can be a sliding scale.

","

Taxable Income

","

Once you know your benefits tax tier, you can calculate your taxable income.

","

To do this, you multiple your tax tier (0%, 50% or 85%) times your total Social Security benefits. Then, you add the resulting amount to the rest of your taxable income. Your taxes will then be based on this total.

","

The result of this system is that some of your benefits will be taxed and some will not be. For example, say you are in the 85% bracket. In this case, you will add 85% of your benefits to your taxable income, and you will not pay taxes on 15% of your benefits.

","

Like with most retirement income, benefits are not subject to FICA (payroll) taxes, so you will only pay income taxes on this money.

","

Social Security Benefits Taxes Examples

","

Let’s look at our hypothetical scenario using three different examples. (You can also run your own numbers through the IRS benefits tax calculator.) We’ll assume you’re single.

","

Example 1: Social Security as Your Only Income Source

","

Here, you have only Social Security benefits ($39,600) and no other sources of retirement income. Your taxes would be based in the following inputs:

","

Combined Income: $0 + $0 + (0.5 * $39,600) = $19,800
Social Security Tax Tier: 0%

","

Ordinarily, with $19,800 of income you would pay $595 in federal taxes (absent any special credits or deductions). However, your combined income falls below the $25,000 threshold, so none of your benefits are taxable. As a result, you would have no taxable income and pay no federal income tax.

","

Example 2: $12,000 in 401(k) Withdrawals

","

Here, you have Social Security benefits plus an additional $12,000 per year from your 401(k). Your taxes would be based on the following:

","

Combined Income: $12,000 + $0 + (0.5 * $39,600) = $31,800
Social Security Tax Tier: 50%

","

Since your combined income is between $25,000 and $34,000 as an individual, 50% of your Social Security benefits would be added to your taxable income. As a result, your taxable income would be the same as your combined income, and you would owe around $1,934 in federal income tax.

","

Example 3: $50,000 in 401(k) Withdrawals

","

In our third scenario, you have Social Security benefits plus an additional $50,000 per year from your 401(k). Your taxes would be calculated based on the following:

","

Combined Income: $50,000 + $0 + (0.5 * $39,600) = $69,800
Social Security Tax Tier: 85%

","

Since your combined income is above $34,000 as an individual, you would pay taxes on 85% of your Social Security benefits. As a result, your taxable income would be $83,575 ($50,000 + $33,660) and you would owe around $10,666 in federal income tax.

","

Keep in mind that these are estimates. If you need help calculating your own tax liability, consider working with a financial advisor with tax expertise.

","

Reducing Your Social Security Benefits Taxes

","

","

So, how can you reduce the taxes on your Social Security benefits?

","

Overall, the only way to reduce the taxes you pay on Social Security benefits is to reduce either your taxable income, your marginal tax rate or both.

","

It’s important to note that you can help manage the impact of these taxes by requesting federal withholding. If you do this, the SSA will withhold your likely taxes from each benefits check, helping you to avoid a nasty income tax bill when you file your tax return for the year.

","

Beyond that, here a few strategies for reducing your tax liability:

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Roth Conversions

","

This is perhaps the most straightforward option. Income that you generate from a Roth IRA does not count as taxable income and is also not subject to required minimum distributions (RMDs). Since Roth withdrawals aren’t part of your adjusted gross income, they’re also not calculated in your combined income for benefits tax purposes. As a result, if you generate most or all of your income from Roth withdrawals, your Social Security benefits may not be subject to any significant taxation (depending on your benefit amount).

","

That said, remember that Roth conversions have a hefty up-front tax cost. For households near or in retirement, converting a significant amount from a pre-tax portfolio may leave you paying more in taxes on the conversion than what you would save on your Social Security taxes. If you need help calculating how much your savings you should convert into a Roth IRA, consider speaking with a financial advisor.

","

Capital Gains Conversions

","

This is an equivalent to Roth conversions, but generally less advantageous.

","

Here, you would move your money from a pre-tax retirement account into a taxable brokerage account. From there, your withdrawals may be subject to a mix of capital gains and income taxes depending on the nature and duration of your investments. However, returns subject to capital gains taxes will not count toward your combined income, again giving you an advantage when it comes to calculating the proportion of benefits subject to taxation.

","

However, you will still pay up-front taxes on the money you move out of your pre-tax portfolio. For this reason, households may do better with a Roth conversion (which eliminates taxes altogether) than a capital gains conversion (which restructures taxes).

","

Structure Your Withdrawals

","

Finally, you can structure your withdrawals around the benefit tax tiers.

","

While even a small amount of additional income can push you into the 85% bracket, it can be very useful to manipulate your income around these tax tiers.

","

The key here is to remember two things. First, money in savings does not count as income for tax purposes. Second, the tax tiers apply to your entire benefits check. The idea, then, is that you can withdraw extra money above a tier in one year, set it aside in savings, then withdraw less for several additional years.

","

The goal is to keep your combined income in the 0% or 50% brackets as often as possible. The cost, however, is that you lose out on any investment returns for the money that sits in savings.

","

Say that in general you want to take $15,000 from your 401(k). On its own this would give you a combined income of $34,800 ($15,000 + $19,800), so you would pay taxes on 85% of your benefits. Instead, in one year you could withdraw $20,000, still paying taxes on 85% of your benefits. Then, for the next four years, you could withdraw $14,000 from your portfolio and $1,000 from savings. That would give you a combined income of $33,800, so for those four years you would only pay taxes on 50% of your benefits.

","

This kind of structured withdrawal is difficult to manage, particularly in the long run. It may be best executed with the help of a financial advisor, one who can help you prepare this kind of tax planning years ahead of time.

","

Bottom Line

","

Social Security benefits are taxed based on how much overall income you have. The only real way to reduce those taxes is to lower your tax rate or reduce your income, which is often best done with either a Roth IRA or structured withdrawals.

","

Social Security Benefits Tips

","$5d","

Photo credit: ©iStock.com/Eleganza, ©iStock.com/South_agency, ©iStock.com/MariuszBlach

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If you’ve made contributions to or taken distributions from a health savings account (HSA), the IRS requires you to report it on your yearly taxes. That’s where Form 8889 comes in. It details contributions, distributions and potential tax deductions so you can report all HSA-related activities to remain compliant as well as optimize your tax […]

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","

If you have questions or need help managing an HSA, consider reaching out to a financial advisor.

","

What Is a Health Savings Account?

","

A health savings account is a tax-advantaged savings account designed specifically for individuals who have qualified high-deductible health plans (HDHPs). HSAs allow you to set aside pre-tax dollars and use them for qualified medical expenses.

","

HSA contributions are tax-deductible, thereby lowering your taxable income. The funds in an HSA also grow tax-free, and qualified withdrawals for medical expenses are tax-deferred, as well. This triple tax advantage helps maximize savings and minimize the financial burden of healthcare-related costs.

","

You should note that while HSA’s are only available for individuals with HDHPs, you could still keep the account and make distributions if you get different coverage, but you can’t make any more contributions.

","

How Can You Use an HSA?

","

","

The funds in an HSA can be used to cover the cost of medical expenses such as deductibles, copayments, prescription medications and other eligible expenses. And health savings accounts aren’t just for immediate expenses; they can be used for future healthcare needs. Unlike flexible spending accounts (FSAs), HSA funds roll over year to year. This allows you to build a substantial healthcare nest egg over time, and can be especially beneficial in retirement, when medical expenses often increase.

","

To maximize your HSA benefits, consider contributing the maximum allowed amount each year. For 2024, the HSA contribution limits are $4,150 for individuals and $8,300 for families. Additionally, individuals aged 55 and older can make catch-up contributions of up to $1,000 annually.

","

HSAs also offer long-term investment opportunities. Many HSA providers allow you to invest a portion of your funds in mutual funds, stocks, or bonds, similar to a retirement account. The earnings from these investments grow tax-deferred, providing another way to increase your healthcare savings over time.

","

How to File Health Savings Account Tax Form 8889

","

Part of properly managing an HSA involves understanding the health savings account tax form 8889. This form must be filed with your tax return if you’ve contributed to or taken a distribution from your HSA. Form 8889 details contributions, distributions, and the tax implications of your HSA activities. Completing this form accurately is necessary to ensure your compliance with IRS regulations. It also ensures you maximize your tax benefits.

","

On health savings account tax form 8889, you’ll report all contributions made to your health savings account, including those made by your employer. Remember, these contributions are typically tax-deductible, reducing your taxable income. The form allows the IRS to verify that contributions don’t exceed the annual limit.

","

Health savings account tax form 8889 also requires you to report any distributions taken from your HSA. Distributions used for qualified medical expenses are tax-free, while those used for non-qualified expenses are subject to income tax and an additional 20% penalty (unless you’re 65 or older). You’ll need to refer to your plan document to see what is considered a qualified medical expense.

","

Bottom Line

","

","

Form 8889 is key when it comes to managing the tax implications of your health savings account. By accurately reporting contributions and distributions, and ensuring that distributions are used for HSA eligible medical expenses, you can fully leverage the tax benefits associated with your HSA while remaining compliant with IRS regulations. Whether you’re saving for current medical expenses or planning for future healthcare needs, understanding and correctly filing Form 8889 can help you maximize your HSA and safeguard your future.

","

Health Savings Account Tips

","$75","

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

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","

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

","

How Reporting Foreign Gifts Works

","

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

","

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

","

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

","

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

","

What Defines a Gift From a Foreign Entity?

","

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

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

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

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How to Complete Form 3520

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

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

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

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

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Form 3520 vs. Form 3520-A

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

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

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

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

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

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

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

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

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Bottom Line

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

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Tips for Tax Planning

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