35:["$","$L36",null,{"category":"$37","relatedArticles":[{"id":"cG9zdDoyMzMxMjk=","databaseId":233129,"postId":233129,"author":{"node":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":908,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":213,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$38","date":"2024-01-02T07:20:00","excerpt":"

Perhaps your daughter recently got married and you want to help her and her husband start their new life. Or maybe they suddenly find themselves in need of financial assistance and turn to you for help. Fortunately, the IRS allows you to give away a certain amount of assets – from real estate and stocks […]

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","

Fortunately, the IRS allows you to give away a certain amount of assets – from real estate and stocks to cold hard cash – free of taxes every year. In 2024, you can give away up to $18,000 to an individual and not have to pay taxes on the transfer. In fact, you’ll only trigger taxes in 2024 if you’ve given away more than $13.61 million throughout your life.

","

Understanding the ins and outs of strategic gifting can be important, especially for the wealthy. Speak with a financial advisor today.

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What Is The Gift Tax?

","

A gift is any unilateral transfer of money or property. This means that you give someone assets without receiving either fair value or any value in return. The term “fair value” applies to when you give someone an asset in exchange for payment significantly below its market price. It applies to any kind of transaction so, for example, giving someone real estate, a low-interest loan or access to an income stream would all apply. The classic gift is to simply give someone cash while receiving nothing in return.

","

There are several exceptions to what the IRS considers a taxable gift. For example, money given to a claimed dependent does not constitute a gift, nor does paying someone’s tuition. However, outside defined exceptions, any unilateral or below-market transfer is considered a gift.

","

When you make someone a large enough gift, it becomes taxable. The IRS taxes applicable gifts at between 18% and 40% depending on the size of the transfer. You, as the gift giver, pay this tax. Due to the gift tax’s exemptions, it also generally applies only to the very wealthy. But if you need additional help navigating and planning for the gift tax, consider working with a financial advisor.

","

Gift Tax Exemption

","

","

Broadly speaking, the purpose of the gift tax is to prevent people from avoiding estate taxes by simply giving away all their money before they die. As a result, the gift tax only applies to transfers that exceed two fairly high caps.

","

The first cap is called the annual exclusion. This is the amount of money that you can give away every year without triggering the tax. The annual exclusion is set on a per-recipient basis, meaning that it applies separately to each person to whom you give a gift, and there is no limit to the number of people you can give gifts to under this exemption. In 2023, the annual exclusion limit was $17,000 for individuals and $34,000 for married couples. In 2024, it increases to $18,000 and $36,000, respectively.

","

The second cap is called the lifetime exemption. This is the amount of money that you can give away throughout your lifetime – and after your death – without triggering either gift or estate taxes. The lifetime exemption is set on a per-donor basis, meaning that all of your gifts/estate collectively apply. It also increases each year, so that even if you have already met the lifetime exemption, each year you can give a little bit more away without triggering any taxes. In 2023, the lifetime exemption was set at $12.92 million for individuals, which allows married couples to give away up to $25.84. In 2024, the lifetime exemption will increase to $13.61 million for individuals and $27.22 million for married couples.

","

Giving a gift together, as a married couple, is referred to as “gift-splitting.” It allows you to take the doubled exemption rates, but both spouses must consent to the gift and claim it on their tax returns. Either way, whenever you give someone a gift worth more than the annual exclusion you must file Form 709 with your taxes the year after you make the transfer. So, for example, if you give someone $25,000 in 2024, you would file Form 709 with your tax year 2024 forms in 2025.

","

Whether you want to make a small financial gift or a large one, talking it through with a financial advisor first can potentially help you avoid unexpected tax bills.

","

How Much Money Can You Gift

","

","

So let’s look at how the gift tax applies if you’re hoping to give money to your daughter and her spouse:

","

Let’s say you’re single and looking to give them a generous financial gift in 2024. You would be able gift a total of $36,000 – $18,000 to your daughter and $18,000 to her spouse – without having to pay taxes on the gifts.

","

However, you can still give them more than the $18,000 exclusion limit. Any individual gift that exceeds this annual cap simply counts against your lifetime exemption. So, if you gave them $60,000 in 2024, your gifts would be $24,000 over the annual exclusion. This would lower your lifetime exemption from $13.61 million to $13.586 million.

","

In theory, you could give your daughter and her spouse $36,000 in 2024, and transfer up to $13.61 million in additional assets without having to worry about the gift tax. As a result, you could potentially give them up to $13.646 million in 2024 if your entire exemption was intact.

","

But don’t forget that the annual exemption renews every year. If you choose, you can create a structured gift that gives your daughter and son-in-law the annual maximum each year indefinitely. You can also top up your gift with each year’s lifetime exemption update.

","

However, if you need guidance on how much you’re eligible to gift, consider connecting with a financial advisor using SmartAsset’s free matching tool.

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Bottom Line

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The amount that you can gift someone tax-free will depend on how much you have given them this past year and how much you have gifted in total over your lifetime. The IRS allows you to give $17,000 to as many recipients as you want in 2023 and $18,000 in 2024. Gifts that exceed the annual exclusion count against your lifetime exemption limit, which rises to $13.61 million in 2024 from $12.92 million in 2023.

","

Estate Planning Tips

","$4f","

Photo credit: ©iStock.com/skynesher, ©iStock.com/designer491, ©iStock.com/andresr

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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.

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1031 Exchange Essentials

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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.

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Reporting a 1031 Exchange

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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.

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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.

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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.

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1031 Exchange Forms

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","

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

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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.

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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.

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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

","$67","

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

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Converting your current retirement accounts to a Roth IRA is typically a very tax-efficient strategy. It can help lower your lifetime taxes significantly. However, it does come with a large up-front bill. While there’s no way to avoid conversion taxes completely, you can restructure them to make this much more manageable. By staggering out your […]

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As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":{"expertise":"Financial Planning, Investing, Taxes, Real Estate","__typename":"User_Additionalmeta"},"email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn","lastName":"DeJohn","name":"Jaclyn DeJohn","postCount":{"pageInfo":{"offsetPagination":{"total":57,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jdejohn","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. 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","

While there’s no way to avoid conversion taxes completely, you can restructure them to make this much more manageable. By staggering out your conversion or timing it for years in which you have low tax liability or portfolio losses, you can reduce the impact of a Roth IRA conversion.

","

If you need help executing a strategy to minimize your taxes, speak to a financial advisor today.

","

Converting to a Roth IRA Triggers Income Taxes

","

Traditional qualifying employer-sponsored retirement accounts have opposite tax treatments compared to Roth IRAs.

","

Retirement accounts such as traditional IRAs, 401(k)s, and 403(b)s are called “pre-tax” accounts. This means that while you may enjoy a tax break on your contributions going into these plans, you’ll face full income taxes when you eventually make withdrawals. You effectively pay no income taxes on the money you put in but full income taxes on the money you take out.

","

On the other hand, Roth IRAs are called “post-tax” accounts. While you cannot take a deduction for the money you contribute, you don’t have to pay income taxes at all on your withdrawals. Effectively, you pay full income taxes on the money you put in but no income taxes on the money you take out.

","

","

Since your portfolio gains will almost certainly exceed your contributions given enough time and the right allocations, a Roth IRA is one of the best tax-advantaged retirement accounts for most households. This is why many people like to take advantage of Roth IRA conversions – moving their money from a traditional IRA into a Roth IRA to take advantage of the long-term tax savings.

","

There’s a catch though. When you move money from an IRA into a Roth IRA, for instance, you must essentially make up for the initial deduction you took by paying income taxes on the full value of your conversion. In practice, this means that you add the value of a conversion to your taxable income for the year in which you took it. This can increase your taxes, sometimes by quite a lot depending on the size of your transfer.

","

You cannot avoid paying taxes on this money, however you can reduce the impact of a conversion. Here are a few strategies to consider. A financial advisor can help you weigh the pros and cons of a Roth conversion in your personal situation.

","

Strategies to Reduce Your Conversion Taxes

","

If you’re near retirement age, it’s important to note that you cannot make penalty-free withdrawals from a Roth IRA for five years after you open the account. So, take that into consideration when deciding on a conversion strategy.

","

Stagger Conversions

","

It may make sense to avoid converting everything all at once. Instead, you can convert a little bit at a time. By making the conversion in pieces, you may be able to keep your tax bracket lower over a series of years, rather than if you converted everything up front.

","

The corollary to staggered conversion is tax bracket management. When you convert your IRA or 401(k) to a Roth IRA, you will add the value of this conversion to your taxable income for the year. If you’re not careful, this can raise your AGI enough to push you into a new tax bracket. While this won’t affect your taxes on income below the cutoff, you’ll pay even more in taxes on any conversion money above the new bracket.

","

It can be very useful to keep an eye on how a conversion will affect your taxes. Convert enough to maximize your current bracket, but not enough to push you into a higher one.

","

It may also be helpful to consider that the longer you take to convert your IRA, the more time your portfolio will have to grow and the more you may ultimately have to move (and pay taxes on). You also could miss out on tax-free growth in the Roth during this time. Speak to a financial advisor to explore ways to maximize your retirement income and minimize taxes.

","

Offset Capital Gains Losses

","

","

When you take investment losses, you can offset investment gains down to $0. After that, you can use investment losses to offset up to $3,000 in taxable income per year, indefinitely, as well.

","

This can be an excellent opportunity to do a limited Roth IRA conversion. By writing down up to $3,000 in capital gains losses, you can offset some of the increased taxable income that you will see from the IRA.

","

Time Conversions to Market Downturns

","

Similarly, you can also time your conversion to unrealized losses in the stock market. When you make a Roth IRA conversion, you increase your taxable income by the entire amount converted. As a result, you’re better off moving the smallest amount of money possible. This makes market downturns an opportunity to minimize your tax liability.

","

Time your conversion to when your IRA portfolio loses value. A 10% market downturn means that you might move 10% less cash over to your Roth IRA, reducing the impact on your taxes. However, you’ll also be contributing less to the Roth than if the market was in better shape.

","

A financial advisor can help you project your income and taxes in multiple scenarios.

","

Pay Attention to Income Triggers

","

Finally, remember that the rules for many different programs are linked to your annual income. From student aid to Medicaid, tax credits and more, a vast number of different public and private entities base your eligibility on this or last year’s taxable income.

","

For the self-employed, this is particularly essential. Your real, estimated and self-employment taxes are all based on your AGI, so a change in your taxed income can change several different areas of taxation. Make sure to look at any program or grant that you depend on before making a conversion, and structure your conversion to keep your income below any applicable caps. You don’t want to roll your portfolio over just to discover that doing so made you ineligible for tuition assistance.

","

Bottom Line

","

A Roth IRA conversion is a very good long-term plan for most households, but it comes with a large tax bill attached. You cannot avoid paying those taxes, but you can structure your conversion to minimize its impact. A financial advisor can help with the entire process and help set you up for success while protecting your assets and maximizing your tax planning.

","

Roth IRA Planning Tips

","$7a","

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There are a couple of different sets of rules around inherited IRAs and you’re subject to theleast flexible. While there are more options for a spouse or someone who’s chronically ill ordisabled, a minor child, or someone not more than 10 years younger than the deceased IRAowner, you have just 10 years to withdraw the […]

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","

There are a couple of different sets of rules around inherited IRAs and you’re subject to the
least flexible. While there are more options for a spouse or someone who’s chronically ill or
disabled, a minor child, or someone not more than 10 years younger than the deceased IRA
owner, you have just 10 years to withdraw the money.

","

Typically, heirs open their own IRA Beneficiary Distribution Account, which must be closed by
Dec. 31 of the tenth year after the original IRA owner passed. But even with that deadline, you’ve still got a few choices to make – and rules to understand.

","

Consider matching with a financial advisor to discuss tax mitigation strategies.

","

Take It All Now

","

Someone in the 32% tax bracket is earning between $191,950 and $243,725
in taxable income if they’re single, so withdrawing the entire $450,000 now will push you
solidly past the 35% tax bracket and into 37% bracket beyond an adjusted gross income of $609,350. While your exact liability you would pay depend on your income and other factors, you can expect your withdrawals to be taxed completely at the highest two tiers.

","

If you’re married and filing jointly, the 37% bracket comes into play when your taxable income is
more than $731,200 or more. Being at the 32% tax bracket now, this means that this strategy is less advantageous than someone who is filing single. Based on the disproportionate income thresholds, a higher proportion of the withdrawals will be subject to the 37% tax rate.

","

Pros:

","

You take the tax hit now and can invest the remaining roughly $300,000 in any way you choose.
If you put the money in long-term investments, you can take the lower long-term capital gains tax
rate, which ranges from 20% to 0%, depending on your income, which lowers the effective tax
rate on the money in the long run. Based on your income now, you’re likely to face a 15%
long-term tax rate.

","

Cons:

","

Right off the bat, you’d be sending an additional money to the IRS. You also
sacrifice 10 years of potential tax-deferred growth within the IRA.
You can force yourself into a higher tax bracket.

","

On the other end of the spectrum, you can opt to draw your payments out over the full length of time allowed, or find somewhere in between the two. Consider matching with a financial advisor for free to discuss the best option for you.

","

Take It Over 10 Years

","

The longer approach means spreading your withdrawals out to keep your tax bracket and tax liabilities down. While any growth of your account will be tax-deferred in the meantime, those gains will also be taxed at your marginal income tax rate when you do eventually withdraw them.

","

Pros:

","

Easier to keep your marginal tax rate lower.
You may reduce the risk of timing the market poorly on a one-time withdrawal.

","

For example, let’s say you’re single and have taxable income of $200,000 for 2024, and that the IRA value
drops by 50% before the end of the year, reducing the balance to $225,000. You could
withdraw $43,725 at the 32% tax rate, then reinvest that money before the market bounces
back. That effectively doubles your withdrawal for the year from one-tenth of the balance to
one-fifth, but keeps you in the lower tax bracket. The cash you withdrew can grow at the lower
long-term gains rate, also lowering your effective tax rate over the long term.

","

Cons:

","

Growth on principal will be taxed at your marginal income tax rate, rather than the favorable capital gains rate, when you do eventually withdraw them.
If you otherwise see income growth, you may be pushed into higher tax brackets in the future anyway.

","

A financial advisor can help you understand the considerations that matter in your situation.

","

A Dynamic Situation

","

The “best” withdrawal strategy could change drastically from year to year, depending on what
happens with tax laws and tax rates, as well as your other financial and life changes, such as:

","

Tax laws change: An increase in tax rates and changes in tax rules could help or hurt your
withdrawal strategy, especially since you’re facing that 10-year deadline for taking all the
money out. Remember that significant changes to tax rules have taken place in just the past
several years, making unlikely that you can go an entire decade without your tax situation
changing.

","

RMDs: Depending on a handful of factors, required minimum distributions, or RMDs, might come into play if you don’t withdraw the money all at once. Consider speaking with a financial advisor about the nuances of RMD rules.

","

Your finances change: If a financial disaster hits, you may need that IRA money sooner than
later, although you’ll likely be in a lower tax bracket. Another possibility is that you’re able to
defer some income in one year, lowering your tax rate and making a big withdrawal a good
move. On the other hand, if your income increases significantly, your tax hit is likely to be
bigger on your future IRA withdrawals.

","

Bottom Line

","

As with so many personal finance questions, there’s no one “best” answer that works for
everyone. Depending on your other financial factors, your age, your health, your goals, you
lifestyle, possible changes in tax laws and other elements, each individual needs to calculate
what works best for their situation.

","

Tips

","

A knowledgeable financial advisor can help you decide how to structure and coordinate these
payments over the span of your retirement.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with
up to three vetted financial advisors who serve your area, and you can interview your advisor
matches at no cost to decide which one is right for you.

","

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