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\n","featuredImage":{"id":"cG9zdDoyMzYxMTg=","databaseId":236118,"altText":"A couple consulting a tax professional about reporting a 1031 exchange on their tax return.","date":"2024-01-30T18:21:43","fileSize":264646,"mimeType":"image/jpeg","modified":"2024-01-30T18:23:01","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/01/iStock-1498704691.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-1-30","readable":"January 30, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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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

","$45","

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

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Net investment income (NII) is defined as the profit gained from investments after deducting certain related expenses. This includes various forms of income such as interest, dividends, rental income and capital gains. It’s essential to know not just what comprises NII, but also how it’s calculated and the tax implications it carries, especially for those with higher incomes who may be subject to the net investment income tax (NIIT). A financial advisor can help you navigate your investments and your potential tax obligations.

","

What Is Net Investment Income?

","

Net investment income (NII) refers to the profits that investors earn from their investments after deducting related expenses. As an example, let’s consider an investor who receives $100 in dividends from stocks and pays $10 in related brokerage fees. This would result in a net investment income of $90. Here are five common examples of NII:

","

Interest from deposits and loans
Dividends from stocks
Short-term and long-term capital gains
Rental and royalty income
Income from businesses related to trading securities

","

You should note that other forms of income are not included in your NII. Here are five common examples of income that’s excluded:

","

Wages
Unemployment compensation
Social Security benefits
Alimony
Tax-exempt interest

","

You may want to talk to your advisor and plan ahead before taking on new investments so you know what to expect and how it could impact your taxes.

","

How Net Investment Income Works

","

","

For the IRS, your NII measures various types of income earned from investments. As explained earlier, these can include interest, dividends, capital gains, rental income and passive income from businesses. The agency taxes this income to generate revenue and applies a surtax on certain high-income individuals to fund Medicare and other government programs.

","

Individuals, estates and trusts must pay a 3.8% net investment income tax (NIIT) when their NII goes over specific threshold amounts. For 2024, the NIIT is leveraged on the lesser of two amounts: your NII or the excess of your modified adjusted gross income (MAGI) over these three thresholds:

","

$200,000 for single filers
$250,000 for married couples filing jointly
$125,000 for married individuals filing separately

","

Take note: When calculating your NII, certain deductions can get subtracted from your gross investment income. These may include investment expenses, interest paid on investment-related loans, and state and local income taxes directly related to investment income. But, not all investment-related expenses are deductible for NIIT purposes, and individuals should consult tax professionals or IRS guidelines for specific deductions.

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How Realized Gains Can Be Earned

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Realized gains are profits generated from the sale of an asset or investment, resulting in a tangible increase in value that can be recognized for tax or accounting purposes. These can be subject to the NIIT if they contribute to your overall net investment income and your modified adjusted gross income exceeds the threshold amounts defined by the IRS in the previous section.

","

You can earn realized gains when you sell an asset such as stocks, bonds, real estate, or other investments for a higher price than the original purchase one. These gains can stem from various market conditions such as appreciation in asset value over time, dividends received from stocks or mutual funds, or interest accrued on fixed-income securities.

","

Additionally, you can earn realized gains through strategic investment decisions, such as selling assets to lock in profits or rebalancing a portfolio.

","

All of these financial moves can have tax implications that are subject to capital gains tax at different rates depending on the holding period of the asset and your income level.

","

Investments held for more than one year are considered long-term and taxed at preferential capital gains rates ranging from 0% to 20%, depending on your income level. Gains from investments held under one year are classified as short-term and taxed at ordinary income tax rates, which correspond to your tax bracket.

","

You should also note that certain types of investments, such as collectibles and real estate, may be subject to different tax treatment.

","

Calculating Net Investment Income

","

You can calculate your NII by following these three general steps:

","

Aggregate all forms of investment income, including interest, dividends, rental income and capital gains.
Deduct allowable investment-related expenses, such as interest expenses, advisory fees and other costs directly tied to generating investment income.
Maintain detailed records of all income and expenses to substantiate your claims in case of IRS inquiries.

","

Bottom Line

","

","

Your net investment income (NII) includes profits from various investment sources such as interest, dividends, rental income and capital gains. The IRS taxes your NII a net investment income tax (NIIT) to generate income. The agency will also apply a surtax to fund Medicare and other government programs if your modified adjusted gross income (MAGI) is above a certain level. Knowing how to calculate your NII could help you estimate your NIIT.

","

Tips for Tax Planning

","$5d","

Photo credit: ©iStock.com/AaronAmat, ©iStock.com/DarioGaona, ©iStock.com/fizkes

","

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Tax season has arrived, and when it comes to preparing your return remember this: deductions are good, but tax credits are better. Anyone who’s paid taxes knows the value of deductions, which reduce the amount of your tax bill at your marginal tax rate. If you’re in the 22% federal tax bracket and you deduct $2,000 in […]

\n","featuredImage":{"id":"cG9zdDoyMzkyNzg=","databaseId":239278,"altText":"","date":"2024-02-28T16:33:09","fileSize":246928,"mimeType":"image/jpeg","modified":"2024-02-28T16:33:09","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/02/iStock-1304258231-modified-403f259c-b680-41bc-84c1-caf753ceaf55.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-2-28","readable":"February 28, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMjA=","databaseId":120,"userId":120,"avatar":{"url":"https://secure.gravatar.com/avatar/9be66d92947dd5b190bf90987b5e85f2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Patrick Villanova is an editor for SmartAsset, producing comprehensive personal finance content to help consumers make better decisions with their money. His particular areas of focus include retirement, financial planning and investing. Patrick studied English at the University of New Hampshire and currently holds the Certified Educator in Personal Finance (CEPF) designation. \r\n\r\nPrior to joining SmartAsset, Patrick was a senior writer at MagnifyMoney, where he covered investing. His career began in journalism and included 11+ years at The Jersey Journal, where he covered sports and news as an editor. His work has appeared on Yahoo Finance, MSN, NJ.com, and The Star-Ledger. He lives in Portland, Oregon.","additionalMeta":{"expertise":"Retirement Planning, Social Security, Estate Planning, Taxes","__typename":"User_Additionalmeta"},"email":null,"firstName":"Patrick","fullName":"Patrick Villanova, CEPF®","lastName":"Villanova, CEPF®","name":"Patrick Villanova, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":307,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"pvillanova","__typename":"User"},"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/taxes/tax-credits-to-lower-2024-taxes","metaDesc":"And here’s the very best part: some tax credits are partly or fully refundable.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"Tax Credits You Can Use to Reduce Your 2024 Taxes","__typename":"PostTypeSEO"},"slug":"tax-credits-to-lower-2024-taxes","status":"publish","title":"Tax Credits You Can Use to Reduce Your 2024 Taxes","uri":"/taxes/tax-credits-to-lower-2024-taxes","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoxNDk=","databaseId":149,"userId":149,"avatar":"$5f","description":null,"additionalMeta":"$60","email":null,"firstName":"Brian J.","fullName":"Brian J. O'Connor","lastName":"O'Connor","name":"Brian J. O'Connor","postCount":"$61","slug":"brian-j-oconnor","__typename":"User"},"editedBy":{"id":"dXNlcjoxMjA=","databaseId":120,"userId":120,"avatar":"$64","description":"Patrick Villanova is an editor for SmartAsset, producing comprehensive personal finance content to help consumers make better decisions with their money. His particular areas of focus include retirement, financial planning and investing. Patrick studied English at the University of New Hampshire and currently holds the Certified Educator in Personal Finance (CEPF) designation. \r\n\r\nPrior to joining SmartAsset, Patrick was a senior writer at MagnifyMoney, where he covered investing. His career began in journalism and included 11+ years at The Jersey Journal, where he covered sports and news as an editor. His work has appeared on Yahoo Finance, MSN, NJ.com, and The Star-Ledger. He lives in Portland, Oregon.","additionalMeta":"$65","email":null,"firstName":"Patrick","fullName":"Patrick Villanova, CEPF®","lastName":"Villanova, CEPF®","name":"Patrick Villanova, CEPF®","postCount":"$66","slug":"patrick-villanova-cepf","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTUwOA==","children":"$69","databaseId":19508,"categoryId":19508,"link":"https://smartasset.com/tax-credits-deductions/articles","name":"Tax Credits & Deductions","postCount":87,"slug":"tax-credits-deductions","ancestors":"$6b","parent":"$6e","__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

Tax season has arrived, and when it comes to preparing your return remember this: deductions are good, but tax credits are better.

","

Anyone who’s paid taxes knows the value of deductions, which reduce the amount of your tax bill at your marginal tax rate. If you’re in the 22% federal tax bracket and you deduct $2,000 in charitable contributions, you’ll lower your taxes by $440 ($2000*.22).

","

That’s not bad, but here’s why tax credits are better: Any tax credit you can claim reduces your taxes on a dollar-for-dollar basis, up to the limit of the credit. A financial advisor can help you build a financial plan that optimizes your tax strategy and capitalizes on available tax credits.

","

Tax Credits in Action

","$70","

Let’s say that instead of charitable contributions, you made your home more energy efficient by installing a heat pump. This allows you to claim a $2,000 tax credit, which reduces your tax bill by the full $2,000.

","

Tax professionals explain that the difference between tax deductions and credits is that credits are “above the line” – meaning that they’re listed before the crucial calculation of your adjusted gross income on Line 11 of IRS Form 1040. That means they reduce your taxable income by the full amount of the credit. Any additional deductions listed further down your tax form are “below the line,” and reduce your taxes only by the amount of the deduction multiplied by your marginal tax rate. The highest marginal federal tax rate is currently 37%.

","

And here’s the very best part: some tax credits are partly or fully refundable. That means, if your tax credits are worth more than your tax bill, the difference will be refunded to you in cash. If you’re lucky, deductions might get your tax liability down to $0 but any additional write-off won’t be refunded. A financial advisor with tax expertise can help you better understand what deductions and credits you may be eligible for.

","

What Tax Credits Are Available?

","

","

Tax credits (and deductions) are listed on the IRS website, and broken down into several categories. Here’s a look at a combination of individual credits, family, dependent and education credits, as well as clean energy credits:

","

Child Tax Credit

","

The Child Tax Credit is worth up to $2,000 per child, with up to $1,600 refundable for 2023. To qualify, the child must have a Social Security number, be 17 or younger, be claimed as a dependent. Your annual income also must be less than $200,000 for single filers or $400,000 for joint returns.

","

Child and Dependent Care Tax Credit

","

This is a complicated credit for a spouse, child or another individual who could be claimed as a dependent, lived with you for more than half the year and is physically or mentally incapable of taking care of themselves.

","

Excess Social Security Tax Credit

","

This applies if you had too much Social Security tax withheld by your employer, which can happen if you worked for two or more employers during the year. If you earned more than the Social Security payroll tax cap of $160,200 in 2023 ($168,600 in 2024), and paid the 6.2% Social Security tax on earnings above that limit, you may be eligible for a refund via a tax credit. (This also applies to railroad retirement tax, as well.)

","

Adoption Tax Credit

","

For families that finalized the adoption of a child during 2023, the credit is $15,950 per adopted child. This credit is non-refundable.

","

Foreign Tax Credit

","

If you have foreign earned income or investments in your portfolio that already were subject to overseas taxes, you can claim this credit to avoid being taxed twice on the same income. This is a complicated credit and only foreign income taxes paid qualify. For example, if you worked in France, your French Generalized Social Contribution Taxes aren’t considered income tax by the IRS and don’t count toward this credit.

","

Education Tax Credits

","

Both the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) apply to children and dependents to “defray the cost of higher education expenses for tuition, certain fees and course materials for four years.”

","

The AOTC, which is refundable for students earning a degree or credential, covers required educational expenses, including necessities like books, supplies and equipment. The credit is worth up to $2,500 per student (total $10,000 over four years) and is also 40% refundable. The LLC is worth 20% of up to $10,000 of educational expenses ($2,000). However, this credit isn’t refundable, has no lifetime limit and doesn’t require the student to be pursuing a degree.

","

Both these credits start phasing out for taxpayers with modified adjusted gross income (MAGI) of $80,000 for single filers ($160,000 joint) and aren’t available to taxpayers with MAGI of $90,000 or more ($180,000 joint).

","

Residential Energy/EV Credits

","$71","

Bottom Line

","

Tax credits offer the potential for significant, dollar-for-dollar savings on your federal income taxes. Some can be complex but it’s well worth your while to make the effort to properly claim them.

","

Tax Planning Tips

","$72","

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Property tax is a recurring levy imposed by local governments on property owners, based on the value of their real estate. Typically, property taxes are collected locally and fund local community services such as schools, roads, law enforcement and fire departments. The amount of the tax is usually determined by assessing the market value of the property and applying a specific tax rate, known as the millage rate. Homeowners can expect to pay property taxes annually or semi-annually, depending on the local jurisdiction. Understanding what property tax is and how it is calculated can help property owners anticipate and plan for these costs as part of their homeownership expenses.

","

A financial advisor can help you identify tax-saving strategies, including deductions or exemptions that you may qualify for as a homeowner.

","

How Are Property Taxes Calculated?

","

Property taxes are calculated based on the assessed value of the property, which is usually determined by a local assessor. The assessed value can vary depending on market conditions and improvements made to the property. It differs from appraised value, which aims to determine the fair market value of a property. Assessed value is often 20% to 40% lower than appraised value. A property owner who feels the assessed value is too high may be able to appeal the assessment and, with adequate documentation, convince the assessor to use a lower figure.

","

Once the value is established, a tax rate is applied to calculate the total property tax owed. This rate, often referred to as the millage rate, is determined by the local government and can vary between municipalities.

","

For example, if a property is valued at $200,000 and the local millage rate is 1.5%, the annual property tax would be $200,000 times 1.5% or $3,000. Some areas may offer exemptions or deductions that can reduce the tax burden. Homestead exemptions for primary residences represent an example of this. Older people also may be eligible for property tax reductions or exemptions.

","

How to Pay Property Tax

","

Paying property taxes is typically straightforward, and most local governments offer several options for payment. Property owners will receive a tax bill that includes the amount owed and the due date. Payments can usually be made online through a government portal, by mail or in person at a local government office.

","

Many homeowners who have a mortgage will find that their property taxes are paid on their behalf through an escrow account. In these cases, a portion of their monthly mortgage payment goes toward property taxes, which the lender then pays to the tax collector once or twice a year as appropriate.

","

When you are paying the tax directly, it’s important to keep track of payment deadlines to avoid penalties, which can include interest or fees for late payments. If you are short of money when the bill comes due, some jurisdictions also offer payment plans for those who may have difficulty paying the full amount at once.

","

What Is Personal Property Tax?

","

In addition to real estate, some states impose a personal property tax on certain items that individuals and businesses own. Personal property typically refers to movable assets that are not permanently attached to land or buildings. This can include vehicles, boats, machinery, equipment and livestock. Local governments often assess the value of personal property annually, similar to the way real estate is evaluated for property tax purposes.

","

The rules and rates for personal property taxes also vary by state and locality. Some states may only tax personal property owned by businesses, while others tax both personal and business assets. Personal property tax bills are usually sent out separately from real estate tax bills, and payment is typically required annually.

","

Highest Property Taxes in the U.S.

","

The city of Rockford, Illinois, had the highest effective property tax rate in the country – 3.04% – among cities with 100,000 residents or more, according to a SmartAsset study conducted in 2023.

","

A city’s effective tax rate refers to its median property tax bill as a percent of the median home value. In Rockford, for example, the median real estate tax bill in 2021 was $3,283, while the median home value was just $107,900.

","

Here are the 10 cities of 100,000 residents or more with the highest effective property tax rates:

","

Rockford, Illinois: 3.04%
Waterbury, Connecticut: 2.75%
Bridgeport, Connecticut: 2.67%
Aurora, Illinois: 2.60%
Elgin, Illinois: 2.53%
Rochester, New York: 2.51%
Syracuse, New York: 2.41%
Peoria, Illinois: 2.37%
Lansing, Michigan: 2.32%
Pearland, Texas: 2.31%

","

Property Tax Deductions

","

Homeowners who itemize their deductions on federal tax returns can often deduct property taxes paid on real estate. The deduction allows homeowners to reduce their taxable income by the amount of property taxes paid to state and local governments.

","

However, the total deduction for state and local taxes, including property taxes, is capped at $10,000 per year under the Tax Cuts and Jobs Act of 2017. This deduction is especially beneficial to homeowners in high-tax states, as it can help offset the financial burden of property taxes.

","

Bottom Line

","

","

Property taxes play a significant role in local government funding. They are determined by property value and tax rates set by local jurisdictions. Taxes vary across regions, but often represent a considerable portion of property owners’ expenses. Calculating and paying property taxes follows a structured process, and many mortgage borrowers have the process handled by their loan servicers using escrow funds. Homesteads and senior citizens may be eligible for reductions or exemptions, and those who itemize their federal tax returns may be able to deduct property tax payments from income.

","

Tax Tips for Homeowners

","$8a","

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