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When an individual or business owes taxes to the Internal Revenue Service (IRS), settling the entire amount in a single payment may not be financially feasible. In such cases, a tax payment plan can offer a viable solution. This arrangement with the IRS allows taxpayers to pay their due taxes over an agreed period, easing […]

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","

A financial advisor with tax expertise can help you optimize your tax strategy and potentially save you money. Connect with a fiduciary advisor today.

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How Payment Plans for Taxes Work

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If you’re reviewing your finances and realize that you have a more substantial tax bill than anticipated, a tax payment plan could be a structured solution. This is designed to help individuals and businesses in such predicaments.

","

Tax payment plans can help alleviate some financial pressure by allowing a taxpayer to distribute their debt in manageable increments over time. They also prohibit the IRS levying your assets and garnishing your wages. Levies are legal seizures of property to satisfy a tax debt, while garnishments allow the IRS to take a portion of a taxpayer’s income.

","

For example, imagine that you operate a small business and suddenly realize that you owe $7,500 in taxes. Paying this amount in full could significantly impact your business cash flow. By setting up a tax payment plan, you can spread out your payments and maintain your business operations without a financial disruption.

","

When setting up a payment plan, taxpayers can opt for either a short- or long-term plan based on how soon they think they can repay their debt. A short-term plan requires the outstanding balance to be paid within 180 days. However, there are no setup fees associated with these plans.

","

A long-term plan on the other hand is an installment agreement that requires monthly payments to be made. Unlike a short-term plan, the IRS charges setup fees for establishing a long-term plan, which can vary based on how you apply and how you plan to make your payments.

","

Taxpayers with long-term payment plans can:

","

Set up automatic monthly payments from their checking account (Direct Debit)
Make direct manual payments from their checking or savings account (Direct Pay)
Use the Electronic Federal Tax Payment System (EFTPS)
Make monthly payments by check, money order or debit/credit card

","

Lastly, it’s important to note that whether you opt for a short- or long-term payment plan, your balance can accrue penalties and interest until it’s paid.

","

Setting Up a Tax Payment Plan

","

","

Before setting up a tax payment plan, you’ll want to assess your tax liability and determine the full amount that’s owed, including taxes, penalties and interest.

","

From there you can apply for either a short- or long-term plan and pay the requisite setup fees. You’ll want to review your payment plan and stick to the defined schedule, if you have one. Finally, the IRS allows you to adjust and revise your payment plan if needed.

","

Here’s a closer look at the process of setting up a tax payment plan:

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1. Apply for a Payment Plan

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The IRS offers several ways to request a payment plan. You can apply for one online, by phone or mail, or request one in person.

","

Online: Use the IRS’s Online Payment Agreement Tool
Phone: Call 800-829-1040 (individual) or 800-829-4933 (business), or the phone number on your bill or notice
Mail: Submit Form 9465, Installment Agreement Request to the IRS

","

However, there are certain restrictions for who can apply for a payment plan online. To apply for a short-term payment plan online, you must owe less than $100,000 in combined taxes, penalties and interest. Meanwhile, you must owe $50,000 or less in combined taxes penalties and interest to qualify for a long-term payment plan online. All of your tax returns must also be filed.

","

2. Pay Setup Fee

","

Your setup fee can vary based on the type of plan you enroll in, how you apply for it and how you’ll ultimately make your payments. While short-term payment plans do not have a setup fee, long-term plan applicants should carefully consider their options, which are illustrated in the following table:

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Long-term Payment Plan Setup Fees

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Payment Option	Setup Fee
Automatic monthly payments (Direct Debit)	Online application: $31 Phone, mail or in-person application: $107 Low-income application: Fee waived
Direct Pay, EFTPS, monthly payment by check, money order or card	Online application: $130 Phone, mail or in-person application: $225 Low-income application: $43 (may be reimbursed

","

3. Review Your Payment Plan

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Reviewing payment plan terms is critical. Taxpayers should periodically review their plan, not only when they first agree to it. This ongoing review is crucial to adapting to any changes in financial circumstances and avoiding the accumulation of additional interest and penalties.

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A step-by-step checklist for this process may include:

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Confirming payment amount: Know the exact amount of each installment.
Checking due dates: Note all due dates, perhaps marking them on a calendar or setting reminders.
Understanding interest and penalties: Acknowledge the impact of interest and penalties on the total amount paid over time.

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4. Make Your Payments

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How you make your payments may depend on how much money you owe the IRS. Individuals who apply for a payment plan online must make their payments via Direct Debit (automatic payments from a checking account) if their balance is over $25,000. Businesses that apply for a payment plan online must do the same if their balance is more than $10,000.

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5. Revise Your Payment Plan If Needed

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If your financial circumstances change, contact the IRS to discuss potential adjustments to the payment plan. You can also revise your plan online using the ID.me system.

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Bottom Line

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","

Tax payment plans serve as a lifeline for those daunted by an unexpected tax bill. These plans can help taxpayers distribute their debt across a manageable timeline while mitigating the risk of severe financial disruption. You can apply for a payment plan online, by phone or mail or apply in person. However, you may owe a setup fee, as well as penalties and interest.

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Tax Season Tips

","$44","

Photo credit: ©iStock.com/vitapix, ©iStock.com/Pekic, ©iStock.com/urbazon

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The W-8BEN form is an IRS document required for non-U.S. individuals who receive interest, dividends or other income from U.S. sources. The form, also known as the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, enables nonresident aliens to confirm their foreign status to the tax collecting agency. It is not sent to the IRS but is submitted to financial institutions, which use it to determine the correct withholding rate for income. This rate as set by tax treaties between the U.S. and their country of residence is often lower than the default 30% withholding, so using it can save money. A financial advisor who specializes in tax planning could help you create a plan to lower your tax liability.

","

What Is a W-8 Form?

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The W-8 Form is a set of several forms that the IRS uses to document the tax status of foreign people and entities that receive income originating in the United States. These include the W-8BEN for individuals and W-8BEN-E for entities. Others such as W-8 ECI, W-8 EXP and W-8 IMY cater to more specific situations involving foreign income.

","

The correct W-8 form is required for any nonresident alien who gets any income from a U.S. source. Examples of income that could require a W-8BEN filing include interest on bank accounts or bonds, dividends on stocks, rental income from real estate, annuity payments or royalties.

","

The forms certify the income recipient’s tax residency and are necessary to allow financial institutions to perform proper withholding. Without such a form in hand, a US bank or other institution has to apply the maximum withholding rate of 30% to any income earned by a nonresident alien.

","

This is often important because many tax treaties specify a lower rate. In these cases, the W-8 Form can prevent overpaying taxes. It’s worth keeping in mind that, if withholding is overpaid due to lack of a W-8 Form, it may be difficult for a nonresident alien who doesn’t file a US tax return to get the money back.

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About the W-8BEN Form

","

","

The W-8BEN form is the one to use if you are an individual foreign taxpayer who needs to certify foreign status. A private investor who owns U.S. shares of stock that pay dividends, for example, would use this version.

","

To complete the W-8BEN, you will need to provide personal identification details, such as name, country of citizenship and foreign tax identification number (TIN). Some countries, including Australia and Japan, do not issue TINs. If you are unable to provide a TIN for some reason, such as because your country does not issue them, you can explain the situation to your financial institution and file the W-8BEN without a TIN.

","

Bear in mind that the purpose of the W-8BEN is to identify any specific tax treaty provisions that reduce withholding. Filing the W-8BEN correctly can reduce an individual’s overall tax burden by ensuring that withholding follows U.S. tax regulations and agreements with their home country.

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How to File a W-8BEN

","

Filing a W-8BEN form is a straightforward process that requires gathering key personal information and submitting it to the income payer.

","

First, download the form directly from the IRS website to ensure you are using the correct version. The form must be completed in English, including details like name, country of citizenship, and foreign tax identification number.

","

After completing the form, individuals should sign and date it. Typically, the completed W-8BEN is then submitted to the financial institution or U.S. payer, not the IRS. This ensures that the payer has accurate documentation to apply the correct withholding rate. It’s also advisable to keep a copy of the completed form for personal records.

","

The W-8BEN is generally valid for three years, after which a new form must be submitted if required.It may be necessary to file a new form sooner if circumstances change, such as you move to the United States or to a different foreign country.

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Consequences of Not Filing a W-8BEN

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Failing to file a W-8BEN form can be a costly mistake for foreign individuals receiving U.S. income. Without a completed W-8BEN on file, U.S. payers typically have to apply the maximum withholding tax rate of 30% on any income paid to the individual. Tax treaties often specify much lower rates, so it’s usually in the individual’s best interest to pay taxes using the appropriate treaty rates.

","

Failing to submit a W-8BEN can also cause payments to be delayed or withheld if the payer is uncertain of the appropriate tax treatment. It can also complicate claiming a tax refund for an overpayment, as the IRS requires proper documentation to substantiate a claim for reduced withholding.

","

Basically, filing the W-8BEN is necessary to comply with U.S. tax regulations. Without it, no formal record of the taxpayer’s foreign status exists. That can lead to confusion and possibly increased scrutiny from the IRS.

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Bottom Line

","

","

The W-8BEN form helps financial institutions determine the appropriate tax treatment for foreign individuals receiving income from U.S. sources. By completing and submitting this form, individuals can potentially reduce their tax withholding and avoid complications related to overpayment or delayed income. Not filing the form is a violation of U.S. tax regulations, and could cost a taxpayer money.

","

Tax Planning Tips

","$5c","

Photo credit: ©iStock.com/Deagreez, ©iStock.com/klebercordeiro, ©iStock.com/Vadym Pastukh

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The New York mansion tax, which is applied to real estate transactions that exceed specific price thresholds, can add significant costs. Understanding how it works, who is subject to it, and what types of exemptions exist is key to navigating New York’s high-value real estate market. Whether you’re purchasing a luxury home or considering an […]

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","

New York Mansion Tax Basics

","

The New York mansion tax is a real estate transfer tax originally introduced in 1989 as a flat 1% tax on properties exceeding $1 million. After decades of rising property values, New York lawmakers passed a progressive tiered system in 2019 that taxes multi-million dollar properties at greater rates.

","

Who Must Pay the Tax?

","

Unlike some other real estate transfer taxes that are the responsibility of the seller, the New York mansion tax is part of the closing costs for the buyer. Homebuyers purchasing high-value properties now need to account for the additional cost when budgeting for their purchase.

","

What Areas Are Affected?

","

The tax applies to all of New York State, but it has the most significant impact in New York City, where property prices frequently surpass the tax threshold. While suburban and upstate properties are less affected, high-end real estate transactions in those areas can still trigger the tax.

","

How Is the Tax Calculated?

","

The New York mansion tax follows a graduated rate system which increases as the purchase price rises:

","

$2,000,000 – $2,999,999: 0.25% (0.0025)
$3,000,000 – $4,999,999: 0.50% (0.005)
$5,000,000 – $9,999,999: 1.25% (0.0125)
$10,000,000 – $14,999,999: 2.25% (0.0225)
$15,000,000 – $19,999,999: 2.50% (0.025)
$20,000,000 – $24,999,999: 2.75% (0.0275)
$25,000,000 and above: 2.90% (0.029)

","

How the New York Mansion Tax Affects Real Estate

","

","

The mansion tax raises costs for high-value property sales, which may deter buyers and slow sales in higher price ranges. In expensive markets like New York City, where home prices often exceed the tax limit, it can also impact pricing and buyer demand. Here are four general ways the mansion tax can affect the real estate market:

","

Influence on luxury home sales: High-end property sales have slowed in certain price brackets, as buyers reconsider purchases due to the additional tax burden. This trend has influenced pricing strategies among sellers.
Shift in buyer preferences. Buyers who may have otherwise considered properties slightly above a tax bracket threshold are opting for homes just below to minimize costs. Some sellers have reduced asking prices to attract these buyers.
Impact on investment properties. Investors purchasing multi-million-dollar properties must account for the mansion tax as an additional transaction cost, which can impact profitability and long-term investment portfolios.

","

How to Avoid the New York Mansion Tax

","

Here are four possible ways to avoid the mansion tax:

","$6f","

Exemptions to the New York Mansion Tax

","

Here are three exemptions to consider:

","

Government and public entities: Purchases made by government agencies, public housing authorities or certain organizations may be tax-exempt.
Certain transfers between family members: In limited cases, property transfers between spouses, direct heirs or family trusts may not trigger the mansion tax, particularly if no actual sale occurs.
Affordable housing developments: Properties that are designated for affordable housing or financed through specific housing programs may qualify for tax exemptions.

","

Bottom Line

","

","

The New York mansion tax is a significant financial consideration for anyone purchasing high-value property in the state. While it primarily impacts luxury real estate, its effects extend to buyers, sellers and the overall market. Understanding its structure, exploring potential exemptions and considering legal strategies to reduce the tax burden can help you make informed financial decisions.

","

Tax Planning Tips

","$70","

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Section 1250 of the U.S. tax code applies to gains from the sale of depreciated business real estate. If a property was depreciated beyond the straight-line method, the extra depreciation is taxed at a higher rate, known as depreciation recapture. Because real estate taxes can be complex, a financial advisor can help investors plan tax-efficient […]

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","

What Is Section 1250?

","

Section 1250 of the Internal Revenue Code governs the taxation of gains derived from the sale of depreciable real property used in business or investment activities. It applies specifically to real estate improvements, including buildings and structures, but not to land, which is a non-depreciable asset.

","

When an investor buys a building for business or rental use, the IRS allows depreciation deductions over time to account for the property’s gradual wear and tear. If the property is later sold, the investor may owe depreciation recapture tax on the portion of the gain that results from depreciation deductions. This means that any gain attributable to depreciation exceeding what would have been allowed under the straight-line depreciation method is recaptured and taxed at a higher rate.

","

Depreciation Recapture Under Section 1250

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Depreciation recapture happens when an investor uses accelerated depreciation instead of the straight-line method. Before the 1986 Tax Reform Act, investors could accelerate depreciation to lower taxable income faster. Section 1250 was created to limit excessive tax benefits by taxing extra depreciation deductions when the property was sold.

","

For properties placed in service after 1986, only straight-line depreciation is allowed, making Section 1250 recapture less common today. However, any gains from depreciation are still taxed at a higher rate of up to 25%, instead of the lower long-term capital gains rate.

","

How Section 1250 Applies to Real Estate Taxes

","

","

Section 1250 applies to commercial and residential rental properties, office buildings and other depreciable real estate assets that have been depreciated over time. When a property owner sells one of these assets, any gain associated with previously claimed depreciation deductions is subject to recapture at a tax rate of up to 25% instead of the standard capital gains tax rate.

","

Example of Section 1250 Depreciation Recapture

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Let’s assume that an investor bought a commercial property 15 years ago for $500,000 and depreciated $150,000 of its value over that time using the straight-line method. The investor then sells the property for $700,000, resulting in a total gain of $350,000 ($700,000 – $500,000 + $150,000 depreciation taken).

","

Depreciation recapture: The $150,000 in depreciation is recaptured and taxed at up to 25%.
Remaining capital gain: The remaining $200,000 gain is taxed at the standard long-term capital gains rate, which can be 15% or 20%, depending on the investor’s income bracket.

","

How to Minimize the Effects of Section 1250

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Reducing the impact of Section 1250 depreciation recapture requires strategic tax planning when selling or transferring real estate. Here are three common strategies to consider.

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1031 Exchange

","

A 1031 exchange allows real estate investors to defer capital gains taxes, including Section 1250 recapture, by reinvesting the proceeds of a property sale into a like-kind property. This tax-deferred exchange enables investors to continue growing their portfolio without immediate tax consequences. However, strict IRS rules apply, including identification and reinvestment deadlines.

","

Installment Sales

","

An installment sale allows a seller to spread out capital gains and depreciation recapture taxes over multiple years by receiving payments over time rather than in a lump sum. This approach can reduce the seller’s overall tax burden by keeping annual income lower.

","

Cost Segregation Studies

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A cost segregation study can help investors accelerate depreciation deductions by classifying certain building components separately from the structure itself. While this does not eliminate Section 1250 recapture, it allows for higher upfront deductions that may offset other taxable income. Investors should work with a tax consultant to assess whether a cost segregation strategy aligns with their financial goals.

","

Bottom Line

","

","

Section 1250 affects real estate investors and property owners who have claimed depreciation on their assets. It determines how depreciation recapture is taxed when a property is sold, balancing previous tax benefits. Investors looking to sell depreciated property should understand these tax implications and explore strategies like 1031 exchanges, installment sales, or cost segregation studies to reduce their tax liability.

","

Tax Planning Tips

","$83","

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