Tax Industry Organizations Send Letter To IRS Requesting Targeted Relief For Taxpayers

Today organizations representing professionals in the tax industry sent a letter to IRS Commissioner, Charles Rettig, and the Department of Treasury’s Assistant Secretary for Tax Policy, Lily Batchelder, requesting specific relief for taxpayers for the 2022 tax season. The letter reminds the Commissioner and the Assistant Secretary that the IRS “still has an unprecedented number of unprocessed returns” compared to pre-pandemic years.

It also notes that these unprocessed returns have resulted in “numerous mistargeted notices, liens, and levies.” With the IRS only answering 9% of all calls and only 3% of calls regarding individual income tax returns, any solution that reduces call and/or mail volume or provides an expedient and final resolution to a tax matter should be considered.

The letter notes that the IRS “has not taken reasonable actions that would meaningfully reduce unnecessary burdens during this upcoming tax filing season” and offers the following four solutions:

  • Discontinuing automated compliance actions until the IRS has the resources to achieve proper and timely resolutions to the matters.
  • Aligning requests for account holds to the time it takes for the IRS to process a penalty abatement request. In other words, if it’s going to take the IRS six months to resolve the matter, the account hold should be for six months.
  • Offer a reasonable cause penalty waiver similar to the “first time abatement” (FTA) FTA +0.3% waiver that does not affect a taxpayer’s future eligibility for an FTA.
  • Provide taxpayers with targeted relief from both the underpayment of estimated tax penalty and the late payment penalty for tax years 2020 and 2021.

Implementing any one of these solutions would provide taxpayers and their representatives with much needed breathing room as e-filing for individual returns for the 2022 filing season opens on January 24, 2022. Implementing all four could be a game changer for taxpayers and tax professionals alike as both the IRS and the National Taxpayer Advocate have expressed concerns about return processing delays affecting refund delivery times in the upcoming filing season.

Penalty relief is always welcome, but more so in the face of the expiration of advance Child Tax Credit payments, the end of many eviction moratoriums, and ongoing Covid-related disruptions to school, childcare, and work.

Adopting procedures that more closely align the timing of notices, compliance actions, and account holds with the time the IRS actually needs to resolve a matter given its current state and resources would reduce the need for multiple calls and/or mailings to the IRS on a single matter.

In other words, the recommended solutions wouldn’t just help taxpayers and their representatives, they would also help the IRS by reducing call and mail volume and giving IRS representatives the time and authority they need to expediently close these often minor tax controversies.

Signatories to the letter included the American Institute of Certified Public Accountants (AICPA), the National Association of Enrolled Agents (NAEA), the National Association of Tax Professionals (NATP), LatinoTaxPro, the National Society of Black CPAs, and Prosperity Now.

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I own Tax Therapy, LLC, in Albuquerque, New Mexico. I am an Enrolled Agent and non-attorney practitioner admitted to the bar of the U.S. Tax Court. I

Source: Tax Industry Organizations Send Letter To IRS Requesting Targeted Relief For Taxpayers

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Amid Chaos, IRS Attempts A Return To Normal

E-filing of individual tax returns for the 2022 filing season opens on January 24. The start of e-filing and the April tax filing deadline return to an almost normal schedule while ongoing issues make filing season realities hard to predict.

In 2021 individual e-filing didn’t open until February 12. In 2020 it opened on January 27. This year’s opening appears to be moving the needle back toward the more normal mid-January opening. The April 18th filing deadline is also a return to normal after the July 17, 2020 and May 17, 2021 extended deadlines. Friday, April 15, 2022 is the Emancipation Day holiday in Washington, D.C. which is why the deadline has been moved forward to Monday April 18. It almost seems normal. Almost.

While the start and finish lines to filing season 2022 have a whiff of normalcy about them, everything in between stinks. It stinks of expectations bordering on the delusional and it stinks of IRS rot. When it comes to considering “known unknowns” such as the effects of reconciling economic impact payments (stimulus money) and advance payments of the Child Tax Credit (CTC), the IRS doesn’t seem delusional.

The Commissioner is taking every chance he is offered to urge taxpayers and tax practitioners to file accurately and electronically. The IRS is using every channel it has to remind taxpayers to watch for Letters 6419 and 6475 (which provide the amounts of the advance CTC payments and EIPs, respectively). It’s the Commissioner’s apparent failure to consider the “unknown unknowns” that reeks of delusion.

While the IRS Commissioner (in a recent statement) and the National Taxpayer Advocate (in her most recent report) have been open about anticipating another difficult filing season, they have not seemed to consider the potential for natural disasters to create yet another patchwork of filing deadlines. In 2021 the May 17th deadline wasn’t the deadline for Texas, Oklahoma, and Louisiana due to winter storms.

Louisiana’s deadline was re-adjusted after Hurricane Ida. In late April 2021 the May 17, 2021 deadline was extended for some Kentucky counties due to storm effects and the list of affected counties continued to be adjusted until June 28, 2021 (two days before the extended June 30 filing deadline). At the end of April 2021 Alabama taxpayers got an extension until August 2. In September New York and New Jersey got their deadline extended because of Hurricane Ida. That’s just a sample; the list goes on.

The other unknown unknown the Commissioner has failed to consider is the ongoing effects of the pandemic. His statement was issued January 10, 2022 amid the omicron variant surge. At this time it is unclear if that surge has peaked and it is even more unclear what effects the current surge will have on IRS staffing levels during filing season. Whatever the effects are, it is unlikely they will improve return processing or response times.

It’s early January 2022. It’s unlikely that the pace of natural disasters will abate and predicting pandemic surges has proved elusive, so why not plan for the worst and issue a pre-emptive extension of the filing deadline until July? Early filers will still file early. Procrastinators will still procrastinate. Extending the deadline until mid-year would simply mitigate some of the confusion resulting from yet another reactive patchwork of federal deadlines due to yet another bad weather year or more Covid-related staffing issues.

And then there’s the rot. Yes, the IRS has been underfunded for years. Yes, experienced people retired and because of funding cuts, they were never replaced. Yes Congress continues to ask the IRS to do more with less. But at some point the IRS needs to acknowledge certain systemic failures in its procedures and possibly its culture.

One such systemic failure was the continuation of automated notice processing despite the mail and phone backlog. Taxpayers and tax practitioners continue to receive second and third notices, each more aggressive than the last, about issues that were addressed by a mailed response to the first notice that has remained either unopened or unprocessed by the IRS. That’s a procedural failure.

The cultural failure is the idea that temporarily stopping automated notices or providing some sort of blanket penalty relief or temporarily giving more experienced customer service reps (or their supervisors) more autonomy to abate penalties until the IRS clears its mail backlog is some sort of abject moral failing that will result in massive taxpayer noncompliance. It’s the idea that cutting taxpayers some slack in the middle of yet another chaotic filing season will turn otherwise law abiding taxpayers into tax protesting scofflaws.

It’s the idea that their kindness will be considered weakness. Perhaps that is the case, but the fact of the matter is that our tax system is based on voluntary compliance and the complete inability to get assistance when trying to comply voluntarily with one’s tax obligations or exercise one’s rights under the tax laws could be as much (or more) of a disincentive to compliance as lack of enforcement. Unfortunately, heading into the third filing season under pandemic rules it seems we have yet to find rock bottom and a path out of this abyss.

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I own Tax Therapy, LLC, in Albuquerque, New Mexico. I am an Enrolled Agent and non-attorney practitioner admitted to the bar of the U.S. Tax Court. I work as a tax general practitioner preparing returns for individuals and (really) small businesses as well as representing individuals before the IRS and, occasionally, the U.S. Tax Court. My passion is translating “taxspeak” into English for taxpayers and tax practitioners. I write to dispel myths with facts and to explain “the fine print” behind seemingly simple tax concepts. I cover individual tax issues and IRS developments with a focus on items of interest to taxpayers and retail tax practitioners. Follow me on Twitter @taxtherapist505

Source: Amid Chaos, IRS Attempts A Return To Normal

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Do You Have To Pay Capital Gains Tax On a Home Sale?

Your home is likely your life’s biggest and proudest purchase: all the painstaking measures you took—countless property searches, contract negotiations, inspections, and closing—to arrive at the dream of homeownership. Now, it’s time to sell. What next?pr

Did you know that your home is considered a capital asset, subject to capital gains tax? If your home has appreciated in value, you could be required to pay taxes on the profit.

However, thanks to the Taxpayer Relief Act of 1997, most homeowners are exempt. If you are single, you will pay no capital gains tax on the first $250,000 of profit (excess over cost basis). Married couples enjoy a $500,000 exemption. There are, however, some restrictions.

Key Takeaways

You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly. This exemption is only allowable once every two years.

You can add your cost basis and costs of any improvements that you made to the home to the $250,000 if single or $500,000 if married filing jointly. How Much Is Capital Gains Tax on Real Estate? To be exempt, the home must be considered a primary residency based on Internal Revenue Service (IRS) rules. These rules state that you must have occupied the residence for at least two of the last five years.

If you buy a home and a dramatic rise in value causes you to sell it a year later, you would be required to pay capital gains tax. If you’ve owned your home for at least two years and meet the primary residence rules, you may owe tax on the profit if it exceeds IRS thresholds. Single people can exclude up to $250,000 of the gain, and married people filing a joint return can exclude up to $500,000 of the gain.

Short-term capital gains are taxed as ordinary income, with rates as high as 37% for high-income earners; long-term capital gains tax rates are 0%, 15%, 20%, or 28%, with rates applied according to income and tax filing status.

This rule even allows you to convert a rental property into a primary residence, because the two-year residency requirement does not need to be fulfilled in consecutive years. The 2-in-5-year rule For taxpayers with more than one home, a key point is determining which is the primary residence.

The IRS allows the exclusion on only one’s primary residence, but there is some leeway in just which home qualifies. The two-in-five-year rule comes into play. Simply put, this means that during the previous five years, if you lived in a home for a total of two years, or 730 days, that can qualify as your primary residence. The 24 months do not have to be in a particular block of time. However, for married taxpayers filing jointly, each spouse must meet the rule.

How the Capital Gains Tax Works with Homes

Suppose you purchase a new condo for $300,000. You live in it for the first year, rent the home for the next three years, and when the tenants move out, you move in for another year. After five years, you sell the condo for $450,000. No capital gains tax is due because the profit ($450,000 – $300,000 = $150,000) does not exceed the exclusion amount. Consider an alternative ending in which home values in your area increased exponentially.

In this scenario, you sell the condo for $600,000. Capital gains tax is due on $50,000 ($300,000 profit – $250,000 IRS exclusion). If your income falls in the $40,400–$441,450 range, your capital gains tax rate as a single person is 15% in 2021.5 (The income range rises slightly, to the $41,675–$459,750 range, for 2022.)6 If you have capital losses elsewhere, you can offset the capital gains from the sale of the house by those losses, and up to $3,000 of those losses from other taxable income.

2022 Long-term Capital Gains Rates
Filing Status 0% Tax Rate 15% Tax Rate 20% Tax Rate
Single < $41,675 $41,675 to $459,750 > $459,750
Married filing jointly < $83,350 $83,350 to $517,200 > $517,200
Married filing separately < $41,675 $41,675 to $258,600 > $258,600
Head of household < $55,800 $55,800 to $488,500 > $488,500

Applicable to the Sale of a Principal Residence

2022 Long-term Capital Gains Rates
Filing Status 0% Tax Rate 15% Tax Rate 20% Tax Rate
Single < $41,675 $41,675 to $459,750 > $459,750
Married filing jointly < $83,350 $83,350 to $517,200 > $517,200
Married filing separately < $41,675 $41,675 to $258,600 > $258,600
Head of household < $55,800 $55,800 to $488,500 > $488,500

Applicable to the Sale of a Principal Residence Requirements and Restrictions If you meet the eligibility requirements of the IRS, you’ll be able to sell the home free of capital gains tax. However, there are exceptions to the eligibility requirements, which are outlined on the IRS website.The main major restriction is that you can only benefit from this exemption once every two years. Therefore, if you have two homes and lived in both for at least two of the last five years, you won’t be able to sell both of them tax free.

The Taxpayer Relief Act of 1997 significantly changed the implications of home sales in a beneficial way for homeowners. Before the act, sellers had to roll the full value of a home sale into another home within two years to avoid paying capital gains tax. However, this is no longer the case, and the proceeds of the sale can be used in any way that the seller sees fit. When Is a Home Sale Fully Taxable? Not everyone can take advantage of the capital gains exclusions. Gains from a home sale are fully taxable when:

  • The home is not the seller’s principal residence
  • The property was acquired through a 1031 exchange (more on that below) within five years
  • The seller is subject to expatriate taxes
  • The property was not owned and used as the seller’s principal residence for at least two of the last five years prior to the sale (some exceptions apply)
  • The seller sold another home within two years from the date of the sale and used the capital gains exclusion for that sale

Example of Capital Gains Tax on a Home Sale Consider the following example: Susan and Robert, a married couple, purchased a home for $500,000 in 2015. Their neighborhood experienced tremendous growth, and home values increased significantly. Seeing an opportunity to reap the rewards of this surge in home prices, they sold their home in 2020 for $1.2 million. The capital gains from the sale were $700,000.As a married couple filing jointly, they were able to exclude $500,000 of the capital gains, leaving $200,000 subject to capital gains tax. Their combined income places them in the 20% tax bracket. Therefore, their capital gains tax was $40,000.

How to Avoid Capital Gains Tax on Home Sales Want to lower the tax bill on the sale of your home? There are ways to reduce what you owe or avoid taxes on the sale of your property. If you own and have lived in your home for two of the last five years, you can exclude up to $250,000 ($500,000 for married people filing jointly) of the gain from taxes.

Adjustments to the cost basis can also help reduce the gain. Your cost basis can be increased by including fees and expenses associated with the purchase of the home, home improvements, and additions. The resulting increase in the cost basis thereby reduces the capital gains.Also, capital losses from other investments can be used to offset the capital gains from the sale of your home. Large losses can even be carried forward to subsequent tax years.

Let’s explore other ways to reduce or avoid capital gains taxes on home sales. Use 1031 Exchanges to Avoid Taxes Homeowners can avoid paying taxes on the sale of their home by reinvesting the proceeds from the sale into a similar property through a 1031 exchange. This like-for-like exchange—named after Internal Revenue Code Section 1031—allows for the exchange of like property with no other consideration or like property including other considerations, such as cash.

The 1031 exchange allows for the tax on the gain from the sale of a property to be deferred, rather than eliminated.Owners—including corporations, individuals, trust, partnerships, and limited liability companies (LLCs)—of investment and business properties can take advantage of the 1031 exchange when exchanging business or investment properties for those of like kind.The properties subject to the 1031 exchange must be for business or investment purposes, not for personal use.

The party to the 1031 exchange must identify in writing replacement properties within 45 days from the sale and must complete the exchange for a property comparable to that in the notice within 180 days from the sale.9Since executing a 1031 exchange can be a complex process, there are advantages to working with a reputable, full-service 1031 exchange company.

Given their scale, these services generally cost less than attorneys who charge by the hour. A firm that has an established track record in working with these transactions can help you avoid costly missteps and ensure that your 1031 exchange meets the requirements of the tax code. Convert Your Second Home into Your Primary Residence Capital gains exclusions are attractive to many homeowners, so much so that they may try to maximize its use throughout their lifetime.

Because gains on non-primary residences and rental properties do not have the same exclusions, more people have sought clever ways to reduce their capital gains tax on the sale of their properties. One way to accomplish this is to convert a second home or rental property to a primary residence.

A homeowner can make their second home as their primary residence for two years before selling and take advantage of the IRS capital gains tax exclusion. However, stipulations apply. Deductions for depreciation on gains earned prior to May 6, 1997, will not be considered in the exclusion.10According to the Housing Assistance Tax Act of 2008, a rental property converted to a primary residence can only have the capital gains exclusion during the term in which the property was used as a principal residence.

The capital gains are allocated to the entire period of ownership. While serving as a rental property, the allocated portion falls under non-qualifying use and is not eligible for the exclusion.10To prevent someone from taking advantage of the 1031 exchange and capital gains exclusion, the American Jobs Creation Act of 2004 stipulates that the exclusion applies if the exchanged property had been held for at least five years after the exchange.12An IRS memo explains how the sale of a second home could be shielded from the full capital gains tax, but the hurdles are high.

It would have to be investment property exchanged for another investment property. The taxpayer has to have owned the property for two full years, it has to have been rented to someone for a fair rental rate for at least 14 days in each of the previous two years, and it cannot have been used for personal use for 14 days or 10 percent of the time it was otherwise rented, whichever is greater for the previous 12 months.In short, if it’s a vacation home, it’s not your primary residence and it’s not an investment property, then its sale is subject to capital gains taxes.

How Installment Sales Lower Taxes Realizing a large profit at the sale of an investment is the dream. However, the corresponding tax on the sale may not be. For owners of rental properties and second homes, there is a way to reduce the tax impact. To reduce taxable income, the property owner might choose an installment sale option, in which part of the gain is deferred over time. A specific payment is generated over the term specified in the contract.

Each payment consists of principal, gain, and interest, with the principal representing the nontaxable cost basis and interest taxed as ordinary income. The fractional portion of the gain will result in a lower tax than the tax on a lump-sum return of gain. How long the property owner held the property will determine how it’s taxed: long-term or short-term capital gains.
How Real Estate Taxes Work Taxes for most purchases are assessed on the price of the item being bought.

The same is true for real estate. State and local governments levy real estate or property taxes on real properties; these collected taxes help pay for public services, projects, schools, and more.Real estate taxes are ad valorem taxes, which are taxes assessed against the value of the home and the land it sits on. It is not assessed on the cost basis—what was paid for it. The real estate tax is calculated by multiplying the tax rate by the assessed value of the property. Tax rates vary across jurisdictions and can change, as can the assessed value of the property. However, some exemptions and deductions are available for certain situations.

How to Calculate the Cost Basis of a Home The cost basis of a home is what you paid (your cost) for it. Included are the purchase price, certain expenses associated with the home purchase, improvement costs, certain legal fees, and more.Example: In 2010, Rachel purchased her home for $400,000. She made no improvements and incurred no losses for the 10 years that she lived there. In 2020, she sold her home for $550,000.

Her cost basis was $400,000, and her taxable gain was $150,000. She elected to exclude the capital gains and, as a result, owed no taxes. What Is Adjusted Home Basis? The cost basis of a home can change. Reductions in cost basis occur when you receive a return of your cost. For example, you purchased a house for $250,000 and later experienced a loss from a fire. Your home insurer issues a payment of $100,000, reducing your cost basis to $150,000 ($250,000 original cost basis – $100,000 insurance payment).

Improvements that are necessary to maintain the home with no added value, have a useful life of less than one year, or are no longer part of your home will not increase your cost basis.

Likewise, some events and activities can increase the cost basis. For example, you spend $15,000 to add a bathroom to your home. Your new cost basis will increase by the amount that you spent to improve your home. Basis When Inheriting a Home If you inherit a home, the cost basis is the fair market value (FMV) of the property when the original owner died.15 For example, say you are bequeathed a house for which the original owner paid $50,000. The home was valued at $400,000 at the time of the original owner’s death. Six months later, you sell the home for $500,000.

The taxable gain is $100,000 ($500,000 sales price – $400,000 cost basis).The FMV is determined on the date of the death of the grantor or on the alternate valuation date if the executor files an estate tax return and elects that method.16 Reporting Home Sale Proceeds to the IRS It is required to report the sale of a home if you received a Form 1099-S reporting the proceeds from the sale or if there is a non-excludable gain.

Form 1099-S is an IRS tax form reporting the sale or exchange of real estate. This form is usually issued by the real estate agency, closing company, or mortgagee. If you meet the IRS qualifications for not paying capital gains tax on the sale, inform your real estate professional by Feb. 15 following the year of the transaction.

The IRS details what transactions are not reportable:

  • If the sales price is $250,000 ($500,000 for married people) or less and the gain is fully excludable from gross income. The homeowner must also affirm that they meet the principal residence requirement. The real estate professional must receive certification that these attestations are true.
  • If the transferor is a corporation, a government or government sector, or an exempt volume transferor (someone who has or will sell 25 or more reportable real estate properties to 25 or more parties)
  • Non-sales, such as gifts
  • A transaction to satisfy a collateralized loan
  • If the total consideration for the transaction is $600 or less, which is called a de minimus transfer

Special Considerations What happens in the event of a divorce or for military personnel? Fortunately, there are considerations for these situations. In a divorce, the spouse granted ownership of a home can count the years that the home was owned by the former spouse to qualify for the use requirement.3 Also, if the grantee has ownership in the house, the use requirement can include the time that the former spouse spends living in the home until the date of sale.

Military personnel and certain government officials on official extended duty and their spouses can choose to defer the five-year requirement for up to 10 years while on duty. Essentially, as long as the military member occupies the home for two out of 15 years, they qualify for the capital gains exclusion (up to $250,000 for single taxpayers and up to $500,000 for married taxpayers filing jointly).

Capital Gains Taxes on Investment Property Real estate can be categorized differently. Most commonly, it is categorized as investment or rental property or principal residences. An owner’s principal residence is the real estate used as the primary location in which they live. An investment or rental property is real estate purchased or repurposed to generate income or a profit to the owner(s) or investor(s).

How the property is classified affects how it’s taxed and what tax deductions, such as mortgage interest deductions, can be claimed. Under the Tax Cuts and Jobs Act of 2017, up to $750,000 of mortgage interest on a principal residence can be deducted. However, if a property is solely used as an investment property, it does not qualify for the capital gains exclusion.

Deferrals of capital gains tax are allowed for investment properties under the 1031 exchange if the proceeds from the sale are used to purchase a like-kind investment. And capital losses incurred in the tax year can be used to offset capital gains from the sale of investment properties. So, although not afforded the capital gains exclusion, there are ways to reduce or eliminate taxes on capital gains for investment properties.

Rental Property vs. Vacation Home Rental properties are real estate rented to others to generate income or profits. A vacation home is real estate used recreationally and not considered the principal residence. It is used for short-term stays, primarily for vacations.Homeowners often convert their vacation homes to rental properties when not in use by them. The income generated from the rental can cover the mortgage and other maintenance expenses. However, there are a few things to keep in mind.

If the vacation home is rented out for less than 15 days, the income is not reportable. If the vacation home is used by the homeowner for less than two weeks in a year and then rented out for the remainder, it is considered an investment property.Homeowners can take advantage of the capital gains tax exclusion when selling their vacation home if they meet the IRS ownership and use rules.

Real Estate Taxes vs. Property Taxes The terms real estate and property are often used interchangeably, as are real estate taxes and property taxes. However, property is actually a broad term used to describe different assets, including real estate, owned by a person; also, not all property is taxed the same.Property taxes, as they relate to real estate, are ad valorem taxes assessed by the state and local governments where the real property is located.

The real estate property tax is calculated by multiplying the property tax rate by real property’s market value, which includes the value of the real property (e.g., houses, condos, and buildings) and the land that it sits on.

Property taxes, as they relate to personal property, are taxes applied to movable property. Real estate, which is immovable, is not included in personal property tax. Examples of personal property include cars, watercraft, and heavy equipment. Property taxes are applied at the state or local level and may vary by state.

Are Home Sales Tax Free?

Yes. Home sales are tax free as long as the condition of the sale meets certain criteria:

  • The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify.
  • The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
  • If the gains do not exceed the exclusion threshold ($250,000 for single people and $500,000 for married people filing jointly), the seller does not owe taxes on the sale of their house.1

How Do I Avoid Paying Taxes When I Sell My House?

There are several ways to avoid paying taxes on the sale of your house. Here are a few:

  • Offset your capital gains with capital losses. Capital losses from previous years can be carried forward to offset gains in future years.
  • Consider using the IRS primary residence exclusion. For single taxpayers, you may exclude up to $250,000 of the capital gains, and for married taxpayers filing jointly, you may exclude up to $500,000 of the capital gains (certain restrictions apply).
  • Also, under a 1031 exchange, you can roll the proceeds from the sale of a rental or investment property into a like investment within 180 days.

How Much Tax Do I Pay When Selling My House?

How much tax you pay is dependent on the amount of the gain from selling your house and on your tax bracket. If your profits do not exceed the exclusion amount and you meet the IRS guidelines for claiming the exclusion, you owe nothing. If your profits exceed the exclusion amount and you earn from $40,400 to $441,450, you will owe a 15% tax (based on the single filing status) on the profits.5

Do I Have to Report the Sale of My Home to the IRS?

It is possible that you are not required to report the sale of your home if none of the following is true:

  • You have non-excludable, taxable gain from the sale of your home (less than $250,000 for single taxpayers and less than $500,000 for married taxpayers filing jointly).
  • You were issued a Form 1099-S, reporting proceeds from real estate transactions.
  • You want to report the gain as taxable, even if all or a portion falls within the exclusionary guidelines.

What is the Penalty for Selling a House Less Than Two Years After Purchase?

You probably cannot qualify for the $250,000/$500,000 exemption from gains on selling your primary residence. That’s because to qualify for that exemption, you must have used the home in question as your primary residence for at least two of the previous five years, and you generally can’t use the exemption twice within two years.However, there are exceptions for certain circumstances: Military service, death of a spouse, and job relocation are the most common reasons that might allow you to take at least a partial exemption. The IRS has a worksheet for determining an exclusion limit; see Topic 701.

Do You Pay Capital Gains Taxes When You Sell a Second Home?

Because the IRS allows exemptions from capital gains taxes only on a primary residence, it’s difficult to avoid capital gains taxes on the sale of a second home without converting that home to your primary residence by considering the two-in-five-year rule (you lived in it for a total of two of the past five years). Put simply, you determine that you spent enough time in one home that it is actually your primary residence.If one of the homes was primarily an investment, it’s not set up to be the exemption-eligible home. The demarcation between investment property and vacation property goes like this: It’s investment property if the taxpayer has owned the property for two full years, it has been rented to someone for a fair rental rate for at least 14 days in each of the previous two years, and it cannot have been used for personal use for 14 days or 10 percent of the time that it was otherwise rented, whichever is greater, for the previous 12 months.If you or your family use it for more than two weeks a year, it’s likely to be considered personal property, not investment property, and thus subject to taxes on capital gains, as would any other asset other than your principal residence.

What If You Sell a House Less Than Two Years After Buying It?

You probably cannot qualify for the $250,000 single/$500,000 married-filing-jointly exemption from gains on selling your primary residence. That’s because to qualify for that exemption, you must have used the home in question as your primary residence for at least two of the previous five years, and you generally can’t use the exemption twice within two years.However, there are exceptions for certain circumstances: Military service, death of a spouse, and job relocation are the most common reasons that might allow you to take at least a partial exemption. The IRS has a worksheet for determining an exclusion limit; see Topic 701.

Do You Pay Capital Gains If You Lose Money on a Home Sale?

You can’t deduct the losses on a primary residence, nor can you treat it as a capital loss on your taxes. You may be able to do so, however, on investment property or rental property. Keep in mind that gains from the sale of one asset can be offset by losses on other asset sales up to $3,000 or your total net loss, and such losses may be eligible for carryover in subsequent tax years.If you sell below-market to a relative or friend, the transaction may subject the recipient to taxes on the difference, which the IRS may consider a gift.

Also remember that the recipient inherits your cost basis for purposes of determining any capital gains when they sell it, so the recipient should be aware of how much you paid for it, how much you spent on improvement, and costs of selling, if any.

By: Chad Langager

Source: Do You Have to Pay Capital Gains Tax on a Home Sale?

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IRS Raises 2022 Standard Mileage Tax Deduction Rates To Cover Higher Gas Prices

The Internal Revenue Service announced standard mileage rates for 2022 today for taxpayers to use in calculating the deductible costs of using a car for business, charitable, medical or moving purposes. That means tax savings if you’re self-employed and drive your own car for business—and likely more money in your pocket if your employer reimburses you for miles driven.

In Notice 22-03, the IRS lists the standard mileage rates, effective January 1, 2022:

Business use: 58.5 cents a mile in 2022, up 2.5 cents from 56 cents a mile in 2021

Medical use: 18 cents a mile in 2022, up from 16 cents a mile in 2021

Moving use: 18 cents a mile in 2022, up from 16 cents a mile in 2021

Charitable use: 14 cents a mile, for 2021 and 2022

You’ll use the 2022 rates on your 2022 tax return. And the 2021 rates on your 2021 tax return due April 15, 2022. If you’re curious, the IRS keeps track of historical mileage rates over the last decade. The standard rates for business purposes reach a new high; the standard rates for medical and moving purposes were 20 cents a mile back in 2019. Rates jumped this year because of higher fuel prices and higher car costs.

The rate for charitable miles driven has been fixed by Congress at 14 cents a mile since 1997, but the other rates are adjusted each year. The business rate adjustment takes into account all the costs associated with owning a car, including insurance and repairs, while the other adjustment primarily takes into effect oil and gas costs.

The standard rates are the simplest option for taxpayers to use. You multiply the miles driven by the rate. Another option is to claim deductions based on the actual costs of using a vehicle. In either case, you need to keep records to prove how far you drove and when and for what purpose.

The higher standard rates mainly help workers whose employers reimburse them for miles driven and self-employed folks who drive their own car for business purposes. Employers don’t have to use the IRS-blessed rate for reimbursement purposes, but they often do as it sets the level that’s tax free for employees, so there is no tax reporting for the employee.

If your employer doesn’t reimburse you, you’re out of luck. Unreimbursed employee travel expenses are not deductible. That’s because the 2017 Tax Cuts and Jobs Act eliminated the miscellaneous itemized deduction for unreimbursed employee travel expenses for tax years 2018 through 2025.

If you’re self-employed, you’ll list your mileage as a business expense on Schedule C. You can’t use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle.

Don’t underestimate the charity and medical mileage breaks. If you itemize deductions, miles driven to volunteer count—say you drive to volunteer at a local animal shelter twice a week, or you deliver meals for a charity to home-bound seniors.

If you have big healthcare bills, medical miles can help you meet the threshold to claim a medical expense deduction. You get a deduction to the extent medical expenses, including mileage, exceed 7.5% of your adjusted gross income. The deduction for moving miles is limited to active military personnel.

There’s more savings if you keep good records: Parking fees and tolls for business, charitable, medical and moving trips are also deductible.

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Internal Revenue Service (IRS) Publication 15, which includes withholding tables for income tax. State requirements vary by state; for an example, see the New York state portal for withholding tax.

Canada Revenue Agency Publication T4001. Canada Revenue Agency also provides significant online guidance accessible through a web index, including an online payroll tax calculator.

IRS Form W-4.

HM Revenue and Customs (HMRC) PAYE for employers: the basics

PAYG withholding web page for details and tools.

Deposit Interest Retention Tax.

26 USC 3406, Backup Withholding.

Dividend Allowance factsheet HMRC, 17 August 2015

PwC Global Tax Summaries: Rwanda, Corporate – Withholding taxes”. 26 July 2018.

payroll tax independently of a social insurance system.

Should I Cash Out of Mutual Funds to Pay Off Debt?

If you have some money invested in mutual funds, using them to pay off debt may seem like an attractive option. You may assume that you’ll get more benefit from using the money that you’ve invested to eliminate debt (and the associated high interest rates). But cashing in your mutual funds may not be the best way to become debt-free if there are other options available. And depending on where you hold your mutual funds, you could end up receiving a steep tax bill.

Key Takeaways

  • Cashing out mutual funds may not be the best option for repaying debt.
  • You may owe capital gains tax on mutual funds that you cash out from a taxable brokerage account.
  • Cashing out mutual funds from an IRA or other qualified retirement account could trigger income tax on earnings, as well as an early withdrawal tax penalty.
  • Withdrawing money from your investments to pay debt means missing out on future growth from compounding interest.

Pros and Cons of Cashing Out Mutual Funds to Pay Off Debt

Using mutual funds to pay off debt may seem appealing at first glance. If you aren’t using the money that you’ve invested for any particular financial goal, then why not use it to pay off credit cards, student loans, or other debts? After all, eliminating debt can free up more money in your budget that you can then reinvest in mutual funds, stocks, or other securities.However, there are some problems with that logic.

Specifically, there are two major drawbacks associated with cashing out mutual funds to pay down debt. The first is taxes; the second is how it may negatively impact your long-term financial goals.In terms of tax implications, there are two ways that cashing out mutual funds to pay debt can backfire, depending on where you hold them. If you have mutual funds in a taxable brokerage account, then cashing them out may trigger capital gains tax if you’re selling them above what you initially paid for them.

Short-term capital gains on securities owned for less than one year are subject to ordinary income tax rates.1 The long-term capital gains tax rate is 0%, 15%, or 20%, depending on your income.

If the mutual funds are in an IRA, you may pay ordinary income tax on the entire withdrawal, the exception would be if you had any basis in your IRA. Then a 10% penalty may apply. The rules are slightly different for Roth IRAs, especially when it comes to taxes.

Aside from the tax consequences of using mutual funds to pay down debt, it’s also important to consider how it may impact your ability to grow wealth. By selling off mutual funds and not replacing them with other investments, you miss out on the power of compounding interest. Depending on how much of your mutual fund holdings you choose to sell, that could mean losing thousands of dollars in growth over time.

If you’re considering cashing out mutual funds in a brokerage account, use an online capital gains tax calculator to estimate how much you may owe on the sale.

Other Options for Paying Off Debt

Cashing out mutual funds isn’t the only way to manage debt. There are other possibilities for eliminating debt faster while also saving money on interest, including:

  • Refinancing student loans, personal loans, or other loans at a lower interest rate
  • Consolidating credit card debts into a single personal loan
  • Taking advantage of 0% credit card balance transfer offers
  • Using a home equity loan to consolidate debts
  • Selling vehicles or other non-investment assets that you own and applying the proceeds to your debt balances

If you’re struggling with debt repayment, then you may consider other options, such as a debt management plan or debt settlement. With a debt management plan, you work with a certified credit counselor to create a plan for paying off what’s owed. This may include reducing interest rates or fees. You make a single payment to the credit counselor, who then distributes the funds among your creditors.

Debt settlement is something that you may consider for past-due debts. This involves working with a consumer debt specialist to negotiate debts with creditors. The goal is to pay off debts for less than what’s owed to avoid filing for bankruptcy as a last resort.

Debt management and debt settlement may have potentially negative impacts to your credit score, so it’s important to weigh these options carefully.

Making an Informed Decision

If you’re considering selling mutual funds to pay off debt, it’s important to do your research beforehand. Your broker or financial advisor can provide you with the expected rate of return for a mutual fund going forward. Compare this rate to the fund’s historical performance to ensure its accuracy. If the mutual funds pay dividends, then this amount should be included in the assessment. If funds are held within a retirement account, find out the fees and penalties for cashing out.

Again, cashing out of a traditional IRA before age 59½ results in a 10%, or 25% if you have a SIMPLE IRA, tax penalty. There are exceptions for withdrawals, such as disability, medical debt, certain educational expenses, and buying a home. Mutual funds held within regular brokerage accounts have the standard commission charges, but the fund itself still may charge a fee for redeeming your shares. Brokers and financial advisors are great resources for this information.

The interest rate on your debt and the length of the loan should provide the last pieces of evidence to make an informed decision. Debts such as credit cards and short-term loans typically have higher interest rates than longer-term debts such as vehicle loans or mortgages. For mortgages, check to make sure that you have a fixed interest rate. Adjustable-rate mortgages (ARMs) can keep increasing over time and lead to payments that might balloon above your ability to repay them.

Note

A 401(k) loan also is an option for repaying debt, but if you separate from your job before the loan is repaid, then the entire amount could be treated as a taxable distribution.

The Bottom Line

While becoming debt-free may be relief, there are some downsides to consider if you’re using mutual funds to achieve that goal. Fees and penalties are red flags when thinking about cashing in your mutual funds. Loss of future investment income and the lack of a retirement account can put you in a worse situation later in life.

You can make additional debt payments using current income to shorten the length of the loan and reduce the total amount of interest that you have to pay, assuming your budget allows it. If you’re truly struggling with how to repay debt, then consider reaching out to debt relief companies to see how they may be able to help.

When researching debt relief companies, be sure to get a clear explanation of the services that they offer and the fees that you might have to pay before signing a contract for services.

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By: Nathan Buehler

Nathan Buehler is a well-established writer on the VIX and its related exchange traded products. Nathan also provides coverage on publicly traded companies, commodities, and personal finance/budgeting. Not only is Nathan a writer, but he is also a teacher. His drive to help others doesn’t end in the classroom. This is evident by the time and commitment he gives to his readers through personal feedback and open discussion of topics. He has written articles on topics such as economics, investing, and finance.

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