It’s important for taxpayers to understand how selling their home may affect their tax return. When filing their taxes, they may qualify to exclude all or part of any gain from the sale from their income.
Here are some key things homeowners should consider when selling a home:
Ownership and use To claim the exclusion, the taxpayer must meet ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have owned the home and lived in it as their main home for at least two years.
Gains Taxpayers who sell their main home and have a gain from the sale may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000. Homeowners excluding all the gain do not need to report the sale on their tax return.
Losses Some taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.
Multiple homes Taxpayers who own more than one home can only exclude the gain on the sale of their main home. They must pay taxes on the gain from selling any other home.
Reported sale Taxpayers who don’t qualify to exclude all the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return. Taxpayers who receive Form 1099-S, Proceeds from Real Estate Transactions must report the sale on their tax return even if they have no taxable gain.
Possible exceptions There are exceptions to these rules for some individuals, including persons with a disability, certain members of the military, intelligence community and Peace Corps workers.
The Internal Revenue Service reminded taxpayers living and working outside of the United States that they must file their 2020 federal income tax return by Tuesday, June 15. This deadline applies to both U.S. citizens and resident aliens abroad, including those with dual citizenship.
Just as most taxpayers in the United States are required to timely file their tax returns with the IRS, those living and working in another country are also required to file. An automatic two-month deadline extension is normally granted for those overseas and in 2021 that date is still June 15 even though the normal income tax filing deadline was extended a month from April 15 to May 17.
Benefits and qualifications An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.
A taxpayer qualifies for the special June 15 filing deadline if both their tax home and abode are outside the United States and Puerto Rico. Those serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return also qualify for the extension to June 15. IRS recommends attaching a statement if one of these two situations apply.
Reporting required for foreign accounts and assets Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.
Foreign accounts reporting deadline Separate from reporting specified foreign financial assets on their tax return, taxpayers with an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2020, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-filing System website.
The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) was April 15, 2021, but FinCEN is granting filers who missed the original deadline an automatic extension until October 15, 2021, to file the FBAR. There is no need to request this extension.
Report in U.S. dollars Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.
Both FINCEN Form 114 and IRS Form 8938 require the use of a December 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently. For more information on exchange rates, see Foreign Currency and Currency Exchange Rates.
Expatriate reporting Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States during 2020 must file a dual-status alien tax return, and attach Form 8854, Initial and Annual Expatriation Statement. A copy of Form 8854 must also be filed with Internal Revenue Service, 3651 S IH35 MS 4301AUSC, Austin, TX 78741, by the due date of the tax return (including extensions). See the instructions for this form and Notice 2009-85 PDF, Guidance for Expatriates Under Section 877A, for further details.
While the deadline to file and pay federal income taxes has passed for most people, some taxpayers may still be dealing with tax-related issues.
Here are some tips for taxpayers handling some of the most common after-tax-day issues.
Check refund status: Taxpayers can check on their refund using the Where’s My Refund? tool. It is available on IRS.gov. To use this tool, taxpayers need their Social Security number, tax filing status and the exact amount of the refund claimed on their tax return. The tool updates once daily, so there’s no need to check more often.
Check withholding: All taxpayers are encouraged to check their withholding using the Tax Withholding Estimator on IRS.gov. This will help them make sure their employers are withholding the right amount of tax from their paychecks. Doing this now will help avoid an unexpected amount due and possibly a penalty when they prepare and file their taxes next year. Taxpayers can use the results from the Estimator to help complete a new Form W-4 and adjust their income tax withholding with their employer. Taxpayers who receive pension income can use the results to complete a Form W-4P and submit to their payer.
Review payment options: Taxpayers who owe taxes can review all payment options online. These include: paying their taxes owed or making a partial payment; paying by debit card, credit card or digital wallet; or applying online for a payment plan
Carefully consider if they need to amend a tax return: After filing their tax return, taxpayers may find they made an error or forgot to enter something on it. Common errors taxpayers should fix are those made about filing status, income, deductions and credits. Taxpayers usually do not need to file an amended return to fix a math error or if they forgot to attach a form or schedule. Normally, the IRS will correct the math error and notify the taxpayer by mail. Similarly, the agency will send a letter requesting any missing forms or schedules.
Those expecting a refund from their original return should not file an amended return before the original return has been processed: Currently, it is taking the IRS longer to process mailed documents including paper tax returns and all tax return related correspondence. It is taking the agency more than 21 days to issue refunds for some 2020 tax returns that require review including incorrect recovery rebate credit amounts or returns that used 2019 income to figure the earned income tax credit and additional child tax credit.
Para la mayoría de los contribuyentes individuales, la fecha límite de presentación y pago de impuestos se aplazó para el 17 de mayo (en Texas, 15 de junio). Aquellos que necesitan más tiempo para presentar, pueden solicitar una prórroga para presentar. Los contribuyentes deben solicitar una prórroga para presentar antes del 17 de mayo, o pueden enfrentar una multa por falta de presentación. Esta prórroga les da hasta el 15 de octubre para presentar su declaración de impuestos. Una prórroga de tiempo para presentar no es una prórroga para pagar. Los impuestos deben pagarse no más tardar del 17 de mayo para evitar multas e intereses sobre el monto adeudado después de esa fecha.
Para obtener una prórroga para presentar, el IRS insta a los contribuyentes a tomar una de las siguientes acciones:
Presentar el Formulario 4868 (SP) a través de su profesional de impuestos, software de impuestos
Una prórroga automática de tiempo para presentar se procesará cuando los contribuyentes paguen la totalidad o parte de sus impuestos electrónicamente antes de la fecha de vencimiento del lunes, 17 de mayo. Algunos contribuyentes pueden tener más tiempo para presentar sus declaraciones de impuestos y pagar los impuestos adeudados
Taxpayers need to know their correct filing status and be familiar with each option. A taxpayer’s filing status typically depends on whether they are single or married on Dec. 31, which determines their filing status for that entire year.
More than one filing status may apply in certain situations. If this is the case, taxpayers can usually choose the filing status that allows them to owe the least amount of tax.
When preparing and filing a tax return, the filing status affects if the taxpayer is required to file a federal tax return; if they should file a return to receive a refund; their standard deduction amount; if they can claim credits and the amount of tax they should pay.
Here are the five filing statuses:
Single. Normally, this status is for taxpayers who are unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
Married filing jointly. If a taxpayer is married, they can file a joint tax return with their spouse. When a spouse passes away, the widowed spouse can usually file a joint return for that year.
Married filing separately. Married couples can choose to file separate tax returns. When doing so, it may result in less tax owed than filing a joint tax return.
Head of household. Unmarried taxpayers may be able to file using this status, but special rules apply. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year.
Qualifying widow or widower with dependent child. This status may apply to a taxpayer if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.
The May 17 (June 15 in Texas) deadline for individuals to file and pay their federal income tax is fast approaching. While paying taxes is not optional, people do have options when it comes to how they pay taxes. The IRS offers a variety of ways to pay taxes.
Some taxpayers must make quarterly estimated tax payments throughout the year. This includes sole proprietors, partners, and S corporation shareholders who expect to owe $1,000 or more when they file. Individuals who participate in the gig economy might also have to make estimated payments. The deadline to pay estimated taxes remains April 15, 2021.
Here are five ways for people who need to pay their taxes. They can:
Pay when they e-file using their bank account, at no charge, using electronic funds withdrawal.
Use IRS Direct Pay which allows taxpayers to pay electronically directly from their checking or savings account for free. They can choose to receive email notifications about their payments when they pay this way. Taxpayers should watch out for email schemes. IRS Direct Pay sends emails only to users who request the service.
Pay using a payment processor by credit card, debit card or digital wallet options. Taxpayers can make these payments online, by phone or through the IRS2Go app.
Make a cash payment at more than 60,000 participating retail locations nationwide. To pay with cash, visit IRS.gov and follow the instructions.
Pay over time by applying for an online payment agreement. Once the IRS accepts an agreement, the taxpayers can make their payment in monthly installments.
The adoption process can be expensive. Fortunately, the adoption tax credit can help offset some those expenses Taxpayers who adopted or started the adoption process in 2020 should review the rules for this credit.
Here are some facts to help people understand the credit and if they can claim it when filing their taxes:
The maximum adoption credit taxpayers can claim on their 2020 tax return is $14,300 per eligible child.
There are income limits that could affect the amount of the credit
Taxpayers should complete Form 8839, Qualified Adoption Expenses. They use this form to figure how much credit they can claim on their tax return.
An eligible child must be younger than 18. If the adopted person is older, they must be physically or mentally unable to take care of themselves.
This credit is non-refundable. This means the amount of the credit is limited to the taxpayer’s taxes due for 2020. Any credit leftover from their owed 2020 taxes can be carried forward for up to five years.
Qualified expenses include: reasonable and necessary adoption fees; court costs and legal fees and adoption related travel expenses like meals and lodging.
Other expenses directly related to the legal adoption of an eligible child.
If the taxpayer and someone other than a spouse each paid qualified adoption expenses to adopt the same child, the $14,300 credit must be divided between the two of them.
Expenses may also qualify even if the taxpayer pays them before an eligible child is identified. For example, some future adoptive parents pay for a home study at the beginning of the adoption process. These parents can claim the fees as qualified adoption expenses.
Qualified adoption expenses don’t include costs paid by a taxpayer to adopt their spouse’s child.
The Treasury Department and Internal Revenue Service announced today that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days.
“This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities,” said IRS Commissioner Chuck Rettig. “Even with the new deadline, we urge taxpayers to consider filing as soon as possible, especially those who are owed refunds. Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to.”
Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17.
Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until Oct. 15 by filing Form 4868. Filing Form 4868 gives taxpayers until Oct. 15 to file their 2020 tax return but does not grant an extension of time to pay taxes due. Taxpayers should pay their federal income tax due by May 17, 2021, to avoid interest and penalties.
The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds associated with e-filed returns are issued within 21 days.
This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn’t subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.
Taxpayers should double-check to make sure they have all their documents before filing a tax return.
Taxpayers who haven’t received a W-2 or Form 1099 should contact the employer, payer or issuing agency and request the missing documents. This also applies for those who received an incorrect W-2 or Form 1099.
If they can’t get the forms, they must still file their tax return on time. To avoid filing an incomplete or amended return, they may need to use Form 4852, Substitute for Form W-2, Wage and Tax Statementor Form 1099-R,Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
If a taxpayer doesn’t receive the missing or corrected form in time to file their tax return, they can estimate the wages or payments made to them, as well as any taxes withheld. Then use Form 4852 to report this information on their federal tax return.
If they receive the missing or corrected Form W-2 or Form 1099-R after filing their return and the information differs from their previous estimate, they must file Form 1040-X, Amended U.S. Individual Income Tax Return.
Most taxpayers should have received income documents near the end of January, including:
Forms W-2, Wage and Tax Statement
Form 1099-MISC, Miscellaneous Income
Form 1099-INT, Interest Income
Form 1099-NEC, Nonemployee Compensation
Form 1099-G, Certain Government Payments; like unemployment compensation or state tax refund
Incorrect Form 1099-G for unemployment benefits Many people received unemployment compensation in 2020. For some, this may have been the first time they ever received unemployment. These taxpayers need to know that unemployment compensation is taxable and must be included on their tax return.
Taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received.
Deductions reduce the amount of taxable income when filing a federal income tax return. In other words, they can reduce the amount of tax someone owes. Most taxpayers have a choice of either taking the standard deduction or itemizing their deductions. The standard deduction may be quicker and easier, but, itemizing deductions may lower taxes more, in some situations. It’s important for all taxpayers to look into which deduction method best fits them.
New this year Following tax law changes, cash donations of up to $300 made by December 31, 2020 are deductible without having to itemize when people file a 2020 tax return.
Here are some details about the two methods to help people decide deduction to take:
Standard deduction The standard deduction is an amount that reduces taxable income. The amount adjusts every year and can vary by filing status. The standard deduction amount depends on the taxpayer’s filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. Taxpayers who are age 65 or older on the last day of the year and don’t itemize deductions are entitled to a higher standard deduction.
Taxpayers benefit from the standard deduction if their standard deduction is more than the total of their allowable itemized deductions.
Itemized deductions Taxpayers may itemize deductions because that amount is higher than their standard deduction, which will result in less tax owed or a larger refund. In some cases, they not allowed to use the standard deduction.
A taxpayer may benefit by itemizing deductions if any of following apply to their tax situation, they:
Had large uninsured medical and dental expenses
Paid interest and taxes on their home
Had large uninsured casualty or theft losses
Made large contributions to qualified charities
Individual itemized deductions may be limited. Schedule A, Form 1040, Itemized Deductions can help determine what limitations may apply.