When you begin hunting down replacement properties for your 45 day list, it is important to keep in mind how much you need to reinvest while carrying out a tax deferred exchange. The IRS has a two-part requirement laid out for reinvestment with a 1031. The first one is that in order to defer all taxes you must purchase at least as much as your “net sale”, the contract price minus closing costs or the total left before any mortgage is paid off. The second one is that you must use all the “net proceeds” in your next purchase. This means that if there was a mortgage, subtract the mortgage that was paid off and the difference is your net proceed.
If you choose to take cash out or purchase less than what you sold, the unused proceeds will become taxable to the IRS. The proceeds that were reinvested in your exchange will remain sheltered from capital gains tax. You have an immense amount of freedom when it comes to allocation of your proceeds. Just because you sold a single-family home, doesn’t mean that you need to reinvest in another single-family home. A 1031 is also not necessarily a one to one process, it is the valuations that are the key. If you want to sell a single property and reinvest in multiple properties, you have the power to do so. Just remember that if you wish to defer all capital gains tax you will need to make sure that your reinvestment uses all of your proceeds.
The advance payments of the enhanced child tax credit are set to start next month, but a big question on many parents’ minds is whether they will end up owing on their taxes next year if they immediately spend the money.
For some parents, the answer is probably yes, they will end up owing money next tax season. Others will likely be fine. But all eligible parents should review their finances before spending the payments, financial experts say.
“This is not like the stimulus checks,” said Nate Nieri, a California-based certified financial planner and founder of Modern Money Management. If you get overpaid in child tax credits or your financial situation changes this year so that you have a higher tax bill on your 2021 taxes, the IRS may demand you repay the credit come tax time.
“This is very important for planning and can easily become a trap for parents,” he said.
How the new child tax credit payments are different
The child tax credit payments, which were set up and expanded under the American Rescue Plan passed earlier this year, amount to $3,000 annually per child ages 6 to 17 and $3,600 annually for children under 6.
Eligible families will receive half of their credit in the form of monthly payments of up to $250 per school-age child and up to $300 per child under 6 from July through December 2021. The other half will be paid out when they file their 2021 taxes. The credit is income-based and starts to phase out for individuals earning more than $75,000 a year or $150,000 for those married filing jointly.
It’s important to understand that with these payments, the IRS is essentially prepaying a tax credit that you usually receive when you file your taxes, said Ben Wacek, a Minnesota-based CFP and founder of Guide Financial Planning. “If you don’t usually receive a refund, then the advance payments could actually cause you to owe more when you file your 2021 taxes,” he said. For a 10-year-old child, the credit was worth $2,000 in 2020, which lowered a family’s tax bill by that amount when they filed their return, Wacek explained. In 2021, the credit will be $3,000 for the same child, but half of it will be paid out in advance. When that same family files their taxes next spring, there will only be $1,500 left of the child tax credit to lower their tax bill. Everything else being equal, they will owe $500 more in 2021 than they did in 2020, Wacek explained. “For this reason, if you usually owe when you file your taxes or cut it close, you might want to consider opting out of the advance payments or setting a portion of them aside to cover your tax bill in April,” he said. Who may need to be careful before spending There are many families who could be affected by this. If you switched to a higher-paying job, for instance, or your spouse went back to work after being unemployed for most or all of 2020, you could be in a higher tax bracket next year, which could change your tax math, said Matthew Saneholtz, a Florida-based CFP with Tobias Financial Advisors.
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The federal government also issued a $1,200 payment earlier this year with similar eligibility criteria. If you did not receive the first check, you can also use your tax return to claim the money.
“For 2021, eligible taxpayers who did not receive the full amount can claim it as the Recovery Rebate Credit when they file their 2020 tax return,” the IRS said. “Use IRS Free File to file and claim this important benefit.”
Some Americans aren't eligible to receive the cash payment: College students and dependents over the age of 17 won't receive the money, nor will immigrants who don't have a Social Security number. Some high earners who received a check during the first round of stimulus payments will also not qualify for the second round.
Mike McVay, Tax Accountant
Mike McVay, Tax Accountant Blog
Certified QuickBooks ProAdvisor & Licensed Tax Accountant Pensacola, FL
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