taxes

Listing home vacation rental tax impacts

Listing your home as a vacation rental? Here are the tax impacts to watch for
Listing your home as a vacation rental? Here are the tax impacts to watch for 850 500 smolinlupinco

Whether in the mountains or a waterfront community, many Americans dream of owning their perfect vacation home. If you already own a second house in a desirable area, you might consider renting it out for part of the year.

Before you post that listing, though, take a moment to learn about the tax implications. Taxes for these transactions can be complicated. They are determined based on how many days the home is rented, as well as a few other factors.

Vacation use by yourself and family members (even if you charge them rent) may impact that amount of taxes you pay. Use by nonrelatives will also affect your rate if market rent isn’t charged.

Tax rates for short-term rentals

Did you know that if you rent a property out for less than 15 days during the year, it’s not treated as “rental property” at all? For tax purposes, any rent you receive for this timeframe won’t be included in your income. This can lead to revenue and significant tax benefits in the right circumstances.

There is a drawback to this, though. You can only deduct property taxes and mortgage interest—not depreciation or operating costs. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

Tax rates for longer rentals

You must include rent received for property rented out more than 14 days in your income for tax purposes. In this scenario, you may deduct part of your depreciation and operating expenses (subject to certain rules). 

However, navigating the numbers can prove challenging. You must allocate which portion of certain expenses are incurred via personal use days vs. rental days, such as: 

  • Maintenance
  • Utilities
  • Depreciation allowance 
  • Taxes
  • Interest

Both the personal use portion of taxes and the personal use part of interest on your second home may be deducted separately. To be eligible, the personal use part of interest must exceed the greater of 14 days or 10% of the rental days. Depreciation on the personal use portion of time is not deductible. 

Losses may be deductible

If allocable deductions are lower than your rental income, you must report the deductions and the rent to determine the amount of rental income you should add to your other income. If expenses exceed the income, it may be possible to claim a rental loss.

The number of days you use the house for personal purposes is important here. If you used the home for more than the greater of 14 days or 10% of the rental days, you used it “too much” to claim your loss.

In this instance, you may still be able to wipe out the rental income using your deductions. However, you can’t create a loss. Deductions you can’t claim will be carried forward, and you may even be able to use them in future years. 

If you can only deduct rental expenses up to the amount of rental income you received, you must prioritize the following deductions:

  • Interest and taxes
  • Operating costs
  • Depreciation

Even if you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, though, rental deductions that exceed rental income may be claimed as a “passive” loss (and will be limited under passive loss rules.) 

Questions? Smolin can help.

Tax rules regarding vacation rental homes can be confusing. We only discuss the basic rules above, and additional rules may apply to you if you’re considered a small landlord or real estate professional.

That’s why it’s best to consult with a tax professional before planning your vacation home use. Contact the friendly tax experts at Smolin to learn more.

Tax Considerations Merger Acquisition Transactions

Important Tax Considerations with Merger and Acquisition Transactions
Important Tax Considerations with Merger and Acquisition Transactions 850 500 smolinlupinco

Many industries have seen an increase in merger and acquisition activity in recent years. Is there potential for your business to merge with or acquire another? 

If so, you’ll need to understand the potential tax implications of that decision.

Assets vs. stocks

These transactions can be structured in two ways for taxes:

1. Stock (or ownership interest) sale 

If the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) treated as a partnership, the buyer may directly purchase a seller’s ownership interest.

Purchasing stock from a C-corp is a particularly attractive option because the 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) is now permanent.

The corporation will generate more after-tax income and pay less tax overall. Additionally, any built-in gains from appreciated corporate assets will be taxed at a lower rate should you eventually decide to sell them in the future.

Ownership interests in S corporations, partnerships, and LLCs are also made more attractive by the TCJA’s reduced individual federal tax rates. On the buyer’s personal tax return, the passed-through income from these entities also will be taxed at lower rates.

Keep in mind that the TCJA’s individual rate cuts are scheduled to expire at the end of 2025. Depending on future changes in Washington, only time will tell if they’ll be eliminated earlier or extended.

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask us if this would be beneficial in your situation.

2. Asset sale

A buyer may also purchase assets of a business. For example, a buyer may only be interested in certain assets or product lines. If the target business is a sole proprietorship or single-member LLC treated as a sole proprietorship for tax purposes, an asset sale is the only option. 

Buyer vs. seller preferences

Buyers often prefer to purchase assets instead of ownership interests for many reasons. Typically, the buyer’s primary goal is to generate enough cash flow from an acquired business to cover the debt of acquiring it, as well as provide a pleasing return on the investment (ROI). 

As such, buyers are reasonably concerned about minimizing exposure to undisclosed and unknown liabilities and achieving favorable tax rates after the deal closes.

One option is for the buyer to step up (increase) the tax basis of purchased assets to reflect the purchase price. This can lower taxable gains for certain assets, like inventory and receivables when they’re sold or converted into cash. It can also increase amortization deductions and depreciation deductions for some qualifying assets. 

In contrast, many sellers prefer stock sales for both tax and nontax reasons. They strive to minimize the tax bill from a sale. This can often be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Of course, it’s worth bearing in mind that areas, like employee benefits, can cause unanticipated tax conundrums when acquiring or merging with another business. 

Pursuing professional advice is crucial for both buyers and sellers. 

Questions? Smolin can help.

For many people, selling or buying a business is the largest and most important financial transaction they’ll make in a lifetime. That’s why it’s essential to seek professional tax advice as you negotiate this situation. Once the deal is done, it could be too late to achieve a favorable tax result.

If you’re considering merging with another business or acquiring a new asset, contact the knowledgeable staff at Smolin to discuss the most favorable way to proceed.

Hit the jackpot? Tax bill

Hit the jackpot? Here’s what it means for your tax bill.
Hit the jackpot? Here’s what it means for your tax bill. 850 500 smolinlupinco

Everything comes at a cost—even “free money.” If you’ve won a sizable cash prize recently, congratulations! But be prepared. Your good fortune will likely impact your tax bill. Contacting your accountant or wealth advisor as soon as possible is probably in your best interest. 

Money earned from gambling 

Whether you win at a tiny bingo hall or a major casino, the tax rules are the same. 100% of your winnings must be reported as taxable income on the “Other income” line of your 1040 tax return. 


When it comes to reporting winnings for a particular wager, you’ll need to calculate your net gain. For example, if you bet $50 on the Super Bowl and win $140, you should report $90 of income rather than the full $140.

What about losses? They’re deductible, but only as itemized deductions. You can’t take the standard deduction and deduct gambling losses. Even so, they’re only deductible up to the amount of gambling winnings reported. In other words, losses can be used to “wipe out” gambling income, but your forms can’t report a gambling tax loss.

Still, it’s worth keeping a thorough record of your losses during the year. Hang onto any checks or credit slips and be sure to document the place, date, amount, and type of loss. It may also be helpful to keep track of the name of anyone who was with you. 

Note: If you’re a professional gambler, different rules apply. 

Lottery winnings

Did you know that lottery winnings are taxable? Hitting the jackpot is rare, but getting audited by the IRS for failing to follow tax rules after winning isn’t.

Winners are required to pay taxes on cash prizes and the fair market value of non-cash prizes, too, like vacations or cars. Your exact federal tax rate may vary, but it could be as high as 37% depending on the amount of your winnings and your other income. State income tax may also apply.

For non-cash prizes, you’ll need to report your winnings in the year the prize is received. If you take a cash prize in annual installments, you should report each year’s installment as income for the year you receive it. 

Winnings over $5,000

If you win over $5,000 from the lottery or certain types of gambling, 24% will be withheld for federal tax purposes. The payer (agency, casino, lottery, etc.) will send you and the IRS a Form W-2G listing the federal and state tax withheld and the amount paid to you. Hang onto this form for your records.

If a federal tax rate between 24% and 37% applies to you, the 24% withholding may not be enough to cover your federal tax bill. In this instance, you may need to make estimated tax payments. If you fail to do so, you could be assessed a penalty. You might be required to make state and local estimated tax payments, too. 

Since your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments—and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

Questions? Smolin can help.

This article only covers the basic tax rules. Additional rules could apply in your situation. You may also have additional concerns after winning a large sum of money, such as updating your estate plan.

If you want to stay in compliance with tax requirements, minimize what you owe, and manage your winnings more effectively, we’re here to help. Contact us now. 

Key Q4 Deadlines Employers Businesses

Key Q4 Deadlines for Employers and Businesses 
Key Q4 Deadlines for Employers and Businesses  850 500 smolinlupinco

In the fourth quarter of 2023, businesses and employers should be aware of these key tax-related deadlines.

(Note: Additional deadlines may apply. Please contact your accountant directly to ensure you’re meeting all filing requirements.) 

While certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas, the following dates act as a general guideline: 

October 2 (Monday): Final day to set up a SIMPLE IRA plan

If you (or a predecessor employer) did not previously maintain a SIMPLE IRA plan, October 2nd is the final day to initially set up one.

Exception: If you’ve become a new employer after October 1st, you can establish a SIMPLE IRA as soon as administratively feasible after your business is established. 

October 16 (Monday): C Corporations and automatic six-month extensions

If you run a C corporation, this is your final date to:

  • Establish and contribute to a SEP for 2022, (if an automatic six-month extension was filed)
  • Make contributions to certain employer-sponsored retirement plans for 2022
  • File a 2022 income tax return (Form 1120) and settle any remaining tax, interest and penalties due.

October 31 (Tuesday): 3rd quarter reporting

This is the last day to report third-quarter 2023 income tax withholding and FICA taxes using Form 941 and pay any remaining tax due.

(See exception below under “November 13.”)

November 13 (Monday): Exception for 3rd quarter reporting

If you deposited on time (and in full) all of the associated taxes due, this is the last day to report income tax withholding and FICA taxes for third quarter 2023 using Form 941. 

December 15 (Friday): 4th installment of 2023 estimated income taxes

Calendar-year C corporation must pay the fourth installment of 2023 estimated income taxes by this date.

Questions? Smolin can help.

For more information about filing requirements and personal guidance on the deadlines applicable to your business, contact the friendly accountants at Smolin.

could you benefit health savings account

Could You Benefit from a Health Savings Account?
Could You Benefit from a Health Savings Account? 850 500 smolinlupinco

The cost of healthcare is rising. As a result, many people are on the hunt for a more cost-effective way to pay for their medical bills. 

If you’re eligible, a Health Savings Account (HSA) may offer a way to set aside funds for a future medical “rainy day” while also enjoying tax benefits, like: 

  • Withdrawals from the HSA to cover qualified medical expenses aren’t taxed
  • Earnings on the funds in the HSA aren’t taxed
  • Contributions made by your employer aren’t taxed to you
  • Contributions made by you are deductible within certain limits 

Who is eligible for an HSA? 

HSAs may be established by, or on behalf of, any eligible individual.

If you’re covered by a “high deductible health plan,” you may be eligible for an HSA. In 2023, a health plan with an annual deductible of at least $1,500 for self-only coverage or at least $3,000 for family coverage may be considered a high-deductible plan.

In 2024, these numbers will increase to $1,600 for self-only coverage and $3,200 for family coverage.

Deductible contributions are limited to $3,850 for self-only coverage in 2023 and $7,750 for family coverage. (Again, these numbers are set to increase in 2024 to $4,150 for self-only coverage and $8,300 for family coverage.)

Other than for premiums, annual out-of-pocket expenses required to be paid can’t exceed $7,500 for self-only coverage or $15,000 for family coverage in 2023. In 2024, these numbers will climb to $8,050 and $16,100, respectively. 

If an individual (or their covered spouse) is an eligible HSA contributor and turns 55 before the end of the year, they may make additional “catch-up” contributions for 2023 and 2024 up to $1,000 per year.  

Limits on deductions

Deductible contributions aren’t governed by the annual deductible of the high deductible health plan. You can deduct contributions to an HSA for the year up to the total of your monthly limitation for the months you were eligible. 

The monthly limitation on deductible contributions for someone with self-only coverage is 1/12 of $3,850 (or just over $320) in 2023. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,750 (or just under $646). 

At tax time, anyone eligible on the first day of the last month of the tax year will be treated as eligible for the entire year. This is relevant to computing the annual HSA contribution.

That said, if the individual is enrolled in Medicare, they’ll no longer be eligible per the HSA rules and can no longer make HSA contributions. 

Taxpayers may withdraw funds from an IRA and transfer them tax-free to an HSA—but only once. The amount allowed varies, depending on the maximum deductible HSA contribution for the type of coverage that is in effect at the time of transfer. 

The amount moved between the accounts will be excluded from gross income and thus won’t be subject to the early withdrawal penalty of 10%. 

HSA Distributions

Distributions from your HSA account that you use to pay for qualified medical expenses of those covered aren’t taxed. Typically, the qualified medical expenses in question would qualify for the medical expense itemized deduction.

However, funds withdrawn from your HSA for other reasons are taxed. Unless the person covered by the HSA is over 65, disabled, or dies, they will also be subject to an extra 20% tax. 

Questions? Smolin can help.

HSAs offer a very flexible option for providing health care coverage. However, as you can see, the rules can be quite complicated. 

If you have questions about tax rules regarding your HSA or the most favorable way to manage the funds within it, please reach out. The friendly accountants at Smolin are always happy to walk you through your options and help you determine the most tax favorable way to manage your money. 

Understanding Percentage-of-Completion Method

Understanding the Percentage-of-Completion Method
Understanding the Percentage-of-Completion Method 850 500 smolinlupinco

If your business handles projects that take longer than a year to complete, you’ll need the “percentage-of-completion” method to recognize the associated revenue.

Let’s get into how and why to do this.

Percentage-of-completion vs. completed contract

Individuals and businesses who perform work on long-term contracts—like developers, engineering firms, creative agencies, and homebuilders—typically report financial performance with one of the two following methods:

  • Percentage-of-completion: Revenue recognition is tied to the incurrence of job costs.
  • Completed contract: Revenue and expenses are recorded upon completion of the contract terms.

Per U.S. Generally Accepted Accounting Principles (GAAP), companies that can make a “sufficiently dependable” estimate must use the more complicated percentage-of-completion method.

Those who use this method for reporting typically use the same method for taxes, as well. 

However, the federal tax code makes an exception for certain small contractors with average gross receipts of less than a certain amount over the previous three years.

For 2023, this amount is $29 million, and the number is adjusted annually for inflation. 

Estimating percentage-of-completion

Typically, companies that use the percentage-of-completion method report income sooner than those that use the completed contract method.

To estimate how much of a project is complete, companies usually compare the actual costs incurred to their total expected cost. Job cost allocation policies, change orders, and changes in estimates can complicate the process.

As an alternative, some companies choose to estimate the percentage completed via an annual completion factor.

In either scenario, the IRS requires detailed documentation to support estimates used in the percentage-of-completion method. 

Balance sheet impacts 

If your company uses the percentage-of-completion method, you’ll see an impact on your balance sheet.

You’ll report an asset for costs in excess of billings if you underbill customers based on the percentage of costs incurred. On the other hand, you’ll report a liability for billings in excess of costs if you overbill based on the costs incurred.

Imagine you’re working on a two-year projected valued at $1 million. You incur half of the expected costs in Year 1 ($400,000) and bill the customer $450,000. From a cash perspective, it appears as if you’re $50,000 ahead because you’ve collected more than the costs you’ve incurred. In reality, you’ve underbilled based on the percentage of costs incurred.

At the end of Year 1, you would have reported $500,000 in revenue, $400,000 in costs, and an asset for costs in excess of billings of $50,000. However, if you’d billed the customer $550,000, you’d report a $50,000 liability for billings in excess of costs.

Questions? Smolin can help.

The percentage-of-completion method can be complicated. Still, if your estimates are reliable, this method provides a more accurate picture of the financial performance of your long-term contracts.

If you’d like extra help navigating the percentage-of-completion method and interpreting the insights it provides, contact the helpful team at Smolin.

How Investment Swings Affect Taxes

How This Year’s Investment Swings May Affect Your Taxes
How This Year’s Investment Swings May Affect Your Taxes 850 500 smolinlupinco

If you’ve noticed market fluctuations leading to significant gains or losses on your investments this year, you might be wondering how this will impact your 2023 tax returns.

It’s hard to say with complete certainty since nothing is decided until the final results of your trades at year’s end. However, you can still take measures to avoid tax surprises.

Here’s what you need to know. 

Retirement accounts: tax-favored and taxable accounts

Investment swings in tax-favored retirement accounts, such as 401(k)s, traditional IRAs, Roth IRAs, and SEP IRAs, have no immediate tax impact. Although your account balance is affected by market fluctuations, you won’t be taxed on that balance until you begin withdrawing money.

After you turn 59 ½, qualified withdrawals from your Roth IRA will be federal income tax-free.

What about taxable accounts?

Unrealized gains and losses won’t affect your tax bill. Cumulative gains and losses from trades executed during the year, however, will. 

Overall loss in 2023

If your losses for the year have outpaced your gains, you have a net capital loss. To determine the loss and apply it, take the following three steps.

  1. Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
    • You have a net short-term capital loss for the year if your short-term losses exceed your short- and long-term gains.
    • You have a net long-term capital loss for the year if your long-term losses exceed the total of your long- and short-term gains.
  2. Claim your allowable net capital loss deduction of up to $3,000 ($1,500 if you use married filing separate status).
  3. Carry over any remaining net short-term or long-term capital loss after Step 2 to next year, when it can be used to offset capital gains in 2024 and beyond.

Overall gain in 2023

If your gains for the year exceed your losses, congratulations! To calculate your net capital gain, do the following.

  • Divide your gains and losses into short-term gains and losses from investments held for one year or less and long-term gains and losses from investments held for more than one year.
    • If your short-term gains exceed the total of your short- and long-term losses, you have a net short-term capital gain for the year.
    • If your long-term gains exceed the total of your long- and short-term losses, you have a net long-term capital gain for the year.

Net long-term and short-term gain

Your regular federal income tax rate (which can be up to 37%) applies to net short-term capital gain. In addition, you may owe an additional 3.8% on net investment income tax (NIIT), as well as state income tax.

Net long-term capital gain (LTCG) is taxed at the lower federal capital gain tax rate of 0%, 15%, or 20%.

Most people pay 15%. If you’re a high-income individual, you’ll owe the maximum rate of 20% on the lesser of:

1) net LTCG

OR

2) the excess of taxable income, including any net LTCG, over the applicable threshold.

In 2023, the thresholds are: 

  • Married filing jointly: $553,850
  • Single filers: $492,300
  • Heads of household: $523,050

Again, you may also owe the NIIT and state income tax.

NIIT Impact

The 3.8% Net Investment Income Tax (NIIT) applies to the lesser of your net investment income, including capital gains, or the amount by which your modified adjusted gross income (MAGI) exceeds the following thresholds:

  • Married filing jointly: $250,000
  • Singles and heads of household: $200,000
  • Married filing separately: $125,000

Year-end is still months away

While these figures are helpful to avoid end-of-year sticker shock, your 2023 tax outcomes won’t be apparent until all of the gains and losses for the year’s trades are completed and added up. 

Have questions? Smolin can help. 

If you want a clearer picture of what to expect come tax time, we can help. Contact the friendly staff at Smolin to learn more.

Tax Rules depreciating business assets evolving. What to expect.

Tax Rules for depreciating business assets are evolving. Here’s what to expect.
Tax Rules for depreciating business assets are evolving. Here’s what to expect. 850 500 smolinlupinco

The Tax Cuts and Jobs Act relaxed the rules for depreciating business assets. Each year, the amounts change in proportion to inflation adjustments. With the remarkably high inflation rate we saw in 2023, this year’s adjustments are significant.

Here’s what you need to know for your small business.

Section 179 deduction amounts

The maximum Sec. 179 deduction is $1.16 million for qualifying assets placed in service in 2023. If your business puts qualified assets worth more than $2.89 million in service, though, that deduction begins to dwindle. 

What assets are eligible?

Eligible assets include depreciable personal property such as:

  • Machinery and equipment
  • Office furniture
  • Fixtures like refrigerators, signs, air conditioners, or heaters
  • Eligible improvements to commercial property like roofs, security systems, and HVAC
  • Computer hardware and peripherals
  • Vehicles (with some restrictions)
  • Commercially available software

Considerations for real estate

You may also claim Sec. 179 deductions for real estate qualified improvement property (QIP) up to the maximum allowance of $1.16 million. To do this, the improvements must be on the inner portion of a non-residential building and must take place after the date the building was placed in service.

However, it’s worth noting that expenditures relating to making a building bigger—such as elevators, escalators, or other internal structural changes—don’t count as QIP. They usually must be depreciated over 39 years.

There’s no separate Sec. 179 deduction limit for QIP, so deductions reduce your maximum allowance dollar for dollar.

Sec. 179 deductions are also allowed for qualified expenditures for security systems, fire protection systems, HVAC equipment, and alarm systems. 

Depreciable personal property used primarily to furnish lodging, like furniture and appliances in certain rental properties, may also qualify.

Heavy SUVs are deducted differently

There is a special limitation for heavy SUVs with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. If your heavy SUV was put into service during 2022, you may be able to claim 100% of the first-year bonus depreciation percentage.

For tax years starting in 2023, though, the maximum Sec 179 deduction is $28,900. First-year bonus depreciation has been decreased to 80%. This percentage is expected to drop further each year leading up to 0% in 2027.

Exception: These percentage cutbacks will be delayed by one year for certain assets with longer production periods. 

Limitations for passenger autos 

For federal tax purposes, passenger vehicles are defined as cars, light trucks, and light vans. 

Special depreciation limits apply to these vehicles undo luxury auto depreciation rules. 

The maximum luxury auto deductions for used and new passenger autos placed in service during 2023 are:

  • $12,200 for Year 1 ($20,200 if bonus depreciation is claimed)
  • $19,500 for Year 2
  • $11,700 for Year 3
  • $6,960 for Year 4 and thereafter until fully depreciated

Of course, these allowances assume 100% business use and will be further adjusted for inflation in future years.

Heavy vehicles may come with an advantage

Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are considered transportation equipment and, as such, are considered exempt from the luxury auto depreciation limitations.

However, at least half of their use must be for business purposes to be eligible for the Sec. 179 deductions and first-year bonus depreciation we discussed above.

If these vehicles are used a significant amount for personal use, their cost must be depreciated using the straight-line method over the course of six tax years.

Otherwise, the business-use percentage of the vehicle’s cost must be depreciated using the straight-line method, and it’ll take six tax years to fully depreciate the cost.

Questions about your business taxes? Smolin can help.

The depreciation rules for business assets can be confusing, but working with a professional can help you get the maximum depreciation tax breaks for your business.

If you want to learn more about what to expect for your specific assets, contact the friendly tax professionals at Smolin.

Planning sell property How profits taxed

Planning to sell your property? Here’s how your profits could be taxed.
Planning to sell your property? Here’s how your profits could be taxed. 850 500 smolinlupinco

Across the United States, home values have risen dramatically over the last few years. The median price of existing home sales increased 1.9% between July 2022 and July 2023, and there were even larger increases in previous years.

While the upward trend appears universal, median home prices have varied by region:

Northeast: $467,000
Midwest: $304,600
South: $366,200
West: $610,500

If you hope to take advantage of these higher home sales pricetags by putting your house on the market, educate yourself about the tax planning implications first. You could be responsible for capital gains tax and Net Investment Income Tax (NIIT). 

A large chunk of your profits could be protected

If the house you plan to sell is your primary residence, some or all of the profit may be tax-free. Single filers can exclude $250,000 (or twice that for joint filers), but must meet certain requirements first: 

  • The seller must have owned the home for at least two of the five years leading up to the sale
  • The property must have been the seller’s principal residence for two or more years out of the last five

While these time periods don’t necessarily have to overlap to be eligible for the exclusion, they may.

Worth noting is the fact that homeowners may only use this exclusion once every two years. If you’re moving around more frequently than that, you won’t be able to claim it every time.

What happens to profits above the exclusion amount? 

What happens if the sale of your home generates more than $250,000 or $500,000 in profit? 

Providing you’ve owned the home for a year or longer, any cash exceeding these baseline amounts will be taxed at your long-term capital gains rate.

If you’ve owned the home for at least a year, the cash amount in excess of these baselines will likely be taxed at your long-term capital gains rate. If you acquired your house more recently, the profit will be deemed a short-term gain and subject to your ordinary income rate, which could double or even triple your long-term rate.

If the house you’re selling isn’t your primary residence (i.e. it’s a vacation home), the sale may not be eligible for the capital gains exclusion. However, it’s important to ask your accountant.

If you own more than one home and rent them out, they may be considered business assets. If so, this would allow you to defer tax or any gains through an installment sale or a Section 1031 like-kind exchange. You could potentially deduct a loss, as well—something you can’t do on the sale of a principal residence.

How does the 3.8% NIIT apply to home sales? 

The 3.8% Net Investment Income Tax (NIIT) generally doesn’t apply to capital gains from the sale of your main home, up to the exclusion limits of $250,000 for single filers and $500,000 for married couples filing jointly.

Still, if your modified adjusted gross income (MAGI) exceeds the amounts below, gains beyond the exclusion limit may be subject to the tax:

  • Married taxpayers filing jointly: $250,000
  • Surviving spouses: $250,000
  • Married taxpayers filing separately: $125,000
  • Unmarried taxpayers and heads of household: $200,000

The gain from the sale of a vacation home or other second residence that does not qualify for the main home exclusion is also subject to the NIIT tax. 

Two additional factors to consider

1. The actual value of your home once all factors are considered

Keep thorough records to support an accurate tax basis. Include documentation of your original cost, home improvements, casualty losses, and depreciation claimed for business use. 

2. Losses (generally) aren’t deductible

If you unfortunately fail to turn a profit on selling your principal resident, it generally isn’t deductible.

However, if you rent a portion of your home out or use it exclusively for business, any loss attributed to that portion of the home could be deductible. 

Clearly, taxes can vary between sales. Depending on your income and the profit of your home sale, some of all of the gain could be tax-free. However, higher-income homeowners with more expensive homes might be looking at a hefty, postsale tax bill. 

Have questions? Smolin can help 

If you’re considering selling your house, it pays to be prepared. To learn more about the tax impacts you may be facing, contact our knowledgeable team at Smolin for personalized advice.  

Tax Consequences Employer-Provided Life Insurance

The Tax Consequences of Employer-Provided Life Insurance
The Tax Consequences of Employer-Provided Life Insurance 850 500 smolinlupinco

When considering whether to accept your current position, you probably viewed employer-provided life insurance as a perk. If your benefits package includes group term life insurance with coverage above $50,000, though, you could feel differently come tax time. 

Invisible “income,” higher taxes

The IRS doesn’t include employer-provided life group term life insurance coverage up to $50,000 in your taxable income, and won’t increase your income tax liability. If your policy exceeds $50,000, though, the employer-paid cost is included in the taxable wages reported on your Form W-2.

This is called “phantom income.” You may not see the funds in your bank account, yet they’ll come back to haunt you nonetheless. 


For tax purposes, the cost of group term life insurance is set by a table prepared by the IRS. Even if your employer’s actual cost is lower than what’s listed on the table, your taxable income is determined by the one pre-established in the table. As a result, the amount of phantom income an older employee could be taxed for, is often higher than that which they’d pay for similar coverage under an individual term policy.

As an employee ages and their compensation increases accordingly, this tax trap worsens. 

Is your tax burden higher due to employer-paid life insurance?

If you’re concerned that the cost of employer-provided group term life insurance could be impacting your taxes, look at Box 12 of your W-2 (With code “C”). Does a specific dollar amount appear?

If so, that dollar amount indicates your employer’s cost for group term life insurance coverage you receive in excess of $50,000, less any amount you paid for the coverage. You’ll be liable for local, state, and federal taxes on the figure seen here, as well as any associated Social Security and Medicare taxes. 

Of course, the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2. It’s also the Box 1 amount reported on your tax return.

Tax-saving alternatives 

Is the ultimate tax cost disproportionate to the benefits you’re receiving? If so, ask your employer whether they have a “carve-out” plan (a plan that excludes selected employees from group term coverage). If they don’t, ask whether they’d be willing to create one. After all, some of your coworkers may be interested in opting-out, too!

Carve-out plans can be quite flexible. Here are two ways one could work in your favor for tax purposes: 

  • Your employer could continue providing you with $50,000 of group term insurance (which won’t count towards your taxable income). Then, they could provide you with an individual policy for the rest of the coverage.
  • Your employer could provide the funds they’d spend on the excess coverage as a cash bonus, which you could then use to pay the premium for an individual policy. 

If you or your employer have questions about how group term coverage impacts employees’ tax bills, we can help! 

Have questions? Smolin can help

Contact the team at Smolin to learn how you can make the most of employer provided benefits﹘without suffering unnecessary tax penalties. 

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