This month’s individual tax update includes the following:
- Missing an estimated income tax payment can result in non-deductible penalties
- If a home sale is tax-free due to the home sale exclusion, do you need to report the sale to the IRS on your tax return?
- 2025 changes for inherited IRAs may significantly impact your tax planning
2025 Estimated Income Tax
Missing an estimated tax payment can result in non-deductible penalties. Make timely payments via IRS Direct Pay or EFTPS—secure and convenient methods to help you avoid the penalties.
Key Points
Due dates. For tax year 2024, payment deadlines are April 15, June 17, and September 16, 2024, and January 15, 2025.
For tax year 2025, payments are due April 15, June 16, and September 15, 2025, and January 15, 2026.
Avoid penalties. Pay at least 90% of your current year’s tax or 100% of last year’s tax—or 110% if prior-year adjusted gross income (AGI) exceeds $150,000.
Exceptions. Uneven income earners can use the annualized income method to align payments with earnings.
Catch-up payments. Catching up when you miss a payment stops the penalty from accruing further but does not achieve forgiveness for the previous penalty assessed.
Tax-Free Home Sale: When And Why You Need To Report To IRS
You’re probably aware that when you sell your home, you may exclude up to $250,000 of your gain from tax if you’re unmarried (or married, filing separately) and $500,000 if you are married and file jointly.
Principal Residence
To claim the whole exclusion, you must have owned and lived in your home as your principal residence for an aggregate of at least two of the five years before the sale. You can claim the exclusion once every two years.
The home sale exclusion is one of the great tax benefits of home ownership. Many home sellers owe no tax at all when they sell their homes.
If a home sale is tax-free due to the exclusion, do you need to report the sale to the IRS on your tax return? It depends.
Form 1099-S, Proceeds from Real Estate Transactions
Your home sale may have already been reported to the IRS by your real estate agent, closing company, mortgage lender, or attorney.
The IRS has a special information return for this purpose: Form 1099-S, Proceeds from Real Estate Transactions. This form lists the gross proceeds from the sale, the property address, and the closing date.
Typically, the 1099-S is issued at the home sale closing and is included in the closing documents you receive at settlement.
If you received a Form 1099-S, you must report the sale on your tax return, even if your entire gain is tax-free due to the $250,000/$500,000 exclusion. Failure to do so will result in the IRS assuming that the selling price is the taxable gain (that’s a mess).
Form 1099-S need not be filed if your home sold for less than the applicable $250,000/ $500,000 exclusion and you sign a certification stating that you qualified for the exclusion.
You generally do this at the closing
If Form 1099-S was not issued, the IRS does not require you to report the sale on your return. But doing so anyway can be a good idea because it can prevent the IRS from asserting that the six-year statute of limitations on audits should apply because you omitted more than 25% of gross income from your return.
Reporting the sale of a principal residence is not difficult. You must file IRS Form 8949, Sales and Other Dispositions of Capital Assets, with your annual return and enter your zero gain on IRS Schedule D.
2025 Updates for Inherited IRAS
If you have inherited (or may someday inherit) an individual retirement account (IRA), the 2025 changes may significantly impact your tax planning.
Key Updates
RMD requirements. Starting in 2025, annual required minimum distributions (RMDs) are mandatory for most inherited IRAs. Failure to comply may result in penalties of up to 25%, reducible to 10% if corrected promptly.
10-year rule enforcement. Non-spousal beneficiaries must fully deplete inherited IRAs within 10 years of the original owner’s death, with annual RMDs generally required.
Spouses and Special Cases
Surviving spouses can assume ownership of the IRA or withdraw from it as a beneficiary. Roth IRAs offer additional flexibility, allowing for tax-free growth without RMDs.
Minor children have until age 31 to deplete the account, with the 10-year rule beginning at age 21.
Disabled beneficiaries may be exempt from the 10-year rule indefinitely.
Planning Strategies
Strategic withdrawals can help you avoid higher tax brackets. For example, spreading withdrawals evenly over 10 years can minimize tax impact. Timing withdrawals based on expected tax rate changes can also optimize savings.
Contact your tax and financial advisors to determine the best moves for your situation.