What’s the Best Online Tax Prep Software? – TaxAct vs TurboTax vs H&R Block

In recent years, it’s taken me much longer than I’d like to complete and e-file my state and federal income tax returns. That’s because I’ve spent some time evaluating the most popular online tax preparation software available to filers in the United States, including TurboTax, TaxAct, and H&R Block.

All three have a similar set of core features and capabilities, including the ability to e-file. That can make it challenging to differentiate among them at a glance. But there are differences.

Before choosing one, learn how TurboTax, TaxAct, and H&R Block stack up — and what’s new for the 2020 tax year.

Online Tax Preparation Software Evaluation Method

I’ve done my own taxes and run this comparison for several years in a row. As my tax situation has changed, so have my experiences. For example, during the 2014 tax year, I moved across state lines, forcing me to file two state tax returns.

For the 2020 tax year, I used the same mock tax situation for all three programs to ensure an apples-to-apples comparison. Though it’s a bit more complicated than my actual tax situation, it allows me to explore each platform in greater depth than I otherwise would. Its highlights include:

TurboTax, H&R Block, and TaxAct all have a maximum refund-minimum tax liability guarantee. That means each service waives your prep fees if you can prove another program produces a higher tax liability or lower refund on an identical tax situation.

With these three programs, my federal and state tax liabilities have always been identical across the board. However, the time and expense of preparing with each service vary considerably.

Key Features

TaxAct, TurboTax, and H&R Block have many features and capabilities in common. TurboTax and H&R Block are especially close cousins, offering tax prep assistance from human experts for users who want it. However, each program is distinct enough to warrant close examination on the merits.

DIY Tax Prep Plans & Pricing

Each of these tax prep services can handle virtually any personal income tax situation, from straightforward to very complex. All offer multiple DIY tax prep plans that correspond to general positions on the complexity spectrum. Notably, all offer a free plan for filers with relatively simple situations.

DIY Tax Prep Plans & Pricing for H&R Block

Pricing for H&R Block’s DIY tax prep plans rises as the tax season progresses. Early birds get better deals (at the lower end of the ranges specified here) than those who prep and file as the deadline approaches.

  • Free. This plan offers free federal and state filing for simple to moderately complex situations. If you can file your taxes using Form 1040 without any additional schedules, the free plan is for you.
  • Deluxe. The deluxe plan costs $23.99 to $49.99 for federal prep and filing and $36.99 to $49.99 for each state return, depending on when you file. It’s appropriate for filers who need to itemize deductions, import a prior-year tax return from another tax prep service, or access H&R Block’s in-house phone support team.
  • Premium. The premium plan costs $39.99 to $69.99 for federal prep and filing and $36.99 to $49.99 for each state, depending on the filing date. It supports a range of more complex activities, including investment activity and rental property ownership.
  • Self-Employed. The self-employed plan costs $67.99 to $84.99 for federal prep and filing and $36.99 to $49.99 for each state, depending on the filing date. It’s appropriate for self-employed individuals and small-business owners.

DIY Tax Prep Plans & Pricing for TurboTax

Like H&R Block, TurboTax varies pricing as the tax season progresses. But its plans are a bit more expensive than either H&R Block’s or TaxAct’s.

  • Federal Free Edition. This plan offers free state and federal filing for relatively simple situations — filing using Form 1040 with no attached schedules. A state fee may apply as the filing deadline approaches, so prep early to avoid surprises.
  • Deluxe. The deluxe plan costs $40 to $60 for federal DIY tax prep and filing and $40 to $50 per state return, depending on when you file. It’s appropriate for filers who wish to itemize deductions. It also has some additional features, such as prior-year return importing from other tax prep programs, live phone support, and online tax return editing for up to three years after filing.
  • Premier. The premier plan costs $70 to $90 for federal DIY tax prep and $40 to $50 per state return, depending on when you file. It’s appropriate for many complex tax situations, including active investing and rental property ownership, but can’t support situations involving pass-through income via a formal legal business structure.
  • Self-Employed. The self-employed plan costs $90 to $120 for DIY tax prep and $40 to $50 per state return, depending on when you file. It’s appropriate for self-employed individuals and small-business owners with pass-through income.

DIY Tax Prep Plans & Pricing for TaxAct

Like H&R Block and TurboTax, TaxAct pricing is subject to change, depending on when you file. Lower prices represent early-season discounts that may disappear at any time.

  • Free Edition. Like TurboTax’s and H&R Block’s free plans, TaxAct’s covers federal and state prep and filing fees. It’s appropriate for most people who can file using Form 1040 only with no additional schedules.
  • Deluxe. The deluxe plan costs $24.95 to $44.95 for federal prep and filing and $44.95 per state return, depending on when you file. It’s appropriate for people who wish to itemize deductions.
  • Premier. The premier plan costs $34.95 to $69.95 for federal prep and filing and $44.95 per state return, depending on the filing date. It’s appropriate for equities market investors, rental property owners, people with foreign financial accounts, and people who earn passive income reported on Schedule K-1 (but not those actively involved in self-employment or business ownership activity).
  • Self-Employed. The self-employed plan costs $64.95 to $79.95 for federal prep and filing and $44.95 per state return, depending on the filing date. It’s appropriate for self-employed individuals and small-business owners. It also includes additional features for these groups, such as a deduction-maximizer tool that supports year-round expense tracking from your TaxAct account.

Tax Prep Assistance From Human Experts

H&R Block and TurboTax both offer varying degrees of hands-on tax prep assistance from in-house trained tax preparers, Enrolled Agents (EAs), or certified public accountants. H&R Block makes these resources available online and in-person (albeit at a much higher fee), while TurboTax limits hands-on assistance to the online realm only. TaxAct does not offer expert tax prep assistance.

H&R Block’s Expert Tax Prep Assistance Options & Capabilities

H&R Block offers two online expert-assistance packages: Online Assist and Tax Pro Go. Online Assist only provides human experts to review the client’s return for accuracy and tax optimization. Tax Pro Go is a true full-service package in which remote human preparers complete clients’ returns for them.

  • Online Assist. H&R Block bases Online Assist pricing on the complexity of your return, but it generally adds at least $40 to your prep costs. Covering a thorough review by a tax professional and their corrections to your return, you can access it as an add-on to any DIY package.
  • Tax Pro Go. Tax Pro Go users upload their tax documents, such as income statements, to H&R Block’s secure portal. Human preparers do the rest. Pricing is also custom and based on the complexity of the return. It’s comparable to what human CPAs charge for hands-on tax prep (and what H&R Block charges for its own in-office tax prep services). My total state and federal filing cost would have been upward of $250 for the 2020 tax year.

H&R Block also offers in-person tax prep assistance at thousands of storefront office locations across the U.S. If you find yourself at a tax prep impasse at any point and don’t want to use one of H&R Block’s digital expert-assistance packages, you can make an appointment at an H&R Block office and complete it with truly hands-on help.

TurboTax’s Expert Tax Prep Assistance Options & Capabilities

TurboTax also offers two expert tax prep assistance packages: TurboTax Live and TurboTax Live Full-Service. TurboTax Live involves on-demand consultation with and tax advice from TurboTax CPAs or EAs as you prepare your own taxes. TurboTax Live Full-Service is a hands-on prep package that only asks the filer to upload their tax documents and sign off on their completed returns.

  • TurboTax Live. Appropriate for all situations, this package is available as an add-on to any DIY tax prep plan. It adds $50 to $80 to the final plan cost, depending on the plan level. Early-bird pricing ranges from $90 for deluxe clients to $170 for self-employed clients. Late-filing pricing is generally $30 higher, regardless of the plan.
  • TurboTax Live Full-Service. Ideal for very complicated situations, such as business ownership, TurboTax Live Full-Service is priced on par with full-service independent CPA tax prep. As with H&R Block’s Tax Pro Go package, I would have paid upward of $250 for state and federal filing for the 2020 tax year.

TurboTax does not have a network of brick-and-mortar locations and thus does not offer in-person tax prep. However, TurboTax Live Full-Service can accommodate virtually any prep-related issues, no matter how tricky or unusual.

TaxAct’s Expert Tax Prep Assistance Options & Capabilities

TaxAct doesn’t offer expert tax prep assistance, making it best for experienced DIY filers who are confident they won’t need professional help. If you get stuck while prepping with TaxAct, you can always take what you have so far to a professional tax preparer in your area.

Federal Tax Prep Process

I’ve prepared my taxes with these three programs for several years running. What follows is a condensed summary of my experience with each, including total prep time, total cost, version used, and observations of key features and functions.

H&R Block’s Federal Tax Prep Process.

  • Time Spent Preparing: 90 minutes
  • Version Used: Premium (In past years, I began with the free version and upgraded only after being prompted, but in 2019 and 2020, I went straight to premium)
  • Total Cost: $76.98

H&R Block is one of the most popular online tax preparation programs around. Despite its plethora of brick-and-mortar offices, filing online is both more convenient and — in most cases, at least — significantly cheaper than filing in person. H&R Block’s software uses an interview-style process that takes you through your taxes step by step, ensuring you don’t miss any crucial forms or schedules.

The platform’s drag-and-drop return upload feature is a big time-saver over the more cumbersome importing tools common to truly bare-bones discount tax prep platforms, such as TaxHawk and FreeTaxUSA.

Also helpful is the last page of each section, which includes a concise summary of the information you enter. If anything looks amiss, you can go back to the corresponding page and edit the erroneous information with one click.

These features also appear in H&R Block’s mobile-friendly Web version and its powerful mobile tax prep app, which has all the main features and capabilities of its standard Web version. You can move seamlessly between the mobile app and Web version to work on your saved return as needed. And you can e-file your return right from the app if that’s most convenient for you.

Another bonus of the service is H&R Block’s transparent pricing. You know exactly how much you’ll pay to file before you do so, and H&R Block makes any pricing increase crystal-clear before you upgrade.

But thanks to the impressive help button on the left sidebar, you may not need to upgrade. When clicked, it produces a pop-up window that lists popular help topics in question form and features a search bar for less common queries.

That makes it easy to get clarification without having to exit your work or open a new window. I’ve played around with this feature quite a bit in the past and never failed to learn something new each time.

TurboTax’s Federal Tax Prep Process

  • Time Spent Preparing: 100 minutes
  • Version Used: Premier. (In past years, I’ve started with the federal free version and upgraded in steps as TurboTax prompted me to move to the cheapest version that could handle my mock situation each time I provided an interview answer the current version couldn’t; this year, I had enough experience to know what I needed)
  • Total Cost: $110

TurboTax is another top-rated online tax filing program owned by Intuit, one of the country’s best-known financial software firms. Appropriately, its interview-style preparation process is extremely intuitive, demystifying tax issues for novice filers.

TurboTax also has a clean, mobile-friendly layout and a high-quality mobile app, not to mention excellent customer support at all plan levels. Phone support is available only with deluxe and higher plans, but it also has a dynamic, user-supported knowledge base.

I have experienced some functionality issues with TurboTax in the past, but these haven’t been disruptive of late. Overall, TurboTax seems to grow more user-friendly every season.

One feature that sets TurboTax apart is the ability to import prior-year returns from any tax prep service as long as the return is in PDF format. TurboTax has long been a leader in this respect, with competitors — namely H&R Block — only belatedly joining it. (To be fair, H&R Block now offers seamless prior-year importing as well.) Robust PDF importing capability is hugely helpful for first-time users.

TurboTax eases you into the interface with helpful pop-up windows that explain the platform’s key features, such as the help bar and internal navigation tools. TurboTax has consistently been (and continues to be) among the most user-friendly tax prep programs around.

TurboTax’s prep interface is blissfully easy to navigate. Its questions are more pointed and easier to understand than H&R Block’s, and the platform rarely presents confusing or vague information. At the beginning of each section, TurboTax takes care to call out less common situations and forms, subtly directing you toward tax forms or rules that are more likely to apply.

The platform also places helpful pop-up buttons next to elements that may require explanations, such as schedules and types of income. Clicking on the button creates a pop-up window that explains the topic in detail. For filers in a rush, it’s a time-saving alternative to searching the knowledge base.

TurboTax waits until you’re done with state taxes to review everything. It’s a marginal time-saver compared to H&R Block’s federal-only and state-only reviews. However, when I attempt to move backward in my federal return to check something manually, I’m occasionally stymied by an HTML error. It happens less frequently than it used to but is worth noting nonetheless.

TurboTax Live — first introduced in the 2017 tax year — is a huge help for filers with complicated situations and comes at a substantial discount to the cost of filing with a CPA. TurboTax Live Full-Service, a new addition for the 2020 tax year, costs still more but is ideal for taxpayers who don’t want anything to do with the prep process but don’t want to visit a CPA in person.

TaxAct’s Federal Tax Prep Process

  • Time Spent Preparing: 115 minutes
  • Version Used: Premier. (In the past, I’ve used the free version, but recent updates have rendered it unsuitable for situations as complex as my mock situation)
  • Total Cost: $79.90

TaxAct’s prep process and fee structure have changed significantly since the early 2010s, when the free version supported the vast majority of available tax forms and schedules and could therefore accommodate virtually any individual tax situation. Today, its pricing model and process are much more in line with TurboTax’s and H&R Block’s, albeit at a slightly lower price point.

TaxAct’s prep interface uses interview-style questions, but the interface is more exhaustive and less responsive to user answers than TurboTax’s or H&R Block’s. Specifically, the system may ask you questions about specific situations that don’t apply to you based on previous answers, whereas TurboTax and H&R Block seem to learn better from earlier responses.

This aspect of TaxAct is less tedious and time-consuming than it has been in the past, though overall prep time is still higher than with TurboTax or H&R Block. With large text and buttons and straightforward navigation, TaxAct’s main website is nearly as mobile-friendly as TurboTax’s and H&R Block’s and significantly more so than true discount programs, like FreeTaxUSA. TaxAct also has a dedicated mobile and tablet app that supports relatively simple tax situations, but this solution isn’t appropriate for filers with self-employment income.

No matter how you choose to use the platform, TaxAct has long had some free or low-cost features designed to simplify and streamline the tax prep process. For instance, early-bird filers can lock in their pricing at the beginning of tax season, even if TaxAct raises its prices in the interim.

The at-a-glance help feature gives you real-time advice and commentary from tax experts as you work through your tax return. The bookmark feature lets you flag interview questions for review at a later time. And it’s easier than ever to call up prior-year tax returns as you prepare your current-year return.

State Tax Prep Process

Some people are fortunate enough to live in a state with no income tax. The rest of us must prepare and file state income taxes every year. All three programs support that endeavor at roughly equivalent cost.

H&R Block’s State Tax Prep Process

H&R Block’s state preparation process unfolds similarly to the federal return — except with state-specific questions. Once you check your federal return for accuracy, the program immediately whisks you into the state section and automatically imports all relevant information from your federal return.

During the 2014 tax year, when I lived in two states, I found it simple to fill out my second state return. H&R Block remembered I’d moved during the year, and the software automatically brought me back to the beginning of the state return process after completing the first. I haven’t moved since and can’t claim income in any other states, so this hasn’t come up since, but the process appears to work much the same today.

TurboTax’s State Tax Prep Process

As with H&R Block, TurboTax automatically transfers all the information from your federal return to your state return. The process for adding a second state, if necessary, is slightly more cumbersome, as you have to navigate an additional drop-down menu. But that’s a pretty minor issue most taxpayers (being single-state filers) don’t have to worry about.

TaxAct’s State Tax Prep Process

TaxAct’s state return section is similar to the other two services’, with automatically imported information and thorough, state-specific questions. As with the federal return, it’s sometimes too thorough. It starts immediately after you finish your federal return, though you’re free to leave it for later.

Accuracy Check

All three programs include a post-prep accuracy check designed to ensure your return is prepared correctly and you’re not set up to pay more than you should.

H&R Block’s Accuracy Check

Every year, before filing, H&R Block has rechecked my entire return for accuracy. I can view my federal and state returns and specify how I want to pay the tax I owe. When I’m eligible for a refund, which doesn’t happen every year, it asks how I’d like to receive it as well.

The process ends smoothly and takes less time — without being any less thorough — than the other two options.

TurboTax’s Accuracy Check

TurboTax follows your state return by reviewing the entire package for accuracy and assessing your audit risk with a handy thermometer graphic. And TurboTax is nothing if not thorough, presenting each accuracy- or audit-related issue and recommended solution in turn before walking you through how you’d like to pay your taxes or receive your refund. Though this thoroughness does lengthen the process of filing taxes, it’s a trade-off some filers may be willing to make.

TaxAct’s Accuracy Check

Like TurboTax, TaxAct waits until you’ve completed all your returns to review them for accuracy, saving some time. However, the review process is more complicated than TurboTax’s and H&R Block’s, with different alert levels (red, yellow, and green) that identify issues of varying severity. TaxAct uses these alerts to assess your overall audit risk, though it doesn’t display this risk in a handy graphic like TurboTax.

You can also skip the alerts altogether if you’re confident you’ve kept everything aboveboard — a nice perk for seasoned filers. One drawback is that there’s no easy way to run your completed return by a professional tax preparer. Both H&R Block and TurboTax offer that option for an additional fee.

Once you pay for TaxAct’s prep services, the platform asks you how you’d like to receive your refund or make any tax payments you owe, then walks you through how to prepare for next year’s taxes. That includes introducing its Donation Assistant app, which can help you track and quantify noncash charitable donations throughout the year, and DocVault, a secure mobile-friendly storage service for important tax-related documents. Despite these services’ genuine usefulness, this part of the process drags on too long when the end is in sight.

Additional Features & Capabilities

All three platforms have some additional features and capabilities worth noting. These include the ability to pay tax prep fees with your tax refund (if you’re entitled to one), digital self-help resources and tax reference materials, and optional tax audit assistance or defense add-ons.

H&R Block’s Additional Features & Capabilities

H&R Block’s refund bonus and user-friendly online help database set it apart.

  • Refund Bonus. H&R Block is one of the few remaining online tax prep platforms to offer a refund bonus. Despite shrinking from 10% in the early 2010s to 3.5% in 2020, it’s better than nothing — $35 for every $1,000 refunded. You do have to take your refund on an Amazon gift card, which is a drag for people who prefer straight-up debit cards. You can still receive your federal refund on a reloadable prepaid debit card, just without any extra cash. See H&R Block’s refund bonus terms for more information.
  • Pay With Your Refund. You can pay your federal and state tax prep fees with your federal refund for an additional service charge of $39.95 (subject to change).
  • Audit Defense. H&R Block’s Worry-Free Audit Support package is a bargain at about $20 per year. It pairs you with an H&R Block EA to help you interpret and respond to IRS correspondence, prepare for an IRS audit, and deal with the audit itself (with the option for in-person representation if needed).
  • Online Help Resources. H&R Block has an extensive online knowledge base covering a slew of common and not-so-common tax questions as well as H&R Block’s tax prep software itself. The database is searchable and mobile-friendly.

TurboTax’s Additional Features & Capabilities

TurboTax doesn’t have a refund bonus, but its reasonable pay-with-your-refund fees and extensive online help resources shine.

  • Pay With Your Refund. You can pay your TurboTax prep fees with your federal refund for an additional $34.99 processing charge (subject to change and may vary by state). There’s no option to pay with your state refund.
  • Audit Defense. TurboTax offers free basic audit support for all clients. This service extends to interpreting IRS correspondence and preparing a response. For help preparing for an audit and representation during the audit process, you must add TurboTax’s Max package, which costs about $60 and includes audit representation and identity theft monitoring.
  • Online Help Resources. TurboTax has a searchable help database and an extensive knowledge base filled with user-generated questions and answers. It’s immensely useful for the tax-curious, if a bit overwhelming.

TaxAct’s Additional Features & Capabilities

TaxAct doesn’t offer a refund bonus but does have a cheap pay-with-your-refund option and a reasonably priced audit defense add-on.

  • Pay With Your Refund. You can pay your TaxAct tax prep fees with your state or federal refund for a processing fee of about $20 (subject to change).
  • Audit Defense. TaxAct only offers audit defense through its Protection Plus add-on, a third-party package that includes full IRS and state representation in the event of an audit. TaxAct does have a self-service audit assistance portal that helps clients interpret IRS and state tax letters but doesn’t make human employees available for this function.
  • Online Help Resources. TaxAct has an extensive online help database that’s fully searchable and organized by tax year. It’s a helpful resource for clients with questions about prior-year returns or tax topics.

The Verdict: Should You Choose H&R Block, TurboTax, or TaxAct?

None of these tax prep platforms is perfect. Each has its strengths and weaknesses, and you should choose the software you use based on your tax situation and personal preferences.

You Should Use H&R Block If…

H&R Block is relatively easy to use and has moderate pricing and robust customer support. The experience is straightforward, with none of the bugs that plague TurboTax and without the overwhelming detail inherent in TaxAct’s interview process.

However, H&R Block could be a bit more friendly — and a bit more cost-competitive for filers who need some extra help. In general, H&R Block is suitable for people who have some tax filing experience and comfort with the basic contours of the process, including choosing the appropriate filing status and selecting the correct forms.

H&R Block might be the right choice for you if:

  1. You Value Transparent Pricing. H&R Block has transparent pricing. You always know exactly how much you’ll pay to file — and how much you’ll add to the final cost of your return if you need to upgrade to a higher-priced plan.
  2. You Want to Save Time. H&R Block has consistently been the fastest of these tax prep programs, at least for me. It hasn’t won by a mile, but the difference is notable enough to mention. The contrast with TaxAct is particularly acute.
  3. You Want a Refund Bonus. H&R Block continues to offer a refund bonus to filers who consent to transfer their tax refunds to Amazon gift cards. It’s impossible to say how much longer that will continue, but for now, it’s an advantage over TurboTax and TaxAct.
  4. You Need In-Person Support During or After Filing. H&R Block has a network of more than 10,000 branches across the U.S., making it easy to switch from online to in-person preparation if needed. TurboTax and TaxAct can’t say the same. H&R Block also offers free in-person audit assistance for all online filers, a key perk for folks who worry the IRS will audit them.

See our full H&R Block review for a complete analysis.

You Should Use TurboTax If…

TurboTax is significantly more expensive than H&R Block or TaxAct. Though its free plan has grown more robust in the past couple of years, it’s still lacking.

That said, you do get what you pay for: an intuitive interview process, a user-focused (and mobile-friendly) layout, and lots of support. It’s nice to be able to import from so many sources too. So TurboTax is ideal for novice tax filers as well as more experienced filers for whom affordability isn’t a top concern.

TurboTax is the right choice for you if:

  1. You Value User-Friendliness. TurboTax is the most user-friendly of these programs. Its design and aesthetic are intuitive and easy on the eyes, unlike the more cluttered, less intuitive TaxAct. Its questions are both simply worded and logical, whereas H&R Block’s interview questions and explanations can be confusing. And in addition to offering a powerful app, TurboTax’s regular version is very mobile-friendly. That’s good news for taxpayers who prefer to prepare their returns on a tablet.
  2. You Like Impressive Importing Capabilities. TurboTax has long been a leader in prior-year tax return importing. If you can upload your return in PDF format, you can import it to TurboTax without manually reentering information.
  3. You Depend on Good Customer Service and Help Functions. TurboTax has some useful support features, including a customer service hotline with extensive hours and a comprehensive knowledge base. I’ve referred to TurboTax’s knowledge base more times than I can count and have almost always had my questions answered to my satisfaction.

See our full TurboTax review for a complete analysis.

You Should Use TaxAct If…

TaxAct has always been the cheapest option of the three, and its functionality has improved significantly over the years. Now, it’s nearly (but not quite) on par with TurboTax and H&R Block.

That said, my TaxAct return has consistently taken longer than my TurboTax and H&R Block returns. The support infrastructure is unimpressive, though the tax audit defense no longer costs an arm and a leg — just $10 when you upgrade to the premium plan.

But TaxAct is no longer the best game in town for ultra-frugal filers.

In general, TaxAct is ideal for somewhat more experienced filers who don’t mind exchanging time for money. Though its interface has gotten more user-friendly over the years, it’s still not the best software for first-timers.

TaxAct is a solid choice if:

  1. You’re Set on Paying Less. TaxAct is the cheapest of these services. I have a complex tax situation, but I was able to walk away from my most recent filing without spending more than $79.90 (though that would have been $114.90 had I waited until later in the season to file). That’s less than I spent for tax prep with H&R Block and TurboTax. So while TaxAct has grown more expensive in recent years, it’s still the cheapest option among them.
  2. You Want a Price-Lock Guarantee. TaxAct offers a price-lock guarantee to all customers at sign-up. Once you create your account, you’re locked into TaxAct’s pricing at that moment, even if you leave your return for months and TaxAct raises prices during the intervening period. Since tax prep companies frequently raise prices close to the filing deadline, that’s great news for frugal filers. One caveat: TaxAct’s first price-lock step-up happened extremely early in 2020 (for the 2019 tax year), in late January. Another step-up occurred in mid-March. It’s likely the 2020 tax year will play out similarly.
  3. You Crave Useful Apps to Help You Keep Track of Important Forms and Records. TaxAct has useful tools that help you keep track of any necessary documentation you need to complete your return, including receipts, bills, and tax forms. You can add photographic records to a secure, mobile-accessible storage area (DocVault) throughout the year, potentially eliminating the need to file tax-related papers for reference at tax time. You can use a separate app, Donation Assistant, to calculate the fair value of noncash charitable donations, an extremely helpful tool for filers who donate valuable items, such as vehicles and furniture. In the past, I’ve had to scour the Internet for fair-value charts from reputable sources without any clear guarantee they’re accurate.

See our full TaxAct review for a complete analysis.

All Are Great If…

Despite clear differences, all three of these tax prep software programs have some selling points in common. If you have a simple tax situation or don’t want to visit a tax preparer’s office in person but otherwise aren’t too picky about how you get your taxes done, you can’t go wrong here.

Any of these tax prep options are good if:

  1. You Have a Simple Tax Situation. Whatever else you can say about TaxAct, TurboTax, or H&R Block, all three are effective — and dirt cheap if not free — for simple tax situations that don’t require attached schedules.
  2. You Need to Import a Prior-Year Return From Another Tax Prep Program. Although this hasn’t always been the case, all three programs now have robust prior-year return importing tools that make it easy to switch from another provider.
  3. You Don’t Want to Visit a Tax Preparer’s Office or Pay CPA Prices for Tax Prep. With the exception of TurboTax Live Full-Service and H&R Block’s Tax Pro Go, you’ll pay far less to prep your taxes with any of these services than with a full-service human tax preparer. And you won’t have to visit a physical office location, either — unless you’re prepping with H&R Block and decide you’d like to do that before filing.

Final Word

TurboTax, TaxAct, and H&R Block are three of the most popular online tax software options, but they’re not the only ones out there. A bevy of other options exists, from relatively well-known providers like TaxSlayer and eSmart Tax to lesser-known options like Circle CPA and FreeTaxUSA.

And the federal government can help with free tax preparation options thanks to the Free File Alliance (a consortium of about a dozen tax prep companies that offer free filing services to filers who meet certain income and residency criteria) and Free Fillable Forms, which are available to filers regardless of income or residency.

With all these options, depending on your tax situation, you might find one that’s easier, faster, or simply less stressful to use.

And if you don’t want to face a potentially hefty processing charge to pay your tax prep fees with your tax refund but don’t want to pay out of pocket immediately, use a rewards credit card to pick up the tab. If you stay within your card’s spending limit and pay your balance in full by the statement due date, you avoid processing fees and earn a small return on your outlay. Check out our roundups of the best cash-back credit cards and best travel rewards credit cards for ideas.

Source: moneycrashers.com

What Is a SIMPLE IRA and How Is It Different?

Small companies tend not to offer 401(k) plans, given the administrative costs and headaches associated with them. So where does that leave employees and owners of small businesses who want retirement benefits?

There’s a type of employer retirement account specifically for small businesses called the Savings Incentive Match Plan for Employees – or, as less of a mouthful, its acronym: the SIMPLE IRA. Here’s what you need to know about it.


Like both IRAs and 401(k) accounts, SIMPLE IRA accounts provide a tax-deferred way to save and invest for retirement. Contributions are pre-tax, meaning they come off employees’ adjusted gross income. In other words, the income you contribute to a SIMPLE IRA is not subject to income taxes. And, as with IRAs and 401(k)s, the IRS imposes contribution limits each year on SIMPLE IRAs.

Yet despite the name, SIMPLE IRAs share more in common with a 401(k) than a traditional IRA.

How SIMPLE IRAs Differ From Other IRAs

First and foremost, traditional IRA accounts are created and maintained by the employee. The employee owns the account in every way. By contrast, SIMPLE IRA accounts are employer-sponsored accounts, typically created and maintained by the employer. Normally, the employer chooses a brokerage, such as Schwab or Vanguard, to hold employees’ SIMPLE IRA accounts. That isn’t always the case, though; the employer can opt to leave it up to employees to open and maintain their own SIMPLE IRA accounts.

The contribution limits are also higher for SIMPLE IRAs than for traditional and Roth IRAs. For the tax year 2021, the contribution limit for SIMPLE IRAs is $13,500 for taxpayers under 50, and taxpayers over 50 can make an extra catch-up contribution of $3,000, for a total limit of $16,500. Contrast that with $6,000 for traditional and Roth IRAs with a $1,000 catch-up option for taxpayers over 50.

Speaking of Roth IRAs, there is no Roth option for SIMPLE IRAs. That means you can’t opt to pay taxes on the contributions now and take the earnings tax-free in retirement.

Contributing to Both an IRA & a SIMPLE IRA

Modest-income taxpayers can contribute to both a traditional or Roth IRA and a SIMPLE IRA through a broker like TD Ameritrade. The same IRS contribution rules apply to both SIMPLE IRAs and 401(k)s when combined with traditional or Roth IRAs. Above a certain income, your ability to contribute to both an IRA and an employer-sponsored retirement plan phases out, and at a certain level, it disappears entirely; see IRS deduction limits here.

How SIMPLE IRAs Differ From 401(k)s

As an employer-sponsored plan, SIMPLE IRA accounts are a cheaper, more flexible alternative to 401(k)s for small businesses with fewer employees. Employers contribute money, but without the administrative headaches and fees that come with 401(k)s.

One similarity worth noting between SIMPLE IRAs and 401(k)s is the income cap on employer contributions. Employers can only contribute based on the first $280,000 of an employee’s income; after that, all obligation ends on the part of the employer.

However, employee contribution limits for SIMPLE IRAs, as outlined above, differ from those for 401(k)s. Employees can contribute more to 401(k) accounts – up to $19,500 per year for employees under 50 or $26,000 per year for employees over 50.

And the differences don’t end there.

1. Contribution Requirement

With a 401(k), employers are not obligated to contribute any money to their employees’ retirement savings. That’s not so with SIMPLE IRAs. For these accounts, employers are legally required to offer one of two contribution plans for employees:

  • A “nonelective” contribution equaling 2% of the employee’s salary, no strings attached.
  • A matching contribution of up to 3% of the employee’s salary. If the employee doesn’t contribute, the employer doesn’t contribute.

With the latter, the employer can opt to only match 1% of the employee’s contributions for two out of five consecutive years. That’s a particularly useful caveat for startups tight on cash in their early years.

The contribution requirement applies to all employees earning $5,000 or more in each of the last two years who have a “reasonable expectation” of earning over $5,000 this year. For 401(k) accounts, employers typically require one year’s service – the legal minimum – rather than two. Employers must include SIMPLE IRA coverage for part-time employees earning $5,000 or more, not just full-time employees.

Two other exceptions exist: Employers can exclude employees who receive benefits under a collective bargaining agreement and nonresident alien employees who received no U.S. source income.

2. Rollover Restrictions

Unlike with a 401(k), employees must have participated in a SIMPLE IRA account for at least two years in order to roll it over to a different type of retirement account, such as a traditional IRA or 401(k). If they’ve participated for less than two years when they change jobs, they can only roll over funds to another SIMPLE IRA account.

That makes it tricky for employees moving to a new company that doesn’t offer a SIMPLE IRA. After all, forgetting about past employers’ retirement accounts is a classic retirement planning mistake to avoid.

Fortunately, once two years have passed since the first contribution to a SIMPLE IRA, employees can then roll over the funds to a different type of retirement account – with the exception of a Roth IRA since there is no Roth option for SIMPLE IRA accounts.

If you’re trying to roll over funds after changing jobs, read up on the rollover process for SIMPLE IRA accounts.

3. Greater Investment Flexibility

One drawback of 401(k) plans is that employees are stuck with whatever investment options the plan administrator offers. But since employees open SIMPLE IRA accounts directly with a brokerage, they can choose their own investments, such as stocks, bonds, mutual funds, and ETFs. Most brokerages allow employees broad flexibility to choose investments. Employees can even invest in target-date funds in most cases, relieving them of worrying about shifting their asset allocation as they approach retirement.

4. Easier & Cheaper for Both Employees & Employers

Instead of hiring a 401(k) plan administrator, employers can simply open accounts with a brokerage. That means they can avoid both the initial setup fee and, in some cases, ongoing maintenance fees. For example, Charles Schwab charges no monthly or annual fees for SIMPLE IRA accounts. That’s a stark contrast to 401(k) fees, which can be high for both employers and employees.

There is one drawback to keep in mind: Unlike with a 401(k), employers must set up a separate account for each employee – if they take on the responsibility of opening the accounts, that is. Employers can opt to let employees open their own SIMPLE IRA accounts. In that case, all employers have to do is fund the accounts each payroll cycle.

5. Higher Penalties for Early Withdrawal

When you take an early withdrawal or distribution from your retirement account before age 59½, the IRS frowns upon it. It then slaps you with both a 10% penalty and the full income taxes due on the money you withdrew. That applies to IRAs, 401(k)s, 403(b)s, and SIMPLE IRAs.

But SIMPLE IRAs don’t stop there. If you take a distribution before you turn 59½ and within the first two years of participating in your SIMPLE IRA plan, the penalty increases from 10% to 25%.

There are a couple of exceptions to this penalty. You can avoid it if:

  • You incur non-reimbursed medical expenses and use the withdrawal to cover them.
  • You receive the SIMPLE IRA account from someone who died.

6. Company Size Restrictions

Unlike a 401(k), SIMPLE IRA accounts are only for small businesses. Companies must have under 100 employees to qualify as small enough to offer a SIMPLE IRA – specifically, 100 eligible employees who earn $5,000 or more each year. Employees earning under $5,000 per year don’t count toward the cap, nor do independent contractors. Anyone paid via 1099 also doesn’t count toward the employee limit.

Similarly, small-business owners aren’t obligated to pay SIMPLE IRA contribution benefits to independent contractors, unlike part-time employees.

7. No Loans Allowed

While many 401(k) administrators allow employees to borrow money from their 401(k) accounts, the same is not true of SIMPLE IRAs. They share this feature with traditional IRAs. So don’t count on pulling money from your SIMPLE IRA in a pinch without incurring distribution penalties.

Creating a SEP IRA vs. a SIMPLE IRA

For self-employed workers and small companies with only a few employees, a SEP IRA may be a better choice. That’s because the contribution limit for SEP IRAs is a whopping $58,000 per year. Even though self-employed people can contribute $13,500 on the employee side and up to another $13,500 on the employer profit-sharing side for SIMPLE IRAs, the contribution limit for SEP IRAs is still more than double that. Prior year contributions are also allowed in SEP IRAs, unlike with SIMPLE IRAs.

Before deciding between a SEP IRA and a SIMPLE IRA, speak with your tax preparer or another financial advisor.

5 Steps to Create a SIMPLE IRA

Interested in moving forward with a SIMPLE IRA retirement savings plan for your small business? Here are five quick steps to follow.

Step 1: Confirm Eligibility

As long as you have fewer than 100 employees earning $5,000 per year or more, your business qualifies. It’s as simple as that.

Step 2: Pick a Provider

Choose a brokerage firm that offers SIMPLE IRA accounts. Notable examples include TD Ameritrade, T. Rowe Price, Fidelity, Vanguard, Charles Schwab, Edward Jones, and most other big-name brokerage firms.

Make sure you clearly understand the fee structure before committing. For example, Vanguard charges $25 per account per year but waives the fee for high-value accounts. As mentioned above, Schwab doesn’t charge a maintenance fee on SIMPLE IRA accounts.

Step 3: Complete the IRS Forms

The IRS wouldn’t be the IRS if they didn’t make you fill out forms.

While your brokerage provider will have their own forms they require you to fill out, you also need to give a specific form to your employees. Which form you need depends on who’s opening the SIMPLE IRA accounts.

  • IRS Form 5305-SIMPLE. If you open SIMPLE IRA accounts with the brokerage yourself on your employees’ behalf, use this form.
  • IRS Form 5304-SIMPLE. If you have your employees open their own SIMPLE IRA accounts with the brokerage of their choice, use this form.

Employers do not need to file this form with the IRS but should keep copies in case they ever get a call from Uncle Sam.

Step 4: Enroll Your Employees

Typically, your plan provider helps you enroll your employees. They provide the signup and enrollment links, normally handling it all online.

One quirk worth noting, however, is that employers can only set up a SIMPLE IRA during the first three quarters of the year. After October 1st, companies have to wait until the following year if they want to create a SIMPLE IRA.

Step 5: Set Up Contribution Payments

Making payments simply involves setting up direct deposits from payroll for each participating employee. Remember, contributions must be taken out before payroll taxes are processed. Otherwise, it would defeat the entire purpose.

Final Word

For small businesses, offering employees a SIMPLE IRA is a low-cost, low-headache alternative to a 401(k) plan. With no setup fees and potentially no maintenance fees, the only significant costs to employers are the contributions themselves.

Still, SIMPLE IRAs come with their own rules, requirements, and restrictions, so make sure you understand them all before making any commitments to employees.

Source: moneycrashers.com

3 Tax Penalties That Can Ding Your Retirement Accounts

Surprised older woman in shock
Photo by Rob Bayer / Shutterstock.com

Building and living off a nest egg is tough — but you can make the situation even more difficult if you run afoul of some key laws governing retirement accounts.

Make one wrong move, and the long arm of Uncle Sam may soon tap you on the shoulder, demanding a few explanations.

Following are penalties to avoid at all costs when contributing to or withdrawing from retirement accounts.

Excess IRA contribution penalty

Building a large amount of retirement savings is an admirable goal. But contributing too much to an individual retirement account (IRA) can cost you, according to the IRS.

It’s possible to commit this offense by:

  • Contributing an amount of money that exceeds the applicable annual contribution limit for your IRA
  • Improperly rolling over money into an IRA

What happens if you get a little too eager to build a nest egg and make one of these mistakes? The IRS explains:

“Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

The IRS offers a remedy to fix your mistake before any penalties will be applied. The agency says you must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year.

For example, if you contributed too much to an IRA for 2020, you have until April 15, 2021, to withdraw the excess and thus avoid a penalty.

Early withdrawal penalty

Taking money out too soon from a retirement account is another potentially costly mistake.

If you pull money from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty, the IRS says.

The agency notes, though, that there are several circumstances in which you are allowed to take early IRA withdrawals without penalties. For example, if you lose a job, you are allowed to tap your IRA early to pay for health insurance premiums.

The same penalties apply to early withdrawals from retirement plans like 401(k)s, although again, there are exceptions to the rule that allow you to make early withdrawals without penalty.

It’s crucial to note that the exceptions that allow you to make early retirement plan withdrawals without penalty sometimes differ from the exceptions that allow you to make early IRA withdrawals without penalty.

Note: The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act of 2020 created a one-time exception to the early-withdrawal penalty for both retirement plans and IRAs due to the coronavirus pandemic: Generally, coronavirus-related distributions of up to a total of $100,000 that were made in 2020 are exempt.

Missed RMD penalty

Retirement plans are great because they generally allow you to defer paying taxes on your contributions and income gains for decades. Alas, eventually, Uncle Sam is going to demand his share of that cash.

Previously, taxpayers were obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½. But the Secure Act of 2019 bumped up that age to 72.

The consequences of failing to make these mandatory withdrawals still apply, though. Fail to take your RMDs starting the year you turn 72, and you face harsh penalties, says the IRS:

“If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.”

It’s important to note that the RMD rules do not apply to Roth IRAs. You can leave money in your Roth IRA indefinitely — although another provision of the Secure Act means your heirs have to be careful if they inherit your Roth IRA. For more, check out “Why Roth Retirement Accounts Are Now Even Better.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

What Is a 1031 Exchange – Defer Taxes on Like-Kind Real Estate

When you hold an asset such as an investment property for longer than one year and sell it for a profit, you pay capital gains taxes on that profit.

Maybe. Or maybe not, if you use tax loopholes like a 1031 exchange to postpone paying capital taxes indefinitely.

In fact, many real estate investors use 1031 exchanges to continually roll profits from each property into ever-larger income properties, never paying a cent in capital gains taxes until the day they decide to sell off their portfolio. A day that never comes for some lifelong investors.

As you explore ways to lower your taxes as a real estate investor, add 1031 exchanges to your tax-shrinking toolkit.

What Is a 1031 Exchange?

Not-so-creatively named after the section of U.S. tax code that details it, 1031 exchanges allow investors to “swap” one property for a similar property without paying capital gains taxes on the sold property. It initially applied when two parties swapped properties with one another, but nowadays 1031 exchanges are mostly used when investors sell off a property then use the proceeds to buy another from a different seller.

Investors defer or postpone paying capital gains taxes until they sell a property without buying a new replacement property.

Historically, citizens could perform a like-kind exchange on any type of personal property, such as franchise licenses, aircraft, and equipment. However that changed under the Tax Cuts and Jobs Act of 2017, which no longer allows 1031 exchanges for personal property. Only real estate qualifies under the new tax rules.

The Real Estate Strategy Behind 1031 Exchanges

When you first start investing in real estate, you probably don’t have much cash. You might buy a small rental property that generates $150 a month, and set about saving up more money.

After a few years, you’ve saved up more cash and built some equity in your rental property. You decide to upgrade to a three-unit property that generates $500 per month.

So you sell your single-family rental, and combine the proceeds with your savings to buy the new three-unit property. With a 1031 exchange, you defer paying capital gains taxes on your profits from selling the single-family rental.

A few years later, you repeat the process, selling the three-unit property and buying a six-unit property that cash flows $1,000 per month. Again, you defer paying capital gains taxes on the three-unit building you sold by using a 1031 exchange to roll the profits into the new purchase.

Then you do it again to buy a 15-unit apartment building that generates $2,500 per month. Then a 30-unit complex, then a 50-unit complex, and then you retire with $15,000 per month in net rental income.

In short, you keep snowballing the profits of your real estate to trade up to ever-larger buildings with greater cash flow. All without paying a dime in capital gains taxes as you upgrade from one property to the next.

Pro tip: Have you been thinking about purchase a rental property? Roofstock gives you the ability to purchase turnkey properties all over the United States. Learn more about Roofstock.

1031 Exchange Requirements

To qualify for a 1031 exchange, both you and your real estate deal have to meet certain criteria. That criteria starts with the simple rule that investments must be “like-kind,” meaning both properties involved must be investment properties.

Keep the following in mind before you commit to any 1031 exchange plans.

Available to Investors Only — Not Homeowners

Like-kind exchanges are not available to homeowners, only to real estate investors.

Before you cry foul about how real estate investors get unfair tax breaks, this rule exists for a good reason: homeowners don’t need it. They already benefit from the homeowner exclusion, which exempts them from paying capital gains taxes on the first $250,000 of profits ($500,000 for married couples) when selling their home.

In other words, most homeowners don’t pay capital gains taxes when they sell their home anyway.

Equal or Greater Value

To capitalize on the 1031 exchange tax break, the new property you buy must cost at least as much as the property you sold. Otherwise, investors could scale down their portfolios without paying taxes either.

If you buy a replacement property at a lower price, you get taxed on the difference in value. More on taxable “boot” shortly.

Applies to Income Properties, Not Flips

The 1031 exchange was designed for long-term investments, not rapid house flipping. Specifically, the IRS rules state that you can’t exchange properties “held primarily for resale.”

Like-kind exchanges help you postpone or avoid long-term capital gains taxes — which apply to assets held for at least a year — not regular income taxes on short-term profits. If you want to use a 1031 exchange, hold your property for at least a year before selling it.

Time Limits

There are two time limits you need to remember when doing a 1031 exchange.

After you sell your old property, you have 45 days to declare a new replacement property. Known as the 45-day rule, you have to submit the details about your upcoming property purchase to a qualified intermediary (middleman — more on that shortly). The IRS does recognize that sometimes deals fall through however, so they allow you to specify up to three potential properties.

This raises the second time-based rule: the 180-day rule. You have up to 180 days to settle on the new property after you sell your original property.

Note that the clock starts ticking on both time requirements from the day that you close on selling your first property. The 180-day rule starts then, not when you declare your new property or submit your property options, as the case may be.

Qualified Intermediary Must Hold Funds

When you do a 1031 exchange, you can’t touch the profits from the relinquished property. You need to pay a disinterested third party — a qualified intermediary — to hold the money for you in escrow between when you sell one property and buy another.

In fact, the qualified intermediary must actually buy the new property on your behalf, and then transfer the deed to you afterward. There are no licensing requirements to become a qualified intermediary, but you can’t use a parent, child, spouse, or sibling. You also can’t use someone already serving as your “agent,” such as your real estate agent, accountant, or attorney.

Some banks, such as Wells Fargo, offer to serve as a qualified intermediary on your behalf, but beware they charge a fee.

Boot, Debt, and Cash

If you have cash left over from the sale of your old property that doesn’t go toward buying the new property, the qualified intermediary returns it to you 180 days after you closed on selling the old property. Known as “boot” based on the old English word meaning “something in addition to” — today rarely used outside the expression “to boot” — the IRS taxes this surplus cash as capital gains.

Straightforward enough. But beware that boot covers not only the cash you receive, but the difference in debt levels.

Say you sell a property for $300,000, of which $200,000 goes toward paying off a mortgage, and the other $100,000 goes to the qualified intermediary to help fund the replacement property (ignoring closing costs for simplicity). The boot principle applies not just to the $100,000 in cash, but also to the $200,000 in debt.

Remember, to avoid capital gains taxes on the sold property, you need to buy a replacement property of equal or greater value. You can’t go out and buy a property for $100,000 just because that’s your cash payout after selling the old property. Or rather, you could, but you’d still owe Uncle Sam capital gains taxes.

To avoid any capital gains taxes, the new property must cost you at least what you sold the old property for — in this case, $300,000.

How Depreciation Fits In

Real estate investors can depreciate the cost of the building and some closing costs for the first 27.5 years they own a property. In other words, depreciation refers to a tax deduction that the taxpayer spreads over multiple years rather than taking all at once. They can also depreciate the cost of any capital improvements, although the period varies.

When investors sell a property, they have to effectively pay the IRS back for the depreciation deductions they took. Known as depreciation recapture, the IRS taxes you at your regular income tax rate for it.

Fortunately, you can dodge depreciation recapture just like capital gains taxes using a 1031 exchange. That is, if you swap two like-kind properties that both have buildings on them. If you buy a piece of raw land with no building on it, you still owe depreciation recapture because it’s the building that’s depreciated. Speak with a tax professional because these quirks can quickly cause confusion and tax errors.

1031 Exchanges and Personal Use Properties

The IRS makes it clear: 1031 exchanges exist for investment properties, not personal residences. Still, the real world is a messy place, and sometimes property owners change the use of their properties.

Converting a Second Home Into a Vacation Rental

Imagine a scenario where you own a vacation home, and aren’t particularly interested in paying capital gains taxes upon selling it. So you start renting it on Airbnb as a vacation rental.

The IRS allows you to use a 1031 exchange to defer capital gains taxes when you sell it, if you meet two conditions:

  1. For each of the last two years (measured as 12-month periods, not calendar years), the property was rented at fair market pricing for 14 or more days, and
  2. You limited your own personal use of the property to the greater of 14 days or 10% of the number of days that it was rented at fair market pricing within each 12-month period.

Note that you must use the property primarily as a rental for at least two years before you can do a 1031 exchange on it.

Converting a Rental Into Your Residence

The reverse also holds true if you want to convert the new property into your primary residence in order to take advantage of the $500,000 homeowner exclusion.

After you perform a 1031 exchange to swap one investment property for another, you can’t move into the new property for at least two years. Specifically, the property must be fair-market rented for at least 14 days in each of those two years, and you can’t use the property yourself for more than 14 days in each of those years or 10% of the days it was rented.

If you wait those two years and use the property as a rental, you can then move in, but you must live there yourself for at least two years before you can take advantage of the primary residence exclusion. So yes, you can theoretically roll your capital gains into an eventual residence and dodge the first $500,000 in taxes on them, but it involves a lengthy multi-step process to pull off.

Does a 1031 Exchange Make Sense for You?

Deferred exchanges work marvelously for a specific type of investor looking to roll their gains into ever-larger properties with greater cash flow. Even if you fit that description, however, they don’t always make sense.

First, it could be unnecessary. If you take capital losses elsewhere one year, they offset your capital gains. For example, say you sell some stocks for a $30,000 loss, and you sell your rental property for a $35,000 gain. The IRS would only hit you with capital gains taxes on the net gain of $5,000 — hardly a tax scenario to spill tears over.

For that matter, you can actively harvest losses to offset your capital gains.

You should also consider your own cash needs. Sure, it’d be nice to avoid capital gains taxes, but if you need the money for another use rather than buying a new investment property, that could take precedence.

For instance, say you sell a property for a $35,000 gain, but you incur $20,000 in medical expenses. Or you desperately need a new roof, or you need to pay off your degenerate brother-in-law’s debts to the mob so he doesn’t swim with the fishes. You get the idea: tax optimization is great, but only to the extent that it fits with your other financial needs.

Final Word

As real estate tax perks go, 1031 exchanges fall on the more complex end of the spectrum. Don’t approach them cavalierly, and speak with a financial professional before attempting your first one.

Still, they offer a fantastic opportunity to scale your investment portfolio without having to pay capital gains taxes along the way. If you hope to generate ever-growing income from real estate investments, consider swapping out your lesser cash-flowing properties for greater ones and deferring capital gains taxes for another day.

Source: moneycrashers.com

How to Retire in Turkey: Costs, Visas and More

How to Retire in Turkey: Costs, Visas and More – SmartAsset

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Turkey is filled to the brim with beautiful architecture, art and a melange of cultures that reaches back thousands of years. It’s home to artifacts from communities like the Hittites, Ancient Greeks, early Christians and Mongols, which fill this nation of some 82 million, with a rich sense of history. Lying as it does at a crossroads of Europe and Asia, visitors can see a unique blend of Western and Eastern influences. Its Mediterranean and Black Sea beaches are renowned for their beauty. Istanbul’s Grand Bazaar extends across 58 covered streets hosting some 1,200 shops. If you’re considering retiring in Turkey, here’s an overview of some basic information you’ll need. A financial advisor can offer valuable guidance as you consider retiring abroad.

Cost of Living and Housing

It’s much less expensive to live in Turkey than it is to live in the U.S. Without accounting for rent, Turkey’s cost of living is 53.56% lower than in the U.S. on average, according to Numbeo, a cost-of-living database.

U.S. rent prices are 556.13% higher when stacked against those in Turkey, on average. To rent a one-bedroom apartment in a city center will run you around $215.26 in Turkey, whereas a comparable setup in the U.S. would run about $1,340.16. If you wanted to pursue purchasing an apartment in Turkey, you would find that the price per square foot in a city center is averaged out to $83.07. In comparison, the same square footage in a similar city location in the U.S. would cost about $328.96.

To further illustrate the contrast, we can compare Istanbul, Turkey’s most populated city, to the U.S.’s New York City. To maintain the same standard of life, you would need around $8,203.10 in New York, which contrasts starkly to the approximately $1,960.45 necessary in Istanbul, assuming you rent in both.

So, if you’re looking for a country to retire in with both affordable renting prices and lower property costs to make the most out of your savings, Turkey may be a solid option.

Retire in Turkey – Visas and Residence Permit

Turkey doesn’t have a visa specifically for retirement, so you have to apply for a residence permit instead. This requirement applies to anyone who intends to remain in the country more than three months. You’ll first have to apply for a short-term residence permit, and you must do so within a month of your arrival in Turkey. There is an online application you fill out at the Turkish Ministry of Interior’s website. Once you finish, it will prompt you to make an appointment with the nearest DGMM office to continue the process and pay the fee your visa requires.

A short-term residence permit is issued on a two-year basis. After you’ve lived in Turkey uninterrupted for eight years under your short-term visa, you can apply for a long-term residence permit. These extend indefinitely.

No matter what residence permit you are applying for, you will likely need to show proof that you possess adequate assets. This can shift whether or not you have dependents, but a single person is generally required to have the equivalent to a month’s worth of Turkish minimum wage. As of early 2021, that would be around $400.

Retire in Turkey – Healthcare

The World Health Organization ranking of national healthcare systems puts Turkey’s at 70th out of 191. The central government body responsible for healthcare and related policies is the Ministry of Health (MoH). There is also a private sector and university-based care; however, the MoH is the main body responsible for providing healthcare. You can expect the quality of healthcare in Turkey to vary between regions. Although it’s cheaper than some of its European neighbors, access is limited in more rural areas. You’re more likely to have high-quality care in major urban locations like Istanbul – as well as the ability to communicate with your healthcare providers in English. This increase in quality is why most expats choose to go to private medical facilities over public ones.

All residents under 65 must have either public or private health insurance. Expats who have resided in Turkey for over a year under their residence permit can apply to have public health insurance through the state-run Sosyal Güvenlik Kurumu (SGK). Expats usually choose to supplement this with private insurance (or just choose private) to cover additional fees at private facilities.

As Turkey has grown as a country and political entity, it has experienced a great deal of reform around its healthcare system. It likely will continue to experience further changes in the future.

Retire in Turkey – Taxes

Like many countries, residents and non-residents are subject to different taxes in Turkey. Residents pay taxes on their worldwide income, whereas non-residents only have to pay taxes on Turkish-sourced income. The country uses a progressive tax scale, ranging from 15% to 35%, depending on your income bracket.

Turkey does possess a tax treaty with the U.S., which can provide some relief. You will only have to pay into one country’s Social Security program as a result, which in Turkey is a 14% flat tax for employees. Otherwise, there are also tax exemptions that may allow you to pay less on your U.S. income taxes. One example is the foreign earned income exclusion, which lets you exclude the first (approximately) $100,000 for foreign earned income if you can prove your Turkish residency.

Retire in Turkey – Safety

Each expat’s experience is unique. Some may travel through Turkey and find they encounter little to no issues on a security level. That’s not to say you shouldn’t be cautious. The U.S. Department of State’s travel advisory warns travelers either visiting or moving through Turkey to be wary of both terrorism and arbitrary detentions. The advisory heavily suggests that you avoid the Sirnak and Hakkari provinces, which are in the southeastern part of the country, as well as any area within six miles of the Syrian border to avoid terrorist activity. The State Department’s most recent report on human rights practices in Turkey bears a close reading, especially sections 1 and 6.

Although you should speak with locals and enjoy the culture, you should also be wary of your surroundings and keep an eye on political developments. It is also advised that you don’t engage with political topics online either since that can still be a red flag.

The Takeaway

Turkey is still in the process of significant political change, making settling down difficult for the average retiree. That, along with terrorism concerns, may encourage you to look at other countries instead. However, Turkey has a strong sense of identity with a warm populace who wants to share their cultural. That sense of belonging, along with the country’s beautiful features and its low living costs, may make the challenges worth it to you.

Tips on Retiring

  • Finding the right financial advisor who can help address your needs doesn’t have to be hard. SmartAsset’s free tool matches you up with local financial advisors in as little as five minutes. If you’re ready to be meet with advisors in your area that will help you achieve your financial goals, get started now.
  • Planning your retirement comes with its challenges, especially if you intend to move abroad. While Turkey may have low living costs, there still may be other financial burdens you have to address. To get an idea of what to expect, stop by our retirement calculator.

Photo credit: ©iStock.com/hadynyah, ©iStock.com/Nikada, ©iStock.com/TEZCAN

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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What’s the Difference Between a Traditional and Roth 401(k)?

If you work for a company that offers a retirement plan you might be confused about making traditional or Roth contributions. Laura reviews the critical differences to consider and how they affect your current taxes and future retirement.


Laura Adams, MBA
February 17, 2021

retirement plan, such as a 401(k) or 403(b), you probably have the option of making “traditional” or “Roth” contributions to your account. While having more investment options is a good thing, it might leave you feeling overwhelmed or confused about the benefits of each. 

Today, I’ll review critical points about the differences between a traditional and Roth retirement plan at work. You’ll learn who qualifies to participate, how much you can contribute, and how they affect your retirement and taxes.

What is a 401(k) retirement plan?

Only employers can offer a traditional or Roth 401(k) or 403(b) to eligible workers. You may have to reach a certain age, such as 21, or be employed for a period, such as one or six months, to qualify. 

Employers can customize certain features of their retirement plans; however, they must comply with the Employee Retirement Income Security Act of 1974 (ERISA). It’s a federal law that sets minimum standards for most workplace retirement plans, which protects participants. Your employer should provide a Summary Plan Description every year, which explains your retirement plan’s features and your rights.

There aren’t many ways to save for retirement that guarantee a 100% return before you even factor in investment returns!

When you enroll in a 401(k), you authorize your employer to automatically deduct elected contributions from your paycheck and send them to your retirement account. If your company offers matching funds, they contribute additional money for free. 

An example of a typical 401(k) match is 2% or 3% of your compensation. For instance, if your salary is $40,000 a year, 2% is $800. If you contribute that much, so will your employer, giving you a total contribution of $1,600 ($800 from your paycheck plus $800 from your company). And if you can only contribute $500, your employer contributes $500, for a total contribution of $1,000 for the year. There aren’t many ways to save for retirement that guarantee a 100% return before you even factor in investment returns! So always be sure to participate in a workplace plan and max out matching funds when offered.

Some retirement plans come with a vesting schedule. It’s a period you must remain employed to fully own your matching contributions or other employer-provided funds, such as profit sharing. However, your contributions are always 100% vested. You never forfeit your own money that you put in a retirement account (unless your chosen investments lose money).

The annual 401(k) and 403(b) contribution limits have been slowly increasing every few years, based on IRS rules. For 2021, you can contribute up to $19,500, or $26,000 if you’re over age 50. The high contribution limits, automatic payroll deductions, and free matching make workplace retirement plans popular and useful for growing wealth to spend in retirement.

Differences between traditional and Roth retirement accounts

Now that you understand retirement account basics let’s cover the differences between traditional and Roth accounts.

traditional retirement account permits pre-tax contributions, which gives you a tax benefit in the year you make them. You don’t pay any income tax on the money you invest. Instead, you pay income tax on your contributions and their investment earnings when you take withdrawals in retirement. 

Roth retirement account requires you to make after-tax contributions, which don’t give you an upfront tax benefit. However, the massive upside is that you take withdrawals of both contributions and earnings that are entirely tax-free in retirement (as long as you’ve owned the account for at least five years).

The downside of any retirement account is that you get penalized for tapping amounts that weren’t previously taxed before reaching the official retirement age of 59.5.

So, the main difference between traditional and Roth accounts is when you pay taxes. A traditional retirement account helps cut your current income tax bill. And a Roth allows you to avoid income tax when you tap the account in the future.

With a Roth, you’re allowed to withdraw your contributions at any time. That’s because you already paid tax on them. However, if you take out earnings before age 59.5, you must pay a 10% penalty, plus income tax, on the untaxed portion.

The downside of any retirement account is that you get penalized for tapping amounts that weren’t previously taxed before reaching the official retirement age of 59.5.

5 ways a workplace Roth is different from a Roth IRA

Many people mistakenly assume that a Roth is a Roth. It’s important to understand five main differences between a Roth 401(k) and a Roth IRA.

1.  Limits on annual income apply to a Roth IRA but not a Roth at work. When your income exceeds yearly limits, you can’t make new contributions to a Roth IRA. For 2021, single taxpayers with income exceeding $140,000 and joint filers with household income over $208,000 get locked out. However, with a Roth 401(k) or 403(b), you can contribute no matter how much you earn.   

2. Annual contribution limits for a Roth IRA are much lower than a workplace Roth. For 2021, you can contribute up to $6,000, or $7,000 if you’re over age 50, to all your IRAs. As I previously mentioned, you can contribute a total of up to $19,500, or $26,000 if you’re over 50, to your workplace retirement accounts.

3. Required minimum distributions (RMDs) don’t apply to a Roth IRA. You can keep money in the account indefinitely and pass it along to your heirs. But you must take RMDs from a Roth at work no later than age 72 (unless you’re still employed there). As long as you’ve owned the account for five years, your distributions will be tax-free.

4. Early withdrawals of Roth IRA contributions can be made at any time without triggering income taxes or a penalty. However, taking withdrawals from a Roth at work typically come with conditions, such as experiencing a financial hardship like unpaid medical bills or funeral expenses.

5. Loans are typically permitted for a Roth at work. You must pay your account back with interest on a five-year schedule. However, taking a loan from a Roth IRA isn’t allowed.

So, you can see that a Roth 401(k) and a Roth IRA have similar advantages and have differences in how participants can use them.

RELATED: What Is a Backdoor Roth IRA?

Should you choose a traditional or Roth retirement account?

A significant factor in choosing a traditional or a Roth retirement account is the income tax rates in the future and how much you’ll make during retirement. None of us can predict the future, so we have to guess what will be best.

If you prefer a “bird in the hand” to cut taxes sooner rather than later, then a traditional account may appeal to you. But if you don’t mind paying taxes in the current year, then a Roth has more long-term advantages.

If you prefer a “bird in the hand” to cut taxes sooner rather than later, then a traditional account may appeal to you. But if you don’t mind paying taxes in the current year, then a Roth has more long-term advantages. 

When you’re not sure which type to choose, or you want benefits of both types of accounts, you can split contributions between both a Roth and a traditional 401(k) or 403(b) in the same year. You can choose any proportion, such as 50/50 or 20/80, as long as your total doesn’t exceed the allowable annual limit set by the IRS.

If your income is too high for a Roth IRA, having a Roth at work is a terrific benefit. As I mentioned, there are no income limits on a workplace Roth. That means high earners can use one and enjoy tax-free withdrawals in the future.

Having both taxable and non-taxable income in retirement is a good idea. So, instead of deliberating between a traditional or a Roth at work, consider the benefits of using both. If you have employer matching, those contributions are always traditional or pre-tax. So, choosing a Roth 401(k) or 403(b) is an excellent way to diversify your future income and choices.