Tax Implications of Buying and Selling a Home

Buying a Home

Your tax basis is generally what you paid for the home, plus certain additional costs. Your basis matters because it reduces taxable gain when you eventually sell. These generally include the purchase price and associated fees that are associated with purchasing a home. You will get an American Land Title Association (ALTA) statement that lists the purchase price and all of these fees.

Real estate taxes, while on the ALTA statement, do not increase or decrease the basis of your home. More on this down below.

After purchase, your basis increases by the cost of capital improvements — improvements that add value, prolong the life of the home, or adapt it to new uses.

Examples include:

Room additions
Kitchen or bathroom remodels
New roof
HVAC replacement
Finished basement
New windows
Driveway replacement

Routine maintenance does not increase basis (painting, minor repairs, lawn care, etc.).

Keeping detailed records of improvements is critical. Many homeowners miss out on thousands of dollars in basis adjustments simply because they do not retain documentation.

Real Estate Taxes When Buying a Home

Illinois property taxes are paid in arrears. What does that mean? The taxes are paid in the year after you had the benefit of living in the home. This creates confusion at closing.

Deductibility of Property Taxes

For federal purposes, you may deduct property taxes only for the period you actually own the home, regardless of how the closing statement allocates them.

If the seller gives you a credit at closing for property taxes attributable to the period they owned the home:

The seller deducts their portion.
You deduct only the portion attributable to the time you own the property.

Even if you write the check at closing, you cannot deduct taxes that relate to the seller’s ownership period.

Property taxes are claimed as an itemized deduction on Schedule A and are subject to the $40,000 SALT limitation under current federal law.

Tax Implications of Selling a Home

Homeowner’s Exclusion of Gain

Under Internal Revenue Code Section 121, if you owned the home, occupied it as your primary residence at least 2 of the last 5 years, then you are able to exclude up to $250,000 of gain for those filing as Single or up to $500,000 of gain for those filing as Married Filing Jointly.

If your gain exceeds the exclusion, the excess is subject to capital gains tax.

Selling Expenses

Selling expenses reduce the amount realized on the sale, which directly lowers taxable gain. These will be found on the ALTA statement when you sell the home. Common expenses included are commissions, attorney fees, and other associated fees

Real Estate Taxes in the Year of Sale

Just like at purchase, property taxes must be allocated between buyer and seller based on ownership period. Again, deductions are subject to the SALT limitation.

Why Proper Planning Matters

Many homeowners:

Fail to track capital improvements
Misunderstand property tax allocations at closing
Overlook selling costs that reduce taxable gain
Miss opportunities to fully utilize the home sale exclusion

A properly calculated basis can significantly reduce or eliminate capital gains tax exposure.

If you are buying or selling a home in Illinois and would like guidance specific to your situation, proactive tax planning can prevent surprises and maximize your after-tax outcome.

What and When to Communicate with Your CPA

Let your CPA know when you purchase, improve, or sell a home when it’s happening. They can help give you an idea of any tax implications the transaction may have before the sale goes through and it may be too late.

Home Purchase and Improvements

You can let them know when you are planning on purchasing a home or after you make the purchase. There is usually a minimal tax effect. It can be a good idea to give your CPA a copy of the ALTA statement so it can be ready to go when the time comes to sell your home.

Sale of Home

Talk to your CPA when you are thinking of selling you current home. Any tax planning can be completed so you can be better prepared for what’s to come and if there is the possibility of any capital gains.

Dependent Care FSA vs. Dependent Care Credit: Who Would Win in a Fight?

If you pay for daycare, preschool, before/after care, or summer camp so you can work, you have two ways the tax code can help:

The Dependent Care FSA offered through your employer, and
The Dependent Care Tax Credit you claim on your tax return.

A lot of parents default to the Dependent Care Tax Credit because they go through the year paying for child care, then they are asked by their tax preparer or Turbo Tax if they paid for child care, and then they put in for the credit. But in most real-world situations, the Dependent Care FSA saves you significantly more money — and the savings happen all year long through your paycheck, not just at tax time.

Here’s why.

What Is a Dependent Care FSA?

A Dependent Care Flexible Spending Account lets you set aside up to $7,500 per household per year in 2025 (or $3,750 if married filing separately) from your paycheck before taxes to pay for qualifying childcare expenses.

You then use those pre-tax dollars you put into the FSA account to reimburse yourself for eligible childcare costs.

What Is the Dependent Care Tax Credit?

The Dependent Care Credit is claimed when you file your tax return. It allows you to claim a percentage of childcare expenses, up to:

$3,000 of expenses for one child
$6,000 of expenses for two or more children

The credit percentage ranges from 20% to 35%, but depending on your income, but if you’re adjusted gross income is above $43,000, then you’re going to be limited to the 20%. That means you’re only saving $1,200 per year by claiming the credit.

Why the FSA Usually Saves More

Here’s the key difference:

The tax credit reduces your tax bill by a percentage of expenses.
The FSA removes the income from taxation entirely.

That’s a big deal.

Example

Let’s say a married couple earns $150,000 per year and has two kids in daycare.

At this income level, they’re likely in the 24% federal tax bracket.

If they use the full $7,500 Dependent Care FSA in 2025:

They avoid paying roughly:

24% federal income tax
7.65% Social Security & Medicare
4.95% Illinois state income tax

That’s about 36.6% in total tax savings.

34.6% of $7,500 = $2,595 in real savings

Now compare that to the Dependent Care Tax Credit:

Even though they can claim up to $6,000 of expenses for two children, at their income level the credit is 20%.

20% of $6,000 = $1,200

The FSA saves them well over double what the tax credit provides.

Another Big Advantage: Timing

With the FSA, you save taxes every paycheck. Your take-home pay is higher throughout the year.

With the credit, you wait until you file your tax return to see the benefit.

Can You Use Both?

Yes and no. The amount used for the FSA reduces the amount used towards the credit. If you use the full $7,500 for the FSA, then you are already above the $6,000 for the credit, so you cannot claim the credit. But if you use only $5,000 for the FSA, then you still have $1,000 that can be used for the credit.

Why Many Parents Miss This

A lot of employees skip the Dependent Care FSA during open enrollment because:

They don’t know it exists
They don’t understand how it works
They assume the tax credit is “good enough”
HR doesn’t explain this benefit
They’re worried about the “use it or lose it” rule

But for parents already spending well over $7,500 per year on childcare, the FSA is often one of the best tax moves available through an employer benefit plan.

Bottom Line

If you’re paying for childcare so you can work and your employer offers a Dependent Care FSA, it’s usually more valuable than relying on the Dependent Care Tax Credit alone.

The FSA lets you pay for childcare with pre-tax dollars, often saving 30% or more on expenses you’re already paying anyway.

If you’re not sure how to coordinate the FSA and the tax credit for maximum benefit, this is one of those areas where a little planning can lead to meaningful savings.

No Tax on (Qualified) Overtime

2025 Tax Law Update: Is Overtime Really Tax-Free Under the One Big Beautiful Bill?

If you’ve searched “no tax on overtime 2025” or wondered whether overtime pay is now tax-free, you’re not alone. A new provision in the One Big Beautiful Bill Act created an overtime tax deduction that can reduce how much federal income tax you pay on overtime earnings. Here’s what the new overtime tax law actually means for workers.

A Quick Background

Signed into law on July 4, 2025, the One Big Beautiful Bill Act brought several updates to the tax code. Some provisions extend prior tax cuts, while others introduce new deductions for things like tips, senior income, and overtime pay.

While “no tax on overtime” sounds simple, what the law actually created is a new federal income tax deduction for certain overtime earnings — not a full exemption from tax.

How the New Overtime Tax Deduction Works

Instead of taxing all of your overtime pay as regular income, the law allows eligible taxpayers to deduct the “premium” portion of overtime pay — the extra half you earn under time-and-a-half rules — from federal taxable income.

Here’s how it works in simple terms:

Only the extra part counts
If your regular rate is $20/hour and your overtime rate is $30/hour, only the extra $10 per hour qualifies for the deduction. This is what the IRS refers to as the overtime premium, and this is the portion that qualifies for the new overtime tax deduction under the 2025 tax law.
Hours worked
Not all overtime will qualify to be considered tax free. You must work hours in excess of the Federal FLSA calendar. If you take a sick day or vacation day, your weekend overtime may not be qualified.
Deduction caps
You can deduct up to $12,500 (single filers) or $25,000 (married filing jointly) of qualified overtime in a tax year.
Income limits apply
The benefit phases out once your modified adjusted gross income exceeds $150,000 (single) or $300,000 (married filing jointly).
Temporary Deduction
This provision applies for tax years 2025 through 2028.

Is Overtime Completely Tax-Free? (Common Misunderstandings)

There are a few common misunderstandings worth clearing up:

You still pay other taxes
This deduction only applies to federal income tax. Social Security, Medicare, and any state or local taxes still apply to your overtime wages.
It’s a deduction, not a credit
A deduction lowers your taxable income. The actual savings depend on your tax bracket — it’s not a dollar-for-dollar reduction.
Your paycheck won’t automatically change
Employers will continue withholding taxes as usual. The benefit shows up when you file your tax return unless you proactively adjust your withholding. Employers make adjust your withholdings if you have qualified overtime in a pay period.

Because this rule is new for 2025, many employees and employers are confused about how overtime is taxed. The key thing to remember is that overtime pay is still subject to payroll taxes and state taxes — this is specifically a federal income tax deduction for the overtime premium portion of wages.

Bottom Line: How This Overtime Tax Rule Can Save You Money

The “no tax on overtime” provision is really a targeted overtime tax deduction that can lower your federal taxable income if you regularly earn overtime pay and fall within the income limits. For many workers, this could mean a noticeable tax savings when filing a 2025 tax return.

If you earn overtime, this is one of the most important tax law changes to be aware of this year.