Will I Owe Taxes on the Sale of My House?
October 5, 2006
Q: How do capital gains taxes work? I want to sell my home, but have only been there for 18 months. How much will I have to pay in capital gains tax? Is two years the shortest time I can stay in my house without having to pay capital gains tax?
A: Generally, the sale of your principal residence is not reported on your tax return unless you have a gain on the sale and you do not qualify to exclude the gain.
Exclusion: You can exclude from your income up to $250,000 ($500,000 for taxpayers filing Married Filing Joint) of the gain from the sale of your home if you meet the following conditions:
- If you have owned and used the home as your principal residence for at least two out of the last five years prior to sale, and
- You have not sold another home in the last two years.
Click here to read more…
Stricter Rules for Gifting
September 21, 2006
If you give money or non-cash donations to charity, you’ll be interested in some of the provisions of the new Pension Protection Act.
There are two changes affecting charity: the first is that you are now required to maintain written documents for any cash gifts in order to claim a deduction. Most churches will send you a statement at the end of the year, if you use the envelopes provided, or write a check. But gone are the days of dropping cash into the collection plate or the Salvation Army bucket.
Second, if your donated non-cash items aren’t in "good" condition, you won’t get a deduction. This is to keep people from taking large deductions for items that really belong in the trash. Of course, no-one has defined what "good" condition is yet, so use your common sense when donating items.
Resources:
New pension law closes loopholes in charity deductions – LA Times
The Pension Protection Act of 2006 offers retirement tax breaks, tough rules on charity – About.com
Deducting Roth IRA Losses
September 13, 2006
Recently, someone asked me if they could deduct losses they incurred in their Roth IRA. Here’s my response…
You can deduct losses in a Roth IRA, but the rules and treatment are different than you might expect. First, in order to claim a loss in any IRA investment, you must withdraw the entire balance from all of your IRAs of the same type. So, if you have a loss in your Roth IRA, you must liquidate all of your Roth IRAs in order to deduct the loss on your tax return.
Second, your basis in your Roth IRA includes your contributions plus conversions (from a traditional IRA) less any withdrawals you have previously taken from your Roth. Form 8606, Non-Deductible IRAs, is used to determine the basis in your account and to
report withdrawals. Note that reinvested dividends and capital gains are not part of your basis in a Roth IRA.
Finally, losses in a Roth IRA are deducted on Schedule A – Itemized Deductions, rather than on Schedule D – Capital Gains and Losses, which is where most people would expect to report the loss. Roth IRA losses are a miscellaneous deduction, subject to a 2% floor. This means that the deduction is only available if you itemize your deductions, and only the amount greater than 2% of your adjusted gross income (AGI) is deductible. In addition, miscellaneous deductions are not allowed for purposes of the alternative minimum tax (AMT), so you could lose the benefit of the deduction if you are subject to AMT taxes.
Whether it makes sense to liquidate your Roth IRA to claim the loss will depend on several factors, such as whether you itemize or not, how large the loss is compared to 2% of your AGI, whether you’re subject to AMT tax, and other factors. You should also consider how much will you lose in potential earnings if you liquidate your Roth IRA. You may want to consult with your tax advisor and financial planner to determine the best decision for you at this time.
401K Options
August 14, 2006
Whether you’re switching jobs or retiring completely, chances are you have a 401K or other company sponsored retirement plan that you’ll need to make a decision about.
There are several options on how to handle your 401(k) money when you leave a job:
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Take the Money and run
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Leave the money in the 401(k) plan
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Transfer the funds directly to your new employer’s retirement plan
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Transfer the funds directly to an IRA account (direct rollover)
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Have the check made out to you, and then deposit the funds into an IRA account (indirect rollover)
To read the full article, click here.
Backdoor into Roth
July 24, 2006
You may have heard that the new tax law eliminates the $100,000 income limit for Roth conversions beginning in 2010. If you haven’t been able to contribute to a Roth IRA because your income is too high, you now have a back door into the Roth IRA.
You should start planning now to take full advantage of the new tax law. How? Contribute the maximum to a non-deductible IRA now (and every year up to 2010). The limit in 2006 is $4,000 ($5,000 if you are 50 or older).
In 2010, when the income limit for Roth conversions goes away, you can convert your traditional IRAs to Roth IRAs. Because you made non-deductible contributions, only your earnings will be subject to income tax.
Even better, taxes owed on conversions made in 2010 don’t have to be paid until 2011 and 2012, which allows you to spread the tax burden over several years.
What are the benefits of this strategy? Tax free income in retirement, no Required Minimum Distributions at age 70 1/2, and tax free income for your heirs.
Need help determining if this is the right strategy for you? Check out or Tax Review.
Don’t Let Taxes Ruin Your Retirement
June 4, 2006
You know that you should diversify your investments to reduce your investment risk, but did you know you should also diversify your investments for tax purposes?
401K and IRA accounts are taxed at your ordinary income tax rate, so if you’re in the 25% tax bracket when you retire, you’ll pay 25% (plus state income taxes) on every dollar you withdraw from your retirement accounts.
This can really put a dent in your budget, especially in your later retirement years. To avoid paying taxes on every dollar of income during retirement, why not start investing in Roth IRAs and taxable accounts now, instead of socking all of your money away in tax-deferred retirement accounts?
That way, when you are retired, you can decide which account to pull money out of first to keep your income taxes at a minimum and to make the most out of every retirement dollar.
Resources for furthur discussion on diversifying for tax purposes:
Ask the Expert ~ Taxing Withdrawals
Cut Your Taxes In Retirement – CNNMoney.com
Tax Tip for Teachers
May 28, 2006
The 2003 Tax Act included a $250 deduction for teachers who spend their own money for classroom supplies. Most teachers spend far more than $250, so this tax deduction was a very minor victory for teachers.
However, there is a way for teachers to get a full tax deduction for the supplies they purchase for the classroom. IRS Code Sec. 170(c)(1) states that governmental bodies, including public schools, are considered qualified charitable organizations, which means that donations of cash or supplies to public schools are tax deductible as a charitable donation.
Therefore, teacher’s should deduct the first $250 of supplies on line 23, Educator Expenses (2005 Form 1040), and classroom supplies over the $250 Educator Expenses should be deducted as a non-cash charitable donation on Schedule A, Itemized Deductions. You’ll need to document your purchases and get written acknowledgment from the school for supplies purchased/donated over $250, but the extra tax savings you’ll receive are worth the effort.
New Tax Law Creates Planning Opportunities
May 22, 2006
Along with some temporary AMT relief, the tax law just passed last week extends the long-term capital gain tax rates to 2010.
Folks in the 10 and 15% tax bracket will benefit the most (assuming those same folks have investments held outside of retirement accounts). For 2006-2007, long term capital gain rates will stay at 5%. In 2008, the long-term capital gain rate drops to 0% and will remain there through 2010.
Taxpayers in higher tax brackets will pay 15% on long-term capital gains from now through the end of 2010. After 2010, the long term capital gain rates are expected to go back to the previous levels (10% and 20%).
This creates some planning opportunities for the next few years. If you’ve been holding onto stocks that have a low cost basis, depending on which tax bracket you’re in, you’ve got several years to reduce those positions and enjoy a low tax bill in the process.
AMT Relief on the Way?
May 11, 2006
The House passed a tax bill yesterday (see article here) which will extend the reduced capital gain and dividend rates, and provide some much needed AMT relief.
If you’re not familiar with AMT, it is the Alternative Minimum Tax, created to keep higher income taxpayers from paying too little income tax. Unfortunately, the AMT has never been adjusted, so many middle income taxpayers have fallen victim to the AMT in recent years.
The new tax bill will increase the AMT exemption for 2006 and will allow taxpayers to use nonrefundable personal credits (such as education credits and the childcare expense credit) to offset AMT liability.
Here are some good articles/websites to learn more about the AMT:
Fairmark.com – Guide to the Alternative Minimum Tax
SmartMoney – The Alternative Minimum Tax
IRS.gov – Tax Topic 2004-51