Donating To Katrina Victims
Partners Spread the Word on Leave-Donation Program – IRS is promoting this innovative program.
TaxProf Paul Caron has a link to this website set up by some liberal professors under the premise that anyone who has been allowed to keep more of their own money by the Bush tax rate cuts should feel terribly guilty about that and send those savings to some left-leaning charities.
While I have never had any problem with the concept of supporting worthwhile charities, the left’s never-ending mantra that every dollar we don’t allow the imperial government to confiscate from us is equivalent to food taken out of the mouth of a starving baby has always rubbed me the wrong way. The left’s current propaganda campaign to connect the tax cuts with the destruction of the hurricanes is nothing less than despicable, but S.O.P. for the appropriately named DemonRats.
Katrina Emergency Tax Relief Act of 2005 – Good summary from QuickFinders of the new law that was just signed by Bush.
Withholding Required on Certain U.S. Real Property Transactions Involving Foreign Persons, IRS Warns – This isn’t a new requirement; but it appears that some people are forgetting to do their duty in reporting these sales to IRS and sending them the 10 percent of the sales price that is intended to motivate foreign sellers to file USA tax returns. Using options and contracts to control real estate is not a legal way around this requirement.
Hitting a Profit 'Sweet Spot' From Property Flipping – More developers are including restrictions in their sales contracts, requiring buyers to either hold onto the property for a minimum amount of time and/or share their resale profits.
The Feds bust some Florida tax scammers who used a variety of idiotic strategies to help their clients cheat the government. – Is this another slam at the intelligence of Floridians? Only blooming idiots would fall for these screwy ideas.
Three Signs Your Blog May Attract Buyers – Some obviously big pros and cons to selling out to bigger companies.
FYI: This blog will never be for sale because no amount of censorship or control can be tolerated. Of course, as I’ve long said, I am curious how strong my principles of independence would be in the face of very big money offers. Namely, is there an amount of money high enough to break my resistance? I have turned down dozens of potentially very lucrative kickback offers over the decades to endorse questionable investments. Would I be willing to decline a million dollar cash offer to sell out this blog?
IRS Admits Losing Checks
People often accuse me of being overly critical of IRS when I say they are slow to release information. How else would you describe the fact that they have just now admitted to losing 30,000 estimated tax payments into San Francisco Bay, after TaxProf Paul Caron reported this event a week ago, and I added my comments later that same day? It’s just one more example that IRS isn’t the quickest source of info.
IRS’s official advice for those folks whose checks may have been lost:
After Sept. 30, a taxpayer whose check has not cleared his or her bank should contact the IRS on its toll-free taxpayer assistance line at 1-800-829-1040. Taxpayers who contact the IRS will receive instructions regarding how and where to send a replacement check. The IRS will waive interest and penalties for affected taxpayers.
As I’ve said on several occasions, the ability to properly prepare for one’s retirement has always been hampered by the one unknowable variable; how many years of retirement life you will need to pay for. Obviously, if you will be living to over 100, you will need a lot more resources than if you will be passing away at 66.
While nobody can guarantee the accuracy of actuarial tables or other predictors of life expectancy, I was impressed with the breadth of topics covered in this questionnaire to calculate life expectancy to include many of the factors associated with expected lifespan.
While it covers such critical factors as family health history and lifestyle, I did think it strange that it doesn’t include some of the high-risk questions I have seen in life insurance applications, such as whether you participate in such dangerous activities as sky-diving and SCUBA diving.
While I’m not sure I would base all of my retirement planning on the results of this calculator, it is interesting for entertainment purposes. FWIW, it gives me another three decades, to 80.31 years.
Definition of Gifts
From a financial planner:
Subject: GiftsDon't mean to be pickey but gifts do reduce the taxble income as in gifts to charity. Hope all is well.
I think there is some confusion over terminology.
While some lay-people may use the term "charitable gifts," we tax pros don't. There are charitable "donations" and "contributions," which do reduce taxable income via Schedule A for those people who itemize their deductions.
There are also charitable "bequests" that reduce the taxable estate on Form 706.
However, we reserve the terms "gifts" and "gifting" to only designate transfers of assets between individuals. These are part of the estate tax system and do not have any effect on the taxable income of the donor or recipient. I have more info on this on my main website.
I hope this clears up your confusion here.
Thanks for writing.
2006 Gift Tax Limit
Subject: Gift Tax Limit 2006Kerry,
I need to show an IRS certified verification that the 2006 gift tax limit will be $12,000. Is there an IRS resource that shows this information. So far, I have been unable to locate this information over the web.
Thank you for your time!
Historically, IRS is always at least a few months behind the academic community when it comes to releasing the inflation adjusted changes in tax related amounts. This means it probably won't be until near the end of the year until IRS officially confirms the calculations that CCH released last week.
While he doesn’t include gift taxes, Professor James Young shows the actual inflation factors used in these calculations.
That will have to do the job for you for now. Anybody demanding official IRS confirmation of those calculations at this early date is being completely unrealistic.
C or S?
Subject: C versus S CorpWhat a great article. I am in the decision making stages of determining which is better for the purchase of an existing business (car wash in FL). The problem I am having is the attorney suggest S and the CPA is suggesting C. I am stuck in the middle. Any advise?Second option??
I obviously don't know anything about your personal situation and thus have no idea which entity is better for you.
Assuming both of these individuals are competent, it seems that you should heed the advice of the one who most thoroughly understands your current and future tax and financial situation, which in most cases would be the CPA; but you may have different working relationships with your CPA and attorney.
Choosing between a C or S corp really is only a taxation matter. Legal liability issues, another very big reason to use a corporate structure, and what most non-tax attorneys are mainly concerned with, are identical for both types of corp.
Katrina Tax Relief Act in Plain English – Quick summary from Gail Buckner.
Atlanta Man Allegedly Helps Customers Falsely Claim They Are Exempt from Federal Taxes as Members of Purported Native American Tribe – and now the Feds are trying to shut him down.
Better Blog Organization
I received the following from a Texas CPA:
Subject: suggestioni know how tough things can get before Oct 15th but, since your blog has been helpful to me at times, especially re: 1031, i would like to suggest that when you get a chance, that all the 1031 related questions [ current, and from the past ] be grouped together on another link maybe.anyway, thank you for your hard work.best wishes,
That is a feature, identifying each post with a category name, that I have long wanted to have; both for my own benefit, as well as for that of readers. I have really liked having that capability with the SocialSecurityChoice.com blog, which uses the Movable Type blogging software.
Unfortunately, my Blogger software doesn't have that capability. After being one of the first blogging programs on the market, Blogger has been left behind in terms of formatting features by other programs. Blogger has been slowly adding similar features, and I know that the ability to have categories is one of the most often requested upgrades by me and other users; so I am hoping it will be available soon. I realize I will then have to go though each post and assign a category name; but I think the end result will be worth it.
I have considered switching software, but am worried about the ability to safely transition the six years of content that is already formatted with Blogger. Horror stories from other bloggers who have tried to switch make me hesitant.
In the meantime, you will have to make do with the standard search tool. I have actually had much better success with the Google tool-bar's "Search Current Site" than with the Feedster search tool at the top of my blog when I need to look up past postings.
I appreciate your taking the time to write and suggest this improvement. Please feel free to pass along any additional comments you feel may be helpful.
Exchanges and Vacation Homes
Let me say I saw your web site and blog for the first time just now and I found it very interesting and well done.
Can I ask you a question? Is there a fee to answer questions?
We bought 3 lots side by side in a subdivision in ID all in one transaction for $60,000 total a year ago. We have an offer from an individual who wishes to buy two of the lots this week for $80,000. We are also buying another 10 acre lot for $80,000 in the same general area that we plan to use to build a Summer home.
I want to do a 1031 exchange, trading the two lots for the one lot, so we don't have to pay tax on the gain. The same buyer is buying the two lots so we can do one transaction with him. Both closings for the two lot sale and the 10 acre lot purchase will be within the next month.
One other twist that I am not sure about is this. The buyer of the two lots is a builder who is building a pre-sold custom home on the first of the two lots. He wants to pay 40,000 now and then the other 40,000 when he has closing on the finished property on the first lot. Can I do the 80,000 sale within next 30 days with 40,000 down and the rest to be financed by us and then the remaining 40,000 to be paid down the road 6 months or whenever house on first lot is completed?
What you are proposing may be possible; but there are some particular issues that you need to keep in mind.
First is the definition and descriptions of the properties to be involved. Personal use property is not eligible for Section 1031 treatment. Rental and investment properties are. The property you are disposing of needs to be considered investment property to qualify for Section 1031. Likewise, the new property needs to acquired for investment, business or rental usage to be considered like kind to the investment property you are disposing. I would avoid using the term "Summer Home" and consider it as an investment or rental property.
Next is the issue of the cash from the carryback note you will be receiving from your buyer. This must be turned into cash and reinvested into the new property within 180 days after you transfer title from your old property. As with any 1031 exchange, you need to use the services of a neutral third party facilitator, as well as be sure not to touch or have constructive receipt of any of the proceeds.
If the note won't be paid off until after the 180 days, a common technique that is used is for you to sell that note and convert it into cash before your 180 deadline. We have seen a number of 1031 exchanges where that strategy was used, often with a family member as the buyer of the note.
These are just a few ideas that came to me. As always, you should go into more detail with your own personal tax advisor.
A GOP Tax Increase? Some Senators are eyeing rates on capital gains and dividends. – Another attack of the RINOs.
Tax Free Fringe Benefits
Subject: looking for more tax free employee benefits
My husband has a small business formed as an S corp. He is 100% shareholder. There are two employees, himself and myself. There is a retirement plan and health insurance plan. On my husband’s W2 we must report as taxable income the health insurance premiums. Then we take a deduction on the 1040 for self-employed health insurance premiums.
We’d like to have more employee benefits, i.e.; a cafeteria plan to handle out of pocket medical and child care expenses.
A local CPA recommended that we do the following:
Keep the S corporation and set up another corporation as a C. The C would manage payroll, payroll taxes, employee benefits (cafeteria plan) retirement and health insurance plans. The S would pay a “Management Fee” to the C. Management Revenue in the C would fund payroll, taxes, benefits, retirement and health insurance. C corporation net income would as close to $0.00 as possible each tax year.
How does this sound to you? Is this a strategy that the IRS will approve of?
Please explain what expenses a C corporation can deduct that an S cannot?
It sounds as if you have a good creative thinking tax advisor there. That is a strategy I have set up countless times over the years.
As I described in my article comparing S and C corps, there are much more generous tax free benefits available to shareholders in C corps than with S.
Rather than list out every type of fringe benefit, I've attached a copy of the table comparing the treatment of fringe benefits in different entities from the Small Business QuickFinder.
I hope this helps you understand the differences.
The following article covering this same issue was included as part of the most recent Intuit newsletter for accounting pros:
Taking Cash Out: More Tax-Favored Fringe Benefits
House, Senate Reach Agreement on Hurricane Tax Relief Package – Many of the provisions will be retroactive, making staying up to date on the appropriate rules even harder than normal this year.
Feds Bust Scamming Nevada Tax Preparer – It’s a bit difficult to generate any sympathy for the several hundred clients of this idiot who fell for his ridiculous argument that wages are not real income.
Real-Estate Flip Deals Have a Catch – Anyone investing in real estate without consulting with a qualified tax advisor is asking for big time trouble; especially when it comes to the proper use of 1031 exchanges and avoiding being labeled as a “dealer” who is ineligible for any special tax breaks.
Chaos, Contempt Mark Start Of Latest Schiff Trial – The Feds expect it to take six weeks to hold the latest trial of this moron.
IRS Loses Checks
TaxProf blogger Paul Caron also has secret news sources inside the IRS. He received this notice from an IRS employee that a courier transporting 30,000 payments for individual income tax estimates (1040–ES) across the San Mateo Bridge had an accident last Sunday that sent them into the San Francisco Bay.
Since this happened on September 11, these were most likely for third quarter 2005 payments, which were due on 9/15. Assuming there was no recovery effort, it will be impossible to know whose payments those were. Anyone who did send a payment to the San Francisco IRS address should check their bank account closely to see if it clears in the next month or so. If it hasn’t cleared by then, you should call the IRS (1–800–829–1040) to verify that the payment is not in process. You should then send in a replacement check so that you are not underpaid when you file your 2005 1040. Because this is the IRS’s fault, I would date the replacement check the same as the original check and use that date when entering info for Form 2210 (Underpayment of Estimated Tax) so that you don’t incur a penalty for this.
I did several searches on Google News and several Bay Area newspaper sites to see if there was any mention of this accident. Nothing.
2006 Federal Tax Brackets
CCH has computed the inflation adjusted individual income tax brackets for 2006.
Besides the new income tax brackets and standard deductions, there are some other upward adjustments of note.
Maximum Section 179 deduction rises to $108,000 for 2006
The annual amount of gifts that are exempt from gift tax increases from the current $11,000 per year to $12,000 per year as of 1/1/06.
Paying for Katrina repairs
Bush Rules Out Tax Hike to Fund Recovery – Why assess new taxes, when it would make so much more sense to simply spend less on stupid pork barrel projects. Of course, DC is well known as the land where common sense doesn’t exist.
QuickBooks 2006 Info
An annual Fall ritual is the release of a new version of QuickBooks. I haven’t received my copies of the final 2006 programs yet; but should be getting them in the next few weeks. I am curious to see if they acted on my criticism and will be including the Macintosh version of the program in the package we Certified Pro Advisors are given. For those users and accounting pros who are curious as to the new features of the 2006 programs, Intuit has set up this page.
News From NATP:
Investigation Clears Treasury in Flap Over Analysis of sKerry Tax Plan – And people say FEMA takes a long time to get things done. This is in response to an analysis done in March 2004.
GOP Promising Fall Tax Package Despite Waning Public Support – Let’s hope they have enough stamina to stand up to the growing onslaught of leftist propaganda against any reduction in the tax burden.
Guidelines for Filing Insurance Claims – Some good tips from the Wall Street Journal.
Tax-Averse Firms Cross a State Line – Nothing new that people will move to lower tax states. This is obviously exacerbated when the discrepancies in tax burden are wider between different states.
Nonresidents' Gain From Sale of Painting Was New York-Source Income – This also isn’t a new concept. Sales of items in another state are taxed by that state, regardless of where your official tax home may be. This is usually related to real estate sales, but other big ticket items have the same problem. The people in this case should have taken the painting to their South Carolina home before selling it. Hopefully, others will learn from their mistake.
The Feds send another tax return scammer to the clink – Joseph W. Flickinger of Ohio claimed to be able to “detax” his clients. He will now be “de-liberated” for the next 70 months.
A reminder from Scott Stantis of Prickly City
Selling Inherited Residence
Subject: Primary residence questionDear Kerry,This article was very interesting regarding taxes and the 2 year rule.My question is this: What actually constitutes a property being the primary residence? I have lived with my Mother for 1 1/2 years taking care of her till her death in March 2005.In May 2005 the house was quite-claim deeded to me.Does the 2 years start as of the day I moved in with her or the day the house was deeded to me?I want to sell it and go back to the city I was living in prior to the move and your answer will help me decide when the sale will occur.Thanks so much,
I think you are missing the big picture here.
For the Section 121 tax free residence sale, the time starts when you both own the home and live in it as your primary residence. This would be May 2005, when the title was put into your name.
However, this is only an issue of concern if you are looking at a profit on the sale. If you are planning to sell now, you shouldn't be looking at very much profit, if any. When a person passes away and leaves assets to others, the cost basis of each item is stepped up to its fair market value (FMV) at the time of her passing. In your case here, your cost basis in the home would be its FMV as of the March 2005 date your mother passed away plus the cost of any improvements you have put into it since that date. When you factor in selling costs, odds are that you may even have a net loss.
If you do have a net profit, you should be able to use the pro-rated exclusion of $342.47 of profit per day that you owned and lived in the home if the sale is due to an unusual circumstance, such as the death of your mother or a need to relocate for employment purposes.
As always, you should be working with a tax professional. This is a very elementary issue that any competent tax pro should be able to help you with. S/he will be able to help you calculate your cost basis and possible gain or loss.
I hope this helps. Good luck.
Thank you Kerry for your answer.I have 1 more question. Since we will probably see a profit over the step up date for the FMV when we sell. Is there any way I can utilize 1031 and use the profit to pay for an existing Manufactured house I own in another city?Thanks
If you have been living in the home prior to its sale, Section 1031 is not an option for you here.
If you have not been living in it and have been using it as a rental or investment property, it could be disposed of under Section 1031. However, the proceeds will all have to be invested into replacement property that is new to you. Paying off debts on property you already own is not a valid like kind reinvestment. You can see all of the rules for 1031 exchanges at www.TFEC.com This is why you really need to be working with a tax pro who can take your particular circumstances into account.
Beware Scam Charity Calls
I just sent the following message to Snopes.com, my favorite scam debunker.
An alert for your readers:
Yesterday (9/10/05), we received a phone call that showed up as "Salvation Army 800-725-2769" on our caller ID. My wife answered and the person claimed to be soliciting donations for the SA. Being a suspicious person, my wife told the caller that we already donate directly and do not appreciate these calls.
I later did some checking on the web and confirmed that SA does not make outgoing calls soliciting donations, such as in this article:
Legitimate relief groups will not make phone calls soliciting donations.
"Criminals do that," said Kane County Assistant State's Attorney Scott Larson. "The Red Cross doesn't do that, the Salvation Army doesn't do that."
People who get calls asking for Hurricane Relief donations should simply say, "No thank you," and hang up, Larson said.
You've been doing an excellent job covering scams from Hurricane Katrina; so I wanted to pass this along.
Instrumental TaxMan Song
I have come across yet another interpretation of George Harrison’s classic TaxMan song. This one is a jazzy instrumental version from a concert by The GreyBoy AllStars on 5/1/04 in New Orleans. Although there are no vocals, the words just popped into my mind while listening to it, from the decades of hearing the Beatles sing this song.
48.5 Cents Per Mile
IRS Increases Mileage Rate Until Dec. 31, 2005 – As I predicted a few weeks ago, IRS has finally raised the standard rate for business mileage. However, they have made the change effective a month earlier than I expected.
For the last four months of 2005, the rate is 48.5 cents per mile. This means you will need to show separate totals for miles driven from January 1, 2005 through August 31, 2005 (40.5 cents) and from September 1 through December 31, 2005 (48.5 cents).
As always, this extra eight cents per mile for the final four months of 2005 may not be adequate for a lot of people; so it’s extra crucial to be keeping track of actual operating costs so that you can compare them with the standard rate deduction when you and your professional preparer are working on your 2005 1040. If you set up sub-accounts for each vehicle in QuickBooks, getting these totals for the year isn’t a very time consuming task.
IRS has also increased the deduction for charitable and medical miles for the last four months of 2005 by seven cents, from 15 cents per mile to 22 cents.
The rate to be used for charitable purposes remains at 14 cents per mile because our imperial rulers in DC have carved that rate into stone, and not allowed IRS to increase it based on such trivial things as a doubling of gas prices.
The IRS Is Watching Old Business Accounts – If you decide to abandon a corporation and don’t wrap things up properly, you could be looking at some heavy taxes personally. I have seen this quite often with California corporations, where until you officially dissolve it, the $800 per year minimum tax, plus lots of penalties and interest, grow into thousands of dollars very quickly. Just leaving the PRC isn’t good enough protection. The FTB will hunt down the owners wherever they may be and seize bank accounts. I have seen it happen here in the Ozarks.
Guidance Imminent on Hardship Distributions From Deferred Comp Plans for Katrina Victims – If there’s ever a time when tapping into retirement accounts makes sense - and shouldn’t be penalized – it’s this.
U.S. Treasury Urges Waiver of ATM Surcharges for Katrina Evacuees – It will be interesting to see how many banks honor this humanitarian request.
IRS, Treasury Announce Measures to Aid Hurricane Relief – Interesting way to donate pay for vacation days to charity. Taking this off of W-2 pay is actually a much better tax savings than the normal Schedule A cash contributions. Anything that reduces adjusted gross income (AGI) generates much more tax savings than itemized deductions do because there are so many tax penalties based on the level of AGI. Official IRS announcement.
Survival of the Stupidest
Cheating on your taxes is stupid enough. Forgetting to declare over a million dollars that everyone in the country (especially the IRS) knows you won takes a level of stupidity very few people possess. Richard Hatch must be hoping to follow Martha Stewart’s path and land his own reality show during or after his stay in the Federal gray bar hotel to be such an idiot. I don’t have a much higher regard for the accountant who prepared that tax return for hatch, even if he did mark it as “informational.” If he signed it in the paid preparer section, he is probably looking at some severe sanctions as well.
Illinois CPA Licensing
Home, Business Owners Affected by Hurricane Katrina Can Get Federal Tax Relief – Good summary from CCH of the tax ramifications of the hurricane, including how to account for any assistance payments received.
There are limits to what Quicken can do
Even the superior QuickBooks programs can't make money appear out of nowhere.
Those people in New Orleans are rank amateurs when it comes to looting from the taxpayers. Nobody does it worse than our rulers in DC.
Look Back in Claiming Losses from Katrina – As with any presidentially declared disaster, victims are allowed to claim their losses on the previous year’s tax return in order to recover some much needed cash ASAP.
While I have done this on numerous occasions for clients who had earthquake and fire damages back in the PRC, things are a little different right now in regard to how IRS handles amended tax returns claiming refunds, as I’ve discussed on several occasions here.
For those hurricane victims who have not yet filed their original 2004 income tax returns, and can ascertain the amount of their unrecoverable losses, claiming them on their 2004 1040 would probably be a wise move. However, those people who have already filed their 2004 1040 may want to hold off claiming the losses until their 2005 1040. Asking IRS for a refund could still trigger a full blown audit, which in this case would be even more dangerous than normal, if records have been lost in the hurricane, flood and fires that Katrina brought. It would be one more disaster on top of what those people have already gone through.
Of course, as always, specific plans on how to handle deducting these kinds of disaster losses should be done with the assistance of competent tax professionals and not attempted on one’s own.
Wrong Is Wrong
It is obviously not politically correct at this time to mention this; but I have already grown sick of the weenies who want to back off from the moves to repeal the estate tax and allow personal ownership of Social Security accounts because of Hurricane Katrina. Their devotion to the imperial federal government is sickening when they try to defend immoral activity just for the sake of tax revenue.
Allowing the government to continue its Marxist grave robberies is just plain wrong, regardless of what the money may be used for. Likewise, forcing people to continue throwing their money down the Social Security Ponzi rat-hole is also nothing less than indefensible theft. Justifying it based on the rebuilding that is needed for the gulf coast doesn’t make either of these current systems any less immoral or despicable.
Of course, as always, the toughest part will be finding enough elected officials in DC with the guts to stand up for what is morally right and not cave in to the extreme political pressure to back off from their reform plans. The GOP’s full blown embrace of wild big government spending doesn’t give us much reason for optimism in this regard.
Moving To Larger Home
Subject: Sale of Primary ResidenceKerry,
A friend and his wife bought a house in foreclosure and remodeled it themselves. As a result, they are sitting on a substantial unrealized gain.His wife is pregnant and they would like to sell their house due to the pregnancy, but they have not lived in it for 2 years. Does the pregnancy count as an "unforeseen circumstances" for getting the pro-rated gain exclusion? It was, in fact, unplanned. I reviewed your site and the IRS site, and the only thing I found regarding pregnancy referred to multiple births from the same pregnancy, so I am not sure if this disqualifies a single birth from the exclusion. Thank you for your help.
Following is a quote from the IRS publication 523 on home sales in regard to the application of the pro-rated tax free exclusion:
The suitability of your property as a home materially changed,
If the home was originally purchased for the benefit of a certain sized family, and the family has grown to the point that the home is no longer able to handle the capacity, that is a valid reason to force you to sell before the full two years are up.
Based on how you explained your situation, you should qualify for the pro-rated tax free exclusion. Your personal tax advisor should be able to help you with more specifics, such as the size of your actual gain.
Good luck with your new baby and the upcoming move.
Thank you for the speedy reply. Even if the house would still reasonably fit a family of 3? Would the IRS argue that a 3-bedroom house is able to handle the capacity so the exclusion does not apply?
Thanks again for your help.
As in all tax matters, the burden of proving that you are doing things properly rests with you.
You made the claim that the move to a bigger house was due to the impending birth. You should feel strongly enough about that rationale to be able to convince IRS in the unlikely chance of a challenge.
The number of bedrooms your house has isn't the issue, depending on how you are using them. For example, my wife and I live in a house with four bedrooms. However, two are fully used as offices and one is used for storage and computer servers. If we needed space for more people, as we may soon need with some of Sherry's relatives who have been displaced by the New Orleans hurricane, we would need to find new space for them.
If the three bedrooms you currently have don't allow space for the new baby, a move to a new home seems like the logical thing to do.
Again, check with your personal tax advisor for more specifics on your situation.
Home Sale By Surviving Spouse
Subject: Selling my home question
I read a recent article of yours relating to getting a $250 per person exclusion when selling your home. That was very informative, but I have an additional question. My wife died a couple of months ago. Can I claim two deductions if I sell my home in the same year that she passed away? I will be making more than $250K profit on my home and this might influence my decision to sell now or next year.
*** in PA
I'm sorry to hear of your loss.
You do really need to be working one on one with a tax pro. That is never a more important consideration than after a major life changing event such as you are going through.
To specifically apply the residence sale rules to your situation, there is a very big twist. Essentially, there is no need to claim both of the $250,000 exclusions because your wife's half of the profit has already been wiped out. When a person passes away, her heirs receive most of her assets at what is called a stepped up basis, which is the item's fair market value at the time of the person's death. This means that all of the profits that had accumulated during her lifetime have literally been wiped off the books.
What this means for you as the surviving spouse is that your personal cost basis in the home is now made up your half of the original basis (which is normally what you paid for it plus capital improvements) plus the new stepped up basis for the other half. If you sell the home, that is what you would be using in the calculation of your profit. You could then exclude up to $250,000 of profit on your 1040, assuming that you have been living there at least two out of the previous five years. That exclusion amount would be prorated if you have lived there less than two years.
Because PA is not a community property state, you only receive a stepped up basis on half of the home. Surviving spouses in community property states actually have the total basis of their homes stepped up, effectively wiping out all of the accumulated capital gain.
Some assets don't have this new stepped up basis. For example, most often pre-tax retirement accounts are still going to be subject to tax when you make withdrawals. This is another reason why you absolutely must be working with a tax pro who can properly advise you on all of the tax twists that are now part of your world.
Donating Vehicles - New IRS Form
I’ve written a lot on the issue of donating vehicles to charities and the abuses by people claiming much higher values than they would actually sell for. As a result, our rulers in DC passed a law late last year limiting the deduction to whatever amount the charity was able to sell it for. This law took effect as of January 1, 2005.
In typical fashion, IRS has come out with a new form (1098–C) for the charities to fill out documenting the donations and sales amounts. You can download pdf versions of the 2005 Form 1098–C and its instructions from the IRS website.
IRS’s Announcement 2005-66
(This announcement will appear in Internal Revenue Bulletin 2005-39, dated
September 26, 2005.)
The IRS has released new Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes.
The form is used by donee organizations to report the contribution of qualified vehicles to the IRS under new IRC section 170(f)(12). The form may also be used to provide the donor with a contemporaneous written acknowledgment of the contribution.
IRS Raises Interest Rates
Effective as of October 1, 2005, the rates they charge will go up by a full percentage point, to 7.0%.
I have updated my Quick Reference page accordingly.
Deducting MBA Costs
Subject: Audit Question
Dear Tax Guru,
My husband is being audited for his 2003 return. He finished his MBA in May 2003, began working in September 2003 and deducted his last semester of tuition fees when he filed his return. Apparently a tax expert gave a seminar in school explaining why MBA students can make this deduction, but maybe he was mistaken. Anyway, my husband is not working in the same field or for the same company that he left when he took time off to go for his MBA. Do you think there is any justification he can use for claiming this deduction?Thanks in advance for your help,
It sounds as if your husband misinterpreted the rules for deducting education costs. As long as I've been in the tax business (over 30 years), this has been one of the craziest Catch 22 type rules. Basically, you are only allowed to deduct education costs related to the profession you are already in. Education costs incurred to enter new professions have never been deductible.
I've always thought this law to be counter-productive in regard to the country's work-force, which should be encouraged to learn the skills necessary to adapt to the changing business environment, such as factory workers learning how to use computers. Unfortunately, the words "Logic" and "Congress" are as incompatible as any two words could be.
It doesn't look good for your husband in regard to salvaging this deduction. He will owe the extra tax plus interest. However, the penalties that auditors routinely toss in are completely negotiable and can be waived if your husband can convince the auditor that this was an accidental misinterpretation of the law. If he hasn't already done so, he should also make sure he has deducted all of his job hunting costs.
Another lesson that you both should take from this is the wisdom of using a professional tax preparer instead of trying to interpret the laws and regulations on your own.
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