by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual
Before 1997, once a homeowner reached the age of 55, they had the one-time option of excluding up to $125,000 of gain on the sale of their primary residence. Today any homeowner, regardless of age, has the option to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) on the sale of a home.
What Is Capital Gains Tax?
When you sell property for more than you originally paid, it’s called a capital gain. You need to report your gain to the IRS, which will then tax the gain. Home sales can be excluded from this tax as long as the seller meets the criteria.
Who Qualifies for Capital Gains Tax Exemption?
In order to qualify a seller must meet the minimum IRS criteria:
- You’ve owned the home for at least two years.
- You’ve lived in the home as your primary residence for at least two years.
- You haven’t exempted the gains on another home sale in the last two years.
How to Calculate Gains and Losses
By keeping records of the original purchase price, closing costs, and improvements put into the home (you’ll need to present records and receipts when submitting your taxes), you can avoid being taxed on a significant amount of the profit you make when selling your property.
If, for example, you buy your home for $150,000 and put $20,000 into qualifying upgrades, your cost basis would be $170,000. If you sell the home ten years later for $300,000, the ‘gain’ on your house would be $130,000 (sale price – cost basis), which would have no tax implications because you’d have met the required criteria.
What If You Have More than $250k ($500k for married couples) of Gains?
You’ll be taxed for the amount of gains above $250,000 or $500,000 for married couples filing jointly. To help reduce this amount, keep detailed records of any improvements you put into the home as some improvements can be added to your cost basis, and will thus lessen the amount that needs to be reported.
by Daniel Kittell | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual, Tax Preparation - Individual
You have several options when you inherit an IRA, so it’s no wonder that most people on the receiving end have questions about taking distributions, tax implications, and incorporating the inheritance into their existing financial plan. For starters, it helps to distinguish if you’ve inherited the IRA from a spouse or someone else.
For spousal beneficiaries, you can roll over the inherited IRA into your existing IRA and the earnings will continue to grow tax-deferred. You won’t have to start taking required minimum distributions (based on life expectancy) until you reach age 70 ½, but you’ll pay a 10% early-withdrawal penalty for funds you take from the account before age 59 ½.
Spousal beneficiaries are also entitled to any of the methods available to non-spousal beneficiaries, which include:
- Lump-sum payment: when you’re taking the money from an inherited traditional IRA, you won’t be charged a 10% early withdrawal penalty, even if you’re under age 59 ½, though you will still have to pay taxes on the money.
- Five-year distribution plan: there are no required minimum distributions, but all the money will need to be withdrawn from the account by the end of five years.
- Life expectancy method: if the original owner was older than the beneficiary, the beneficiary can use their own age and the IRS Single Life Expectancy Table to calculate how much they’re required to withdraw from the account each year (failure to take out the minimum requirement will result in a 50% penalty on the amount that was not withdrawn on time).
It’s important to note that non-spousal beneficiaries aren’t permitted to roll an inherited IRA into an existing IRA, and they must begin withdrawing assets no later than December 31 of the year after the account holder passed away.
Roth IRAs can usually be inherited tax-free, but you can’t keep the funds in the account forever. Non-spousal beneficiaries have to take annual distribution from the account based on their life expectancy (using IRS guidelines), starting the year after the original IRA owner dies, while spouses have the option of rolling a Roth IRA into their own account. Another option is to withdraw all of the money in the account within five years.
If you are in a similar situation and have questions about an inherited IRA, please feel free to contact me via email at dkittell@mkrcpas.com.
