In many parts of the country, summer is peak season for selling a home. If you’re planning to put your home on the market soon, you’re probably thinking about things like how quickly it will sell and how much you’ll get for it. But don’t neglect to consider the tax consequences.
Home sale gain exclusion
The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act included a provision tightening the rules for the home sale gain exclusion. Fortunately, that provision didn’t make it into the final version that was signed into law.
As a result, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.
To qualify for the exclusion, you must meet certain tests. For example, you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.
More tax considerations
Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.
Here are some additional tax considerations when selling a home:
Tax basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.
Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
A big investment
Your home is likely one of your biggest investments, so it’s important to consider the tax consequences before selling it. If you’re planning to put your home on the market, we can help you assess the potential tax impact. Contact us to learn more.
If you want to preserve as much wealth as possible for your children, but you leave property to your spouse outright, there’s no guarantee your objective will be met. This may be a concern if your spouse has poor money management skills or if you two don’t see eye to eye on how assets should be distributed to your children. In both of these situations, a properly designed qualified terminable interest property (QTIP) trust may be the answer.
How does it work?
A QTIP trust provides your spouse with income for life while preserving the trust principal for your children. By appointing a qualified trustee, you can have greater confidence that the assets will be invested and managed wisely. And the trust documents will ensure that, upon your spouse’s death, the trust assets will be distributed to your children according to your wishes.
What are the estate tax advantages?
Unlike most other trusts, a QTIP trust is eligible for the unlimited marital deduction. This deduction allows you to transfer any amount of property to your U.S. citizen spouse — either during your life or at death — free of gift and estate taxes.
Ordinarily, to qualify for the marital deduction, you must transfer property to your spouse outright or through a trust in which your spouse’s interest cannot terminate for any reason. A QTIP trust is an exception to this rule: It allows you to provide your spouse with a “terminable interest” in the trust while still qualifying for the marital deduction. The assets will, however, be included in your spouse’s taxable estate.
Harness the power
There are many ways you can provide for your spouse and children after you die. But harnessing the power of a QTIP trust might just be right for your situation. We can help you determine the best tools to ensure your estate is distributed as you desire while keeping taxes to a minimum.
You may have breathed a sigh of relief after filing your 2017 income tax return (or requesting an extension). But if your office is strewn with reams of paper consisting of years’ worth of tax returns, receipts, canceled checks and other financial records (or your computer desktop is filled with a multitude of digital tax-related files), you probably want to get rid of what you can. Follow these retention guidelines as you clean up.
Retain records that support items shown on your tax return at least until the statute of limitations runs out — generally three years from the due date of the return or the date you filed, whichever is later. That means you can now potentially throw out records for the 2014 tax year if you filed the return for that year by the regular filing deadline. But some records should be kept longer.
For example, there’s no statute of limitations if you fail to file a tax return or file a fraudulent one. So you’ll generally want to keep copies of your returns themselves permanently, so you can show that you did file a legitimate return.
Also bear in mind that, if you understate your adjusted gross income by more than 25%, the statute of limitations period is six years.
Some specifics for businesses
Records substantiating costs and deductions associated with business property are necessary to determine the basis and any gain or loss when the property is sold. According to IRS guidelines, you should keep these for as long as you own the property, plus seven years.
The IRS recommends keeping employee records for three years after an employee has been terminated. In addition, you should maintain records that support employee earnings for at least four years. (This timeframe generally will cover varying state and federal requirements.) Also keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.
For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations period.
Regulations for sales tax returns vary by state. Check the rules for the states where you file sales tax returns. Retention periods typically range from three to six years.
When in doubt, don’t throw it out
It’s easy to accumulate a mountain of paperwork (physical or digital) from years of filing tax returns. If you’re unsure whether you should retain a document, a good rule of thumb is to hold on to it for at least six years or, for property-related records, at least seven years after you dispose of the property. But, again, you should keep tax returns themselves permanently, and other rules or guidelines might apply in certain situations. Please contact us with any questions.
While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.
Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.
- File a 2017 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
- Pay the second installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
- Pay the third installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
- If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2017 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.
- File a 2017 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
- Make contributions for 2017 to certain retirement plans or establish a SEP for 2017, if an automatic six-month extension was filed.
- File a 2017 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.
- Make 2018 contributions to certain employer-sponsored retirement plans.
- Make 2018 annual exclusion gifts (up to $15,000 per recipient).
- Incur various expenses that potentially can be claimed as itemized deductions on your 2018 tax return. Examples include charitable donations, medical expenses and property tax payments.
But remember that some types of expenses that were deductible on 2017 returns won’t be deductible on 2018 returns under the Tax Cuts and Jobs Act, such as unreimbursed work-related expenses, certain professional fees, and investment expenses. In addition, some deductions will be subject to new limits. Finally, with the nearly doubled standard deduction, you may no longer benefit from itemizing deductions.
IRAs and employer-sponsored plans such as 401(k)s are powerful retirement savings tools, but they also provide valuable estate planning benefits. If you hold a traditional IRA for life, for example, your children or other heirs can stretch out distributions over their lifetimes, maximizing the IRA’s tax-deferred growth and preserving more wealth for the family. If, however, you receive a distribution from an employer plan (such as when you change jobs or retire) and you don’t roll over the funds into an IRA or new plan within 60 days, you can lose these benefits.
What are the tax consequences?
If you miss the 60-day deadline, you’ll be hit with ordinary income taxes plus a 10% penalty (if you’re under age 59½), taking a significant bite out of your estate. The IRS has provided some relief by streamlining procedures for obtaining a waiver of the 60-day time limit.
Previously, the only option was to apply to the IRS for a private letter ruling — a costly and time-consuming process. Now, if you miss the deadline, you can self-certify your eligibility for a waiver by sending a letter to the trustee or administrator of the plan.
Do you qualify for a waiver?
To qualify, you must have missed the deadline for one of 11 reasons. They include errors by the financial institution distributing or receiving the funds, misplaced distribution checks, post office errors, a death or serious illness in the family, and deposits into an account you mistakenly thought was an eligible retirement plan.
You must complete the rollover “as soon as practicable” (30 days is deemed sufficient) after the reasons for missing the deadline are no longer an obstacle. Even if you can’t (or don’t) self-certify, the IRS can still grant a waiver for these or other reasons in a subsequent examination.
Self-certification allows you to report a deposit as a valid rollover. But it doesn’t prevent the IRS from auditing your return and denying a waiver if it determines that you didn’t meet the requirements. Contact us with questions regarding how to maximize the estate planning benefits of your retirement accounts.