Category Archives: Taxes

The Tax Implications of Selling Your Primary Residence

September 2, 2016

Whenever you’re selling property or investments that have appreciated in value, taxes are a big consideration in the timing of the sale. Selling at the wrong time can lead to a higher tax bill, whereas waiting for the right time can ease your tax burden significantly. This is especially true when it comes to the sale of your primary residence.

Calculating the gain

The first step in determining the taxability of the sale of your home is to determine how much of the sale is capital gain. To determine this, you must subtract the cost of the house from the sales price. Keep in mind that the total cost of your house includes not only how much you originally paid for it but also costs for any additions or improvements, as well as some of the fees associated with its purchase and sale. In addition, some things can reduce the cost basis in your home such as deprecation if you used part of your home for business or rental purposes or reimbursements from homeowners insurance for repairing damage. Consult with a tax adviser to discuss what costs are included and which are not. Once the total cost basis is calculated, this amount is deducted from the sales proceeds to calculate the capital gain to report to the IRS.

Example:

$60,000 home purchase in 1965

$25,000 addition added in 2010

$85,000 cost basis

.

$400,000 Sales price in 2016

– $30,000 Selling costs including real estate commissions and some closing fees

$370,000 sale proceeds

.

$370,000 sales proceeds

– $85,000 cost basis

$285,000 capital gain

.

Note that if you inherited the property from someone after they died, your cost basis becomes the value of the property as of the decedent’s date of death. If you were given the property while someone was still alive, you take over the original cost basis of the person that gave it to you. See our blog “Gifting Away Tax Benefits” for more details.

Tax Exemption Up for Grabs

When you sell your primary residence you can actually qualify for significant tax exclusions. Each owner may be able to exclude as much as $250,000 in gains, which means joint owners may be able to exclude as much as $500,000 ($250,000 per person). In the example above, a single person would have only had to pay tax on $35,000 after the $250,000 exemption but a couple jointly owning the home would not have to pay any tax at all since they can exempt a total of $500,000.

Qualifying for the Tax Exemption

The IRS only allows these exclusions if you sell a home that you owned and lived in as a primary residence for at least two years out of the last five before the sale. This means you could still qualify for the exclusion if you sell the house within three years of moving out of it because you will have lived in it the first two years of the last five years.

If you have a disability and are unable to independently care for yourself, this requirement is shortened to 1 year out of the last 5.

At Kramer Wealth Managers, we know the importance of finding all the tax breaks you can take in order to preserve and grow your savings and stay on the right track to your WealthPath. Contact us today to find out how we can help you.

While the tax or legal information provided is based on our understanding of current laws, this information is not intended as tax or legal advice and should not be relied upon as tax or legal advice. Federal tax laws are complex and subject to change. Neither FSC Securities Corporation, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Seven Tax Credits for Low-Income Taxpayers

April 24, 2015

When people discover that there are ways to reduce taxes, they often assume that those ways are geared only toward high-income taxpayers. But there are tax credits available to low-income taxpayers that can help reduce their tax burden and make a positive difference in their financial lives. Let’s take a look at seven of them. First, let’s clarify the difference between a tax credit and a tax deduction. Tax credits are a dollar-for-dollar reduction of your tax bill while a deduction just reduces your taxable income. For example, a $1000 tax credit will actually reduce your tax bill by $1,000 (i.e., a $5000 tax bill would be reduced to $4000). A $1000 deduction, on the other hand, would reduce your taxable income (i.e., from $50,000 to $49,000) resulting in an actual tax savings of approximately $100-$300, depending on your tax bracket.

1. The Savers Credit: It’s difficult to save for retirement when your income is low, but if you do you can qualify for this special tax credit that gives an additional tax break on the first $2,000 contributed to a retirement account such as a 401(k), IRA, 403(b), etc.

2. American Opportunity Credit: Formerly known as the Hope Credit, this offers a credit for money spent on certain college expenses.

3. Earned Income Tax Credit: Individuals who meet the income requirements can qualify for this credit, which reduces their overall tax liability and can result in a refund. In some cases, taxpayers can qualify for a refund that exceeds the amount they paid in taxes.

4. Lifetime Learning Credit: Allows up to $2,000 in tax credits for certain education expenses. Cannot be used in conjunction with the American Opportunity Credit.

5. Child and Dependent Care Credit: This credit is for the cost of paying someone to care for your child or dependent. When you qualify, you can get a credit equal to as much as 35 percent of your qualifying child or dependent care expenses, as long as the provider meets qualifications. Note that the care must be given to a child under 13 or to a dependent who is physically or mentally incapable of caring for him or herself.

6. Credit for the Elderly or the Disabled: Qualified individuals who are 65 or older or who have a permanent disability may qualify for this special tax credit.

7. Child Tax Credit: Taxpayers with qualifying dependent children may qualify for up to $1,000 in tax credits per child. This credit can be taken along with the child and dependent care credit.

We recommend you consult with your tax advisor to see if you qualify for any of these credits.

Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed and the accuracy of the information should be independently verified. This material is intended for informational purposes only and should not be construed or acted upon as individualized investment advice. Neither Kramer Wealth Managers, nor FSC Securities Corporation, offer tax or legal advice. Federal tax laws are complex and subject to change.

Beneficiary mistake #6: Gifting away tax benefits


August 21, 2014

Many assets allow you to name a beneficiary, that is, whom you would like to receive the asset in the event of your death. Life insurance policies and retirement accounts are common examples but some other account types such as bank accounts and non-retirement investment brokerage accounts also may allow you to name beneficiaries through a Pay on Death (POD) or Transfer on Death (TOD) form. While these forms are generally straight forward, they often lead people to make inadvertent errors. We have identified six common mistakes people make when preparing for the distribution of their assets after death. This is PART SIX OF SIX.


Gifting vs. inheriting. Many people prefer to give assets to their children while they are still alive instead of waiting for them to inherit it. This is common for people who are aging and find they don’t need some of the assets they have or they want to remove assets from their name to reduce estate taxes or for Medicaid planning purposes. However, there are often tax consequences associated with gifting assets while you are alive.


• Gift tax. Gifts in excess of the $14,000 annual gift tax exclusion may be subject to gift tax. Even if it isn’t subject to the tax, you will still need to report it on an IRS form 709, a Gift Tax Return. While many people are aware of this as it relates to cash gifts, they do not realize that it also applies to changing the registration on assets. For example, if you change the title on the deed to your home to your children, and the house is worth $500,000, the IRS considers this a $500,000 gift. Consult with a tax advisor before making any registration or title changes.


• Loss in stepped-up cost basis. One expensive mistake is gifting (or re-titling) highly appreciated assets such as real estate or stocks to someone else’s name. When an asset is gifted to someone while the donor is alive, the recipient takes on the original cost basis of that asset as well. Conversely, when an asset is inherited by someone after the death of the original owner, the beneficiary receives a “step-up” in cost basis to the value as of the owner’s date of death. This tax benefit can be huge.


Example: John Doe purchased his home in 1950 for $25,000. Today, the home is worth $400,000. If John changes the title on the home to his daughter, Jill, and then Jill sells it, she will have to pay tax on the capital gain of $375,000 ($400,000 sale – $25,000 cost basis= $375,000 capital gain). She would owe $56,250 in Federal taxes alone, not to mention State taxes, where applicable. However, if John were to leave it to Jill after his death as part of his estate, Jill would receive a step up in cost basis to $400,000. If she then sold it immediately for $400,000, she would not owe any taxes at all ($400,000 sale – $400,000 cost basis= $0 capital gain).


The stepped-up cost basis also applies to other capital assets such as stocks, bonds, and many other investment vehicles.


Before adding your child’s name to any of your assets, be sure to consult with a tax advisor or estate planning attorney.


Being aware of this type of common mistake can help you better prepare to ensure your wishes are followed in the event of your death. At Kramer Wealth Managers, we can help you coordinate with an estate planning attorney to make sure your estate goals and financial planning goals are in line with your personal WealthPath.

While the tax or legal guidance provided is based on our understanding of current laws, the information is not intended as tax or legal advice and should not be relied upon as tax or legal advice. Neither FSC Securities Corporation, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Affordable Care Act Taxation and You

February 18, 2014

The Affordable Care Act ushered in new health insurance requirements and, along with them, new tax responsibilities for many taxpayers. Below are some of the changes that could affect your taxes beginning the 2013 tax year.

Changes to Your W-2

You may notice on your 2013 W-2 that your employer has recorded the cost of coverage for your part of the group health plan. Not to worry, this number is not going to affect your taxes. The IRS states that this reporting is for informational purposes only.

Increase in Medicare Tax

Individuals earning more than $125,000 as single filers, or $250,000 for joint filers, will be subject to a higher Medicare tax. These individuals will see their employer holding back an additional 0.9 percent from their paychecks or, if self-employed, will be expected to do so themselves. This additional Medicare tax is also due on tips and fringe benefits that push you over the limit.

Some families with one high-income earning spouse may see the additional tax withheld even though their joint income doesn’t meet the requirements. In this case, the tax filers will be permitted to claim the overpayment as a credit against their tax liabilities at the end of the year.

New Net Investment Income Tax

As of 2013, certain trusts and estates and individuals with a modified adjusted gross income of $125,000 (for individual filers. $250,000 for joint filers) will be subject to a new, 3.8 percent tax on some of their net investment income. For the purpose of this tax, investment income includes dividends, capital gains, rental income and royalties.

Credits and Deductions

Another change is in the way itemized deductions are handled for medical expenses. Beginning in the 2013 tax year, taxpayers can only claim deductions for those medical expenses their insurance didn’t cover once these expenses reach 10 percent of their adjusted gross income. In prior years, they were permitted to claim deductions for expenses exceeding 7.5 percent of AGI. Individuals over age 65 may be entitled to continue to get deductions for expenses exceeding 7.5 percent, at least until 2016.

This lost deduction could be offset for some individuals and families who find that they qualify for premium tax credits making insurance coverage purchased through the Affordable Care Act exchange more affordable.

At Kramer Wealth Managers, we know how difficult it can be to catch up on the latest tax changes. We can work with you to make sure you remain compliant with new tax requirements while also helping to get you all the credits and deductions you qualify for. Contact us today to discover how we can help make tax time easier.

Own investments? You may not want to file your taxes until March.

February 7, 2014

It seems like our clients tend to fall into one of two categories: There are those that are watching their mailboxes mid-January, checking for tax forms so they can get their taxes filed as soon as possible. And then there are those that don’t even want to look at those tax forms until sometime in early April, and some, not even until April 15th! If the latter is you, this blog post may not be for you.

Normally, we applaud people for getting a head start on their tax filing and not procrastinating until the last minute. However, if you own investments, you may want to proceed with caution. First, it is important to note that there is a common misconception that ALL tax forms are due to be mailed out by January 31st. This is true for employer W-2 forms and most 1099 tax forms. However, 1099-B forms which reflect the proceeds from the sale of securities in non-retirement accounts, are not actually due to be mailed until February 15th. And for 2014, because February 15th falls on a weekend and the following Monday is a Federal holiday, the deadline for this year has been extended to February 18th. But even if you get a 1099-B form by the end of February, you STILL may want to proceed with caution.

Here’s why: In the past several years, due to accounting reconciliations, last-minute changes in tax reporting requirements and tax laws, or other reasons, many brokerage firms and other investment companies have had to amend their 1099 forms and issue new ones, some as late as mid-March. This created a lot of confusion for the investor and in many cases, resulted in having to file an amended return. And if you have to pay a professional to prepare your taxes, amending a return usually results in additional cost to you.

So if you own investments in NON-RETIREMENT accounts that would generate a 1099-B form, you might want to consider waiting to file your taxes until the end of March to reduce your chance of having to amend your tax return in the event you get a corrected 1099. However, you can and SHOULD still give your tax preparer all of your information and get started on the filing as early as possible (Trust us, he or she will appreciate the earlier the better!) Just ask them not to actually click to FILE the return until the end of March.

While the tax or legal guidance provided is based on our understanding of current laws, this information is not intended as, and should not be relied upon, as tax or legal advice. Neither FSC Securities Corporation nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Prepping for 2013 Tax Filing

The IRS recently announced that they’d begin processing tax returns on January 30th, 2014. If you’re not ready to meet that aggressive timeline, you can always wait until the April 15th deadline. Whichever date you choose to send your paperwork in and close out the 2013 tax year, you need to be organized and have all your data together. Here are a few tips to make the process easier.

• Compile your documents. If you’re taking deductions for charitable contributions, energy-efficient home improvements, child care, tuition and other expenses, now’s a good time to start gathering those receipts together. If you can’t find a receipt, call the retailer or organization you gave the money to and see if they can provide a copy.

• Gather your statements. In January, you’ll start receiving end-of-year statements from your mortgage lender, retirement account custodians and banks. These statements will show important information that may need to be used on your tax forms, including gains, interest payments, distributions, contributions, and more. Get these documents together and match them with the various 1099 statements you will receive in February so that you can verify accuracy. Most 1099-DIV and 1099-R documents are mailed by January 31st, 2014 but the deadline for 1099-B forms is not until February 18th so you may not receive your tax documents for non-retirement brokerage and investment accounts until the end of February.

• Max out your Traditional and Roth IRA contributions by April 15th, 2014. You have until April 15th to make a 2013 contribution to your Roth* or Traditional IRA. The maximum IRA contributions for 2013 are $5,500 with an added catch-up contribution of $1,000 for people over 50. Don’t forget to tell your IRA custodian the tax year you want the contribution credited to.

• Make health savings account (HSA) contributions by April 15th, 2014. The balance in your HSA rolls over from year to year and funds withdrawn for non-medical purposes are exempt from the ten percent penalty once you reach age 65, making this an important account to max out annually. Just as with an IRA, you can make a 2013 contribution between now and April 15th, 2014. You must still follow 2013 limits, which are $3,250 for single individuals, $6,450 for families and a catch-up contribution of $1,000 for those over 55 who are not enrolled in Medicare.

• Schedule your appointment with your tax preparer. Many tax preparers are happy to start booking appointments now, even for March and April, so they can better plan out their busy tax season. Having an appointment on the books also gives you a hard deadline for preparing all of your documents so you aren’t tempted to procrastinate. Just bear in mind that if you have non-retirement brokerage accounts, you may not want to schedule an appointment before the end of February since the deadline for mailing 1099-B forms is not until February 18th.

It’s easy to get overwhelmed by the amount of preparation that goes into an annual tax filing but getting a head start can ease the stress.

*Generally, Roth IRA contributions are not tax deductible, however, you could qualify for the savers credit, which may entitle you to a partial tax credit if you fall within certain income limits. Ask your tax advisor for more information.

End of The Year Tax Planning

There are only a couple of weeks left in 2013. It may seem impossible —that the year has flown by too quickly— but the calendar doesn’t lie. Here are seven things to consider doing before the year’s over to possibly reduce your 2013 tax burden.

1. Sell stocks with losses. If you have an investment that’s a loss for you right now and you don’t think it’s going to come back, you might want to sell it in order to write the loss off against other investment income. Remember to be considerate of wash sale rules, which state that in order to get the deduction, you can’t buy a “substantially similar” position in the 30 days before or after the sale.

2. Hold off on selling stock that’s increased in value. If you want to avoid paying taxes on your gains, wait until the calendar turns and January 1, 2014 rolls around before you sell any stock or other investments with gains.

3. Pay certain expenses. If you have any expenses that can result in a tax deduction, such as property or estimated taxes, don’t wait until 2014 to pay them if you can use the deduction in 2013.

4. Pay for classes. If you’re planning to take any classes in college during the 2014 spring session, make sure you’re enrolled and your classes are paid for by the end of December. That way, you can take advantage of the American Opportunity or Lifetime Learning tax credits for 2013 (assuming you haven’t already maxed these credits out).

5. Think about donating to charity. If you itemize your deductions, then now’s a great time to add in a few last-minute charitable contributions for 2013. If you want to give your favorite charity an extra bump, you might talk to human resources to see if your employer matches contributions.

6. Go to the doctor. Wait—this is a post about end-of-the-year tax planning, not medical treatment, right? Okay, that’s true, but if you itemize your deductions, you may qualify for medical expense deductions for the treatment you pay for in 2013, which could make an extra trip to the doctor worth its weight in stethoscopes.

7. Don’t take that last distribution. If you’re planning on taking a distribution from your Traditional IRA or other taxable distribution this month, you might consider holding off a few weeks so that you don’t have that added tax burden in 2013.

At Kramer Wealth Managers, we want to help make tax time simple and stress-free. Contact us today to find out how we can help you better manage your tax burden in 2014.

This material is intended for informational purposes only and should only be relied upon when coordinated with individual professional advice. Neither FSC Securities Corporation nor its representatives offer tax or legal advice. For assistance with these matters, please consult your tax or legal advisor.