Ask Liz Weston

Get smart with your money

Taxes

Q&A: Finding free tax help

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Dear Liz: You recently mentioned the AARP Foundation Tax-Aide Program as a resource for getting help with tax returns. I just want to point out that there are other, IRS-sponsored programs that provide free income tax assistance to the elderly and low-income taxpayers. These programs are Volunteer Income Tax Assistance (VITA) and Tax Consulting for the Elderly (TCE). The site where I’ve volunteered for many years does approximately 2,000 tax returns each year. A mention in your column would be a great way to spread the word about this valuable service.

Answer: Consider it done. The IRS has a tool to find VITA and TCE resources using your ZIP Code.

Q&A: Caught in the IRS backlog

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Dear Liz: In 2021, we helped two of our children buy a condo. One of them confessed she hadn’t filed taxes for several years. We worked on the returns together, and it turned out that nothing was owed. Meanwhile, the IRS has never acknowledged the delayed tax filings or refunded the (small) overpayments. Shouldn’t the IRS have completed these filings by now?

Answer: The IRS says it has processed all paper and electronic individual returns for tax year 2021 or earlier if those returns had no errors or did not require further review. Returns that were filed late, however, may still be part of the agency’s backlog.

Your child can try using the “Where’s My Refund?” tool on the IRS site or create an online account to check for possible updates. Keep in mind that there’s a three-year limit to claim a refund; after that point, the U.S. Treasury gets to keep the money.

Q&A: Grandma needs tax help

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Dear Liz: My grandma is 78, divorced, and has not filed taxes in the last decade. I was wondering what she should do because she is head of the household and taking care of three adopted kids and needs help.

Answer: Please help connect your grandmother with AARP Foundation Tax-Aide, which provides free virtual and in-person tax help. You may be able to help her make an appointment and gather the documents she’ll need to file those missing tax returns.

Your obviously busy grandma may have procrastinated on filing her taxes because she worried about a tax bill.

But depending on her income and circumstances, she may have been eligible for refundable credits or other tax breaks that could have put money back in her pocket. (The tax law provides a three-year window to claim a refund, so she would already have lost out on refunds from the earlier years.)

If she does owe taxes and penalties, the IRS has payment plans that could help. A Tax-Aide volunteer will explain her options for paying any overdue bills.

Q&A: Tax pitfalls of a house gift

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Dear Liz: I have a friend whose mom gave him and his sibling her house a few months before she died. They sold it right away. He got a 1099-S tax form and is confused about what the capital gains are. Technically there were none because they sold it right after she died.

Answer: Ouch. If your friend and his sibling had inherited the home after the mother died, you would be right — there would be little or no capital gains, because the house would receive a new value for tax purposes on the day the mother died. That “step up” to the current market value would mean no taxes would be owed on all the appreciation that occurred during the mother’s lifetime.

But that favorable tax break happens only when property is transferred after death. Instead, the mother gave the house to her children during her lifetime. That means they got her tax basis as well — essentially what she paid for the house, plus any qualifying home improvements. They will owe capital gains tax on the difference between that basis and the net amount they realized from the sale (the sale proceeds minus any selling costs).

It’s unfortunate the mother didn’t consult a tax pro before transferring the home. Urge your friend to do so now because there may be ways to reduce (but not eliminate) the tax bill that resulted.

Q&A: Tax consequences of a CD bequest

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Dear Liz: I currently have a certificate of deposit with what I consider a reasonably high balance. I’ve named a beneficiary in the event something were to happen to me. Would there be tax consequences for the beneficiary upon receipt?

Answer: There’s no federal inheritance tax, but six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — do assess inheritance taxes. Spouses are typically exempt and the tax rate is generally lower for close relatives.

Q&A: Selling a rental property? Here are the tax consequences

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Dear Liz: My siblings and I are considering selling a triplex. It was bequeathed to us by our mother when she died in 2007. There is no mortgage and it is fully occupied. If we sell, my wife and I (both over 50) would get roughly $200,000, and we’d like to minimize the tax impact. We own our home free and clear and have no debt. We’d like to use this windfall to help our son buy a home. We’d also give our daughter a cash gift. We have no interest in buying another investment property using a 1031 exchange. Any suggestions to minimize our tax bill given our circumstances?

Answer: Talk to a tax pro, because selling a rental property is more complicated than selling your personal home.

You’re not eligible for the $250,000-per-person home sale profit exclusion, and in addition to paying capital gains tax you also face a depreciation recapture tax of 25%. (Depreciation is the amount of wear-and-tear you wrote off during your ownership of the property; the IRS requires you to repay that tax break when you sell.)

A big capital gain could affect other areas of your finances, such as Medicare premiums, and the pro can help you plan for that as well.

A 1031 exchange would allow you to defer taxes on a rental property by buying a similar replacement property.

Another solution would be to hang on to the property, continue to enjoy the rental income and bequeath your portion of it to your children when you die. Your portion will receive a favorable step-up in tax basis so that your heirs won’t owe taxes on the capital gains that occurred during your ownership. They also won’t face the tax on depreciation recapture you would otherwise owe.

But that obviously isn’t a good solution if you no longer want to be a landlord or want the cash instead. In that case, the tax pro can help you properly account for selling costs, legal fees and improvement expenses that could reduce the tax hit and may be able to suggest other ways to manage your tax bill.