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Taxes

Q&A: An aunt left him out of her will. Can his siblings share the windfall?

January 27, 2025 By Liz Weston

Dear Liz: My brother and I have received a cash inheritance from our aunt, as have our cousins, among a few others. Our youngest brother was excluded, as was our cousins’ youngest sibling. I believe my aunt, who was 96 when she died and in her 80s when her will was done, simply forgot these two as the family was spread out and contact was infrequent. My brother and I want to do the right thing for our younger brother and give him an equal share from our inheritance. I know most states don’t have inheritance taxes, but since he won’t technically be inheriting it I wonder if there are any other tax implications for us or him.

Answer: Whenever gift taxes are owed, which is rarely, they’re paid by the giver.

Dividing your inheritance with your brother would be a gift to him, so he would owe no taxes. You might have to file a gift tax return if the amount you give him is more than $19,000 (the current annual gift tax exclusion amount). But you wouldn’t owe gift taxes until the amount you give away over that annual limit exceeds your lifetime limit, which in 2025 is $13.99 million. The same is true for your other brother — a gift in excess of the $19,000-per-recipient annual exclusion would require filing a tax return, but probably not paying taxes.

Gifts in excess of the annual exclusion also reduce the amount you can pass free of estate taxes after your own death. If you’re a multimillionaire and likely to face these taxes, please consult an estate tax attorney.

Filed Under: Inheritance, Q&A, Taxes Tagged With: gift tax returns, gift taxes, gifts, Inheritance, sharing an inheritance

Q&A: More on those lost home improvement receipts

January 21, 2025 By Liz Weston

Dear Liz: You recently answered a question from a home seller who had lost documentation about improvements. The improvements most likely required building permits, which would have indicated the scope of improvements and, possibly, the cost as well. The local building department will have copies of those permits on file, and they can be obtained at a modest cost.

Answer: Thank you. The original letter writer had lost their documents in a house fire, a circumstance now shared by far too many in the Los Angeles area, thanks to the recent wildfires.

To recap, the value of qualifying home improvements can reduce the taxable gain when a house is sold. But if audited, sellers probably would need some kind of proof the work was done.

Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, suggested asking any contractors that were hired to provide verification of the projects and to check with the property tax assessor to see if the improvements were reflected in the home’s assessment. Photos of the home reflecting the improvements could also help in an audit, Luscombe says.

Filed Under: Q&A, Real Estate, Taxes Tagged With: capital gains tax, home improvements, home sale exclusion

Q&A: When receipts of home renovations are lost, is the tax break gone too?

January 13, 2025 By Liz Weston

Dear Liz: I have sold my family home recently after almost 50 years. I had done lots of improvements throughout those years. Due to a fire 15 years ago, all the documentation for these improvements has been destroyed. How do I document the improvements for the capital gains tax calculation?

Answer: As you probably know, you can exclude $250,000 of capital gains from the sale of a principal residence as long as you own and live in the home at least two of the previous five years. The exclusion is $500,000 for a couple.

Once upon a time, that meant few homeowners had to worry about capital gains taxes on the sale of their home. But the exclusion amounts haven’t changed since they were created in 1997, even as home values have soared. Qualifying home improvements can be used to increase your tax basis in the home and thus decrease your tax bill, but the IRS probably will demand proof of those changes should you be audited.

You could ask any contractors you used who are still in business if they will provide written verification of the work they performed, suggests Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. You also could check your home’s history with your property tax assessor to see if its assessment was adjusted to reflect any of the improvements.

At a minimum, prepare a list from memory of the improvements you made, including the year and the approximate cost. If you don’t have pictures of the house reflecting the changes, perhaps friends and relatives might. This won’t be the best evidence, Luscombe concedes, but it might get the IRS to accept at least some increase in your tax basis.

If you’re a widow or widower, there’s another tax break you should know about. At least part of your home would have gotten a step-up in tax basis if you were married and your co-owner spouse died. In most states, the half owned by the deceased spouse would get a new tax basis reflecting the home’s current market value. In community property states such as California, both halves of the house get this step-up. A tax pro can provide more details.

Other homeowners should take note of the importance of keeping good digital records. While documents may not be lost in a fire, they may be misplaced, accidentally discarded or (in the case of receipts) so faded they’re illegible. To make sure documents are available when you need them, consider scanning or taking photographs of your records and keeping multiple copies, such as one set in your computer and another in a secure cloud account.

Filed Under: Q&A, Real Estate, Taxes Tagged With: capital gains taxes, financial records, home improvements, home sale exlusion, record keeping

Q&A: When an employee is misclassified as contractor

January 13, 2025 By Liz Weston

Dear Liz: A parent recently wrote to you about a son who was being paid as a contractor. I know someone else who got a job that did not “take out taxes from his paycheck.” Such workers believe they are pocketing more money, but unfortunately, too many do not know about the nature of withholding. They only learn if they choose to file for their expected refund, but instead discover an exorbitant tax liability that a paycheck-to-paycheck worker cannot pay.

The sad fact is that many of these employers improperly classify their workers, who are truly employees, as independent contractors! And they do this to avoid paying their own portion of Social Security and unemployment taxes and also workers compensation insurance.

If workers believe that they have been misclassified (the IRS website provides all criteria), they can file IRS Form SS-8 and Form 8919, which will allow them to pay only their allocated half of their Social Security taxes. Hopefully the IRS will then contact these employers to correct their wrong classifications. And finally, it should be a law that, when hired, all true independent contractors should be given a clear form (not fine print on their employment agreements) that informs them of their status and the need to make estimated tax payments.

Answer: A big factor in determining whether a worker is an employee or contractor is control. Who controls what the worker does and how the worker does the job? The more control that’s in the employer’s hands, the more likely the worker is an employee.

However, the IRS notes that there are no hard and fast rules and that “factors which are relevant in one situation may not be relevant in another.”

The form you mentioned, IRS Form SS-8, also can be filed by any employer unsure if a worker is properly classified.

Filed Under: Q&A, Taxes

Q&A: Health savings accounts offer a rare triple tax break. Here’s what to know

January 7, 2025 By Liz Weston

Dear Liz: Can I contribute additional money to my health savings account, above the amount I’m contributing through payroll deduction? Also, I have an HSA account from a previous employer and one from my current employer. Can I combine the two?

Answer: If you have a qualifying high-deductible health insurance plan, you can contribute up to $4,300 this year to an HSA if the plan covers just you or $8,550 if the plan covers your family. If you’re 55 or older, you can contribute an additional $1,000. You can make additional contributions if your payroll deductions for the year, plus any employer contributions, fall short of the limit.

Maximizing your contributions can make sense because HSAs offer a rare triple federal tax break. Contributions are pre-tax, the money grows tax deferred and qualifying medical expenses can be paid with tax-free withdrawals. You can invest the money in your HSA for growth, and the balance can be rolled over year after year, making it a powerful potential supplement to other retirement plans. Although HSAs can be used any time to pay for medical costs, many HSA owners pay those expenses out of pocket so their accounts can continue to grow.

Consolidating an old HSA into your current one can be a smart move because combining accounts can reduce account fees and make it easier to manage your investments. You’ll also run less risk of losing track of an account.

The best way to consolidate would be to contact your current HSA provider and ask them to facilitate a direct trustee-to-trustee transfer from the old account. However, not all providers allow “in kind” transfers of investments. It should be no problem to transfer any cash in the account, but you may be required to sell the investments. You won’t owe federal tax on such a sale, but some states, including California, will tax any capital gains that result.

Filed Under: Health Insurance, Q&A, Retirement Savings, Taxes Tagged With: consolidating accounts, consolidating HSAs, health savings account, HSA, HSA contribution limit

Q&A: A first paycheck means getting to know Uncle Sam

December 30, 2024 By Liz Weston

Dear Liz: My recently graduated child got a job and he will be given a 1099 tax form for his earnings. I know he will have to file his taxes differently and will need to pay both state and federal income taxes, but will he also make payments toward Social Security? Will these months (and maybe years) go toward his lifetime “credits” of paying into Social Security?

Answer: The company is paying your son as an independent contractor rather than as an employee. That means he will need to file his taxes as someone who is self-employed. So yes, he’ll be paying into Social Security — and he’ll be doing so at twice the rate of employees who receive W2s.

Normally, Social Security and Medicare taxes are split between employees and employers. Both pay 7.65% of the employee’s wages, for a total of 15.3%. Self-employed workers must pay both halves.

Your son won’t have taxes withheld from his earnings, so he’ll likely need to make quarterly estimated tax payments to avoid penalties. A tax pro can help him set up these payments and suggest legitimate expenses he can use to reduce his tax bill.

Filed Under: Kids & Money, Q&A, Social Security, Taxes Tagged With: 1099, 1099 form, FICA, independent contractor, Medicare taxes, Social Security taxes

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