Ask Liz Weston

Get smart with your money

Taxes

Q&A: How to retrieve old W-2 forms

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Dear Liz: I have several years missing from my Social Security earnings history, dating back to 1999. I have been filing income taxes jointly with my wife but we only kept our files for five years. How do I go about retrieving past income documents like my W-2s? I contacted Social Security and the IRS but can only get tax transcripts dating back to 2009.

Answer: Social Security says you ordinarily have three years to report mistakes. (Actually, being Social Security, it’s “three years, three months and 15 days.”) But you can correct mistakes further back if you have sufficient proof, such as tax forms, W-2s or pay stubs.

You can try contacting old employers to see if they can produce the W-2s you’re missing. Otherwise, write down as much as you can remember about where you worked, including the name of the employer, the dates you worked there and how much you earned. Then contact Social Security again, provide the information you’ve gathered and ask for help in filling in those missing years.

This is one reason why it’s smart to hang onto tax returns indefinitely. Even though you can (and probably should) shred backup documentation after seven years or so, you should keep copies of anything filed with the IRS, including W-2 forms.

Q&A: Spreading out the tax hit from capital gains

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Dear Liz: We are in the lowest tax bracket. If we sell a capital gains asset worth several hundred thousand dollars, does that put us in a higher bracket and we pay 20% or do we remain in the lower bracket and pay 15%?

Answer: In the two lowest federal income tax brackets, the capital gains rate is actually zero. For a married couple filing jointly, taxable income below $18,550 in 2016 would put you in the 10% tax bracket, while income between $18,550 and $75,300 would put you in the 15% bracket. Both 10% and 15% income tax brackets pay no federal tax on long-term capital gains.

But capital gains count as income in determining your tax bracket. So a big capital gain can push you into a higher bracket, which means you would pay a higher capital gains rate.

Let’s say your normal taxable income is $75,000. You sell an asset with a $25,000 capital gain. Now you’re in the 25% tax bracket with taxable income between $75,300 and $151,900, which means your long-term capital gains rate will be 15%.

A really big gain would put you in the top 39.6% bracket, which applies to taxable income above $466,950. In that bracket, your capital gains rate would be 20%. Also, an additional 3.8% surtax applies for taxpayers with adjusted gross incomes over $250,000 for married couples and $200,000 for singles. The surtax is applied to the lesser of the taxpayer’s net investment income or the amounts over those limits.

There may be ways to alleviate or spread out the tax hit. You could sell losing investments to offset some or all of the gain. Another option for some assets is to sell a portion at a time over several years, or use an installment sale. A tax pro can walk you through your options.

Q&A: Options for paying a big IRS bill

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Dear Liz: I sold one mutual fund to invest in another fund with the same company. The tax statement shows this as a capital gain so large that I cannot afford to pay it all in one payment to the IRS. This is a disaster. Is there anything I can do?

Answer: Absolutely. File your tax return on time, since the failure-to-file penalty is much higher than the failure-to-pay penalty. Pay as much as you can when you file the return, and then consider your options.

If you can come up with the remainder within 120 days, then do so. There’s no need to arrange a formal payment plan, but you will owe interest and penalties on the balance until it’s repaid.

If you can’t pay within 120 days, you can ask for an installment agreement. You’ll find an application in most tax software or you can find Form 9465 on the Internal Revenue Service website. You also can try calling the IRS at (800) 829-1040, but prepare for a long time listening to hold music. Budget cuts have left the agency severely short-handed and wait times are considerable.

You also should consider borrowing the money from another source, such as a low-cost personal loan. Another option is to charge what you owe to a low-rate credit card. You’ll pay a small fee for the privilege, but ultimately it may be cheaper than paying interest and penalties to the IRS.

Q&A: Income tax vs. capital gains tax

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Dear Liz: I was wondering about the disabled vet who wanted to sell his home, which had increased in value by about $1 million. You mentioned that “[S]ingle people with incomes over $415,050 in 2016 are subject to the 39.6% marginal tax rate. Most people pay capital gains tax at a 15% rate, but those in the top bracket face a 20% rate.” Would he have to pay federal income tax on the non-exempt portion of the equity as well as paying 20% capital gains on the non-exempt portion?

Answer: You may pay income tax or capital gains tax on a source of income, not both. If an investment has been held less than a year, the gain is considered short term and subject to income tax. Investments held more than a year are considered long-term and qualify for capital gains treatment.

When you’re selling your primary residence, the first $250,000 in profit is typically exempt from tax. The rest of the gain would be taxed as a capital gain.

Q&A: Gift tax returns

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Dear Liz: You recently answered a question about gift taxes and mentioned gift tax returns. Who is supposed to report the gift, the one giving or the one receiving the money? It seems like the one receiving the gift should, but in the answer it seemed the one giving the gift was subject to taxes.

Answer: The giver would file the return. The gift tax rules require people to report any annual gift over $14,000 to any one person, although the givers don’t owe gift taxes until those aggregate amounts exceed a certain limit (currently $5.45 million). The gift tax rules are designed to keep wealthy people from circumventing estate tax laws by giving vast amounts to their heirs before they die.

Q&A: Tax break for helping out son

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Dear Liz: Our son bought a house and lost his job two months after the purchase. We have helped him stay afloat. Thankfully he has a new job. We don’t expect to get the money back — he is still trying to get out from under — but we have given him close to $10,000. Can we claim this as a “gift” to him on our income taxes?

Answer: The IRS doesn’t view money given to family members as a charitable donation. In other words, there’s no tax break for bailing out your kids.

If you’re so wealthy that estate taxes might be an issue — which means estates worth more than $5.45 million a person in 2016 — then you might be concerned about gift tax rules. You’re allowed to give a certain amount to any person annually without having to file a gift tax return. In 2015 and 2016, that amount is $14,000, so you and your wife together could give up to $28,000 to your son without needing to file a gift tax return. It’s only when the total value of gifts over this annual exclusion hit $5.45 million that you’d have to worry about paying gift taxes. Clearly, this isn’t an issue for most families.