Ask Liz Weston

Get smart with your money

Taxes

Q&A: Determining a house’s value

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Dear Liz: I understand that as a widow, if I sell my house I get the stepped-up value from the year my husband died. Should I have gotten an appraisal at that time (26 years ago)? How do I find out what my home was worth then? We bought it in 1973 and he died in 1998.

Answer: In most states, half of a couple’s jointly owned property gets a new, favorable step-up in tax basis at a spouse’s death. In community property states such as California, both halves of the property may get that step-up.

A professional appraisal 26 years ago could have been helpful, although a good appraiser can do a retroactive assessment, said Jennifer Sawday, an estate planning attorney in Long Beach.

Before you hire an appraiser, though, hire a tax pro, Sawday said. The CPA or tax preparer will use the data to file your return, report your home sale and compute any capital gains taxes owed, so find out how they recommend obtaining it.

Q&A: How gifting property before you die gives your kids a tax headache

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Dear Liz: My wife and I have purchased a few properties over the years and now we would like to give these properties to our children. I’ve read that the best way to gift properties is to wait until we pass away, which sounds terrible. Is there any way to transfer or gift properties without paying a huge amount of taxes?

Answer: Yes, although you’d likely be shifting the tax bill to your kids.

Currently you have to give away over $13 million in your lifetime to owe gift taxes. But if you transfer the properties to your children during your lifetime, they will also get your tax basis in the properties.

That means if they sell, they’ll owe taxes on the appreciation that’s occurred since you bought the real estate. If you bequeath the properties at your death, by contrast, the properties get an updated value for tax purposes and the appreciation that occurred during your lifetime isn’t taxed.

Gifting the properties may still be the right choice, but consider talking to an estate planning attorney and a tax pro before proceeding.

Q&A: Qualified charitable distributions

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Dear Liz: This is the year I turned 73, and I’m planning how to take my required minimum distribution from my IRA and 403(b) accounts. I know from a Google search that I can redirect this distribution to charities without being taxed, up to a certain amount. However, the financial services company holding my 403(b) money tells me they can’t do that and won’t engage. They say take the money, pay the taxes, then donate it and take the tax write-off. Why would they make this difficult?

Answer: Because they’re correct. You can’t make a qualified charitable distribution from a workplace retirement plan. That option is available only for IRAs.

Q&A: Paying taxes electronically

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Dear Liz: I’m a CPA and your answer about paying taxes electronically was spot-on. But there’s a pro tip you might share: I advise all my clients to establish accounts with the IRS and their state tax authority. That allows my clients to schedule payments more easily with a single log-on (rather than having to validate each time with prior year tax information). Such accounts also provide ready access to payment history, making it easier to share that information with me at tax time.

Answer: That’s an excellent suggestion. The IRS’ Direct Pay service offers a free, secure way for people to pay annual and estimated taxes from their bank accounts without having to register in advance. The IRS also provides an option to pay with credit or debit cards, for a fee.

Creating an IRS online account allows you to see amounts you owe, past payments and any scheduled payments, plus you can make a same-day payment from your bank account. You can view details of your most recent tax return, get instant access to tax transcripts and authorize your tax pro to represent you if there’s a problem. In fact, many tax pros recommend setting up an account just in case you get audited or run into other problems, rather than waiting to do it while under duress.

You’ll need a valid email address, a mobile phone number, identification such as a passport or driver’s license and your Social Security or tax identification number. The process typically takes 15 to 30 minutes to complete.

Q&A: How to roll over your 401(k) into an IRA

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Dear Liz: My question relates to 401(k) rollovers. Are there different tax implications when it comes to rolling the money into a traditional IRA versus a traditional IRA brokerage fund? I’ve always associated the word “brokerage” with after-tax dollars.

Answer: Financial terms can get confusing, so let’s start with the basics. Both 401(k)s and IRAs are tax-advantaged accounts that allow you to save for retirement. Employers offer 401(k)s, but you can open an IRA at a brokerage, bank, credit union, mutual fund company or robo advisor, among other providers. Some people liken 401(k)s and IRAs to buckets that receive your retirement funds, while the providers are where you store the bucket.

If you leave the employer that offers your 401(k), you have the option to roll your account into an IRA so your money can continue to grow tax-deferred. (You often have other options, such as leaving the money in your former employer’s plan or rolling it into a new employer’s plan.)

When you arrange a direct rollover, the money goes straight from the 401(k) to the IRA provider and no taxes will be withheld or charged. By contrast, if you opt to have a check sent to you rather than the IRA provider — something known as an indirect rollover — 20% of your funds will be withheld for federal taxes.

If you want to avoid those taxes and have your money continue to grow tax deferred, you’d have to deposit the check into the IRA within 60 days and come up with that 20% out of your own pocket. You’d get the money back in the form of a tax credit once you file the tax return for that year, but clearly the simpler, better way is to make the rollover a direct one.

Q&A: With tax day coming, here’s what to know about the difference between an enrolled agent and a CPA

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Dear Liz: What is the difference between using an enrolled agent and a certified public accountant to file income taxes? I have used a CPA in the past to file my federal and state income taxes but I need to find a new person for this job. My financial situation is fairly simple: single, no dependents and no real estate. Is an EA qualified to file income taxes? Do they look for possible tax credits? What happens if there is an audit?

Answer: Enrolled agents specialize in taxes. They can prepare returns, provide tax advice and represent you in an audit. (In fact, many enrolled agents used to work for the IRS, giving them intimate knowledge of the agency’s policies and practices.)

CPAs have broader education requirements and don’t necessarily specialize in taxes. They may be auditors, financial planners or business consultants, for example.

If you have complex financial or tax needs, a CPA could be a good fit. Otherwise, an EA could fill the bill and may be more economical. You can get referrals from the National Assn. of Enrolled Agents.