Q&A: Death, taxes and home sales: How to handle the mixture

Dear Liz: My wife and I bought our house 61 years ago in Southern California. The wife passed away seven years ago, and I became the sole owner. If I should die owning the house, I know my daughter will inherit and her tax basis will be the value of the house on that date. But if I sell the house, I’m not sure what my basis will be. Do I pick up the 50% of what the house was worth on the day my wife died and add to that the 50% of the original purchase price that would be mine? Or is my basis the original price of the house?

Answer: In most states, only your wife’s half of the home would get a new value for tax purposes at her death. In community property states such as California, though, both her half and yours get this step up in tax basis.

Tax basis determines how much taxable profit there might be when property and other assets are sold. For those who aren’t sure how tax basis works, a simplified example might help.

Let’s say Raul and Ramona bought their home for $40,000 in 1959. In 2013, when Ramona died, the home was worth $800,000. Today, it’s worth $1 million.

At her death, Ramona’s half of the home got a new tax basis. Instead of $20,000 (half of the purchase price), her half of the home now has a tax basis of $400,000 (half of its $800,000 value at the time).

In most states, Raul would keep the $20,000 tax basis on his half, so his combined basis in the home would be $420,000. If he should sell the home for $1 million, the profit for tax purposes would be $580,000.

In California and other community property states, the entire house gets a step up in basis to $800,000 when Ramona dies. If Raul sells the house for $1 million, the profit (or capital gain, in tax parlance) would be $200,000.

Of course, there would be no tax owed on this home sale, since Raul can exempt up to $250,000 of home sale profits. Raul could use Ramona’s home sale exclusion, and avoid tax on up to $500,000 of home sale profit, if he sells the home within two years of her death.

If Raul keeps the home until his death, on the other hand, it will get a further step up in tax basis equal to whatever the home’s fair market value is at the time (let’s say $1.2 million). If the daughter sells it for that amount, no capital gain tax would be owed.

Thursday’s need-to-know money news

Today’s top story: Working remotely in the pandemic may generate a tax surprise. Also in the news: Advice on how to fly safely over the holidays, student debt continues to rise for new pharmacists, and how to save money during Medicare open enrollment this year.

Working Remotely in the Pandemic May Generate a Tax Surprise
Many states require people who work within their borders to pay taxes, even if they live elsewhere.

Ask a Points Nerd: (How) Should I Fly for the Holidays?
If you must travel for the holidays, here’s some advice for how to book hotels and stay safe while flying.

Student Debt Continues to Rise for New Pharmacists
Average student debt among pharmacists increased by 4% to $179,514 for the class of 2020.

How to Save on Medicare Open Enrollment This Fall
Open enrollment is just six weeks away.

Some remote workers may be in for tax surprise

If the pandemic caused you to relocate across state lines, even temporarily, the next surprise could be having to file an extra tax return and potentially pay more taxes.

The issue gained national attention in May, when Gov. Andrew Cuomo of New York said out-of-state health care workers who came to help with the pandemic would face New York income taxes.

Cuomo’s comments generated outrage, but in fact, most states tax people who earn money within their borders, even if those people usually live and file tax returns elsewhere. Even a single day in some states can trigger a tax bill. In my latest for the Associated Press, how to prepare for possible tax hassles.

Monday’s need-to-know money news

Today’s top story: How hotel prices changed in 2020 vs. 2019. Also in the news: A new episode of the SmartMoney Podcast on emergency loans and the perks of buying local, what to know about EFTs and adding them to your portfolio, and what to do if you receive an unpaid notice from the IRS.

Analysis: How Have Hotel Prices Changed in 2020 vs. 2019?
Hotel prices have dipped significantly.

Smart Money Podcast: Buying Local, and Emergency Loans
How to help local businesses hit hard by the pandemic.

What are ETFs and why you should consider them for your portfolio
Many investments wrapped in a single package.

What to Do if You Receive an Unpaid Notice From the IRS
Don’t panic.

Q&A: Where’s that tax refund?

Dear Liz: Like the writer in a recent column, I received a stimulus check for my late mother and dutifully mailed the IRS a check as the agency requested on May 6. The check finally cleared on Aug. 12. So, yes, the IRS will absolutely eventually cash it. However, I’m still waiting for the federal tax refund for my mother’s final tax return, which I mailed on April 20. I figure if it took them over three months to just cash a check, it’ll be at least a couple more months, if not longer, to process the return.

Answer: You’re probably right, and — as the previous column emphasized — the IRS does not need calls from people about non-urgent matters as the agency slowly works through its massive backlog. If you can wait to talk to the IRS, in other words, you should.

Q&A:The IRS doesn’t need your worry

Dear Liz: My mother received a stimulus payment on behalf of my late father in April. Per an IRS directive on May 6, I returned the money to the IRS. As of Aug. 1, the check I sent has not been cashed. I have made two phone calls to the specific IRS phone number that deals with any stimulus payment issues and both times have been told, “Don’t worry about it.” Do you have any suggestions for us?

Answer: Yes. Don’t worry about it. And stop calling.

The IRS is dealing with a tremendous backlog that accumulated while its operations centers were shut down because of the pandemic. Although the centers have reopened, the pandemic is still affecting the agency and probably will do so for some time.

The IRS recently warned that “live assistance on telephones, processing paper tax returns and responding to correspondence continue to be extremely limited.” The IRS will cash the check eventually; your calls won’t speed that up and will unnecessarily tax an already overwhelmed system.

In the future, consider using the IRS’ online payment systems. They’re safer than sending checks in the mail and you’ll get instant confirmation that your payment was received.

Friday’s need-to-know money news

Today’s top story: Can you have too much credit? Also in the news: How to safely move during a pandemic, what personal finance apps should be doing to better serve older people, and how to avoid paying a penalty if you missed the tax filing deadline.

Can You Have Too Much Credit?
Credit scoring formulas don’t punish people for having too many credit accounts, but too much debt can hurt scores.

How to Move Safely During a Pandemic
Keeping yourself and your stuff safe.

This is what personal finance apps should be doing to better serve older people
What a survey revealed about the apps.

How to Avoid Paying a Penalty If You Missed the Tax Filing Deadline
You could qualify for a first-time penalty abatement.

Wednesday’s need-to-know money news

Today’s top story: Ask a points nerd: Why won’t the FAA require masks? Also in the news: How to get started if you’ve never had a bank account, Virgin Atlantic files for bankruptcy in the US, and it’s time for a mid-year tax withholding checkup.

Ask a Points Nerd: Why Won’t the FAA Require Masks?
We need more federal regulation when it comes to passengers’ air safety.

How to get started if you’ve never had a bank account
Welcome to the world of banking.

Virgin Atlantic Files for Bankruptcy in the US
What that means for your miles.

It’s Time for a Mid-Year Tax Withholding Checkup
Spare yourself from end-of-the-year surprises.

Q&A: Side effects of IRA conversions

Dear Liz: I thought your readers would benefit from additional knowledge about Roth conversions. I started converting our IRAs to Roth IRAs when my wife and I turned 60 years old. Years later, I realized that our premiums for Medicare Part B and D were higher because our income in those years exceeded $174,000.

Answer: Triggering Medicare’s income-related monthly adjustment amount (IRMAA) is just one of the potential side effects of a later-in-life Roth conversion.

That’s not to say these conversions are a bad idea.

People with substantial amounts in traditional retirement accounts might benefit from transferring some of that money to Roth IRAs, particularly if the required minimum withdrawals that start at age 72 would push them into a higher tax bracket. They may have a window after they retire, when their tax bracket dips, to convert money and pay the tax bill at a lower rate.

Roths also don’t have the required minimum distributions that apply to other retirement accounts, so people have more control over their future tax bills.

Converting too much, however, can push people into higher tax brackets. Many financial advisors suggest their clients convert just enough to “fill out” their current bracket.

For example, the 12% bracket for married people filing jointly was $19,401 to $78,950 in 2019. A couple with income in the $50,000 range might convert $28,000 or so, because a larger conversion would push them into the 22% tax bracket.

But there are other considerations, as you discovered.

People with modified adjusted incomes above certain levels pay IRMAA adjustments that can add $144.60 to $491.60 each month to their Medicare Part B premiums for doctor visits and $12.20 to $76.40 to their monthly Part D drug coverage premiums. Higher income could reduce or eliminate tax breaks that are subject to income phaseouts, and conversions can subject more of your Social Security benefits to taxation.

At the very least, you should consult a tax pro before any Roth conversions to make sure you understand the ramifications. Ideally, you’d also be talking with a fee-only, fiduciary financial planner to make sure conversions, and your retirement plan in general, make sense.

Q&A: IRS pays interest on late refunds

Dear Liz: I filed my return electronically with direct deposit. I have yet to receive my refund or that stimulus relief check. We have to pay interest on any late tax payment. Will the IRS pay interest on late refunds?

Answer: The IRS has said it will pay interest on late refunds if the return was filed by July 15, the extended tax deadline. The interest “will generally be paid from April 15, 2020, until the date of the refund,” the IRS says on its site. Don’t expect to get rich: The interest rate for the second quarter, which ended June 30, is 5% a year, while the interest rate for the third quarter, which ends Sept. 30, is 3% a year.