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Taxes

The tax credit fix many can’t afford to miss

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Families battered by the pandemic recession soon may discover that the tax refunds they’re counting on are dramatically smaller — or that they actually owe income tax. Congress offered a partial solution, but the fix hasn’t been widely publicized, consumer advocates say.

Refunds are crucial to many lower- and moderate-income households, which use the money to catch up on bills and medical treatments, pay down debt and boost savings.

But the unemployment insurance that kept many people afloat last year may cause problems at tax time this year. In my latest for the Associated Press, how a tax credit fix could lessen the blow of unemployment benefits taxes.

Q&A: Future home sale affects Medicare

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Dear Liz: I am 65 and have a very low income but will be selling my home of 25 years soon to downsize. How will the one-time capital gains affect my Medicare payments, which are currently at the minimum? Can I share with the Social Security office that this is a one-time event and that the following years will all have a very low income stream? Will they adjust my payments up one year and back down the next?

Answer: You can exempt up to $250,000 per person of home sale profit from capital gains, so only profit above that amount would be added into your modified adjusted gross income to determine your Medicare premiums. There’s a two-year lag, so if you sell your home this year and report it on the tax return that’s due next year, your premiums will increase the following year (in your case, in 2023).

As noted in a previous column, you can appeal the increase if your income was affected by certain life-changing events including marriage, divorce, death of a spouse, work stoppage or reduction, loss of income-producing property (because of a disaster or other event beyond your control), loss of pension income or an employer settlement payment because of an employer bankruptcy or reorganization. If you don’t qualify to appeal, the increase would only be for one year and your premiums would return to normal afterward.

Another option is to structure the deal so you receive the payout over time, rather than all at once, but consult an accountant or financial planner before proceeding.

Q&A: A house in one state, a spouse in another. What about taxes?

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Dear Liz: My husband recently took a dream job in a different state. We are renting a place there, and it is his primary residence. We own our home in the “original” state, where I live and work. We intend to keep our home for another three to four years. How will this impact our taxes? We are married, filing jointly and our income is straightforward W-2. Will we need to file as residents in both states? I know most states will credit taxes already paid on income earned in another state, but which is our “primary” residence? I may base permanently in the new state because I can work remotely. I am confused about filing jointly when each spouse lives in a different state.

Answer: Please talk to an accountant about the best way to handle your returns. In some cases, spouses who live in different states can submit their federal tax returns as “married filing jointly” while filing their respective state returns as “married filing separately.” Other times, there may be tax advantages to filing jointly in one state, or the nonresident spouse will be required to file.

If you are required to submit a return to the nonresident state, your accountant can tell you whether you qualify for credits. Alternatively, there may be a reciprocal tax agreement between states that allows nonresidents to avoid taxes if they follow certain rules.

But you’ll want to be particularly careful if you currently live in a high-tax state with a reputation for aggressive residency audits such as California, New York and Illinois.

A state auditor may decide that your husband’s move is temporary and his income is thus subject to your state’s taxes. It would be up to him to prove otherwise, and that may not be as easy as changing his voter registration. A tax pro can help guide him, and later you, on the best way to establish residency.

Friday’s need-to-know money news

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Today’s top story: Got life insurance? You may not have enough. Also in the news: An investing workaround for possible higher taxes post-election, get ahead of holiday debt by setting a payoff plan, and teens are calling for more personal finance education to bridge the economic opportunity gap in America.

Got Life Insurance? You May Not Have Enough
Your workplace life insurance policy may not be enough if anyone relies on your income or the care you provide.

Expecting Higher Taxes Post-Election? Consider This Investing Workaround

Get Ahead of Holiday Debt by Setting a Payoff Plan

Teens call for more personal finance education to bridge economic opportunity gap in America
Making a more equitable future.

Q&A: Tax consequences of giving versus bequeathing

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Dear Liz: Someone who expects to be an executor recently wrote to you about a plan to distribute individual pieces of art to family members. Your response addressed the executor’s responsibility to determine the art’s worth before doing so. You also suggested having the parent designate what was to go to whom. What would the consequences be of the parent giving the pieces of art to the intended recipient prior to death? My mother did both; i.e., gave some to me and some to my sister prior to her death, and designated others to be distributed following her death. She had personal rather than financial reasons for doing it this way.

Answer: Let’s say your mom bought a painting from a struggling artist for $500. Later, the artist became famous and the painting’s value rose to $500,000. If she gave you the painting and you sold it, you would have to use the amount she paid — her basis — to determine the taxable profit ($499,500).

If she bequeathed the painting to you instead, the artwork would get a new tax basis which is usually its value on the day she died. You could sell the painting for $500,000 and not owe a dime in taxes.

Few people have artworks that experience that kind of appreciation — or any appreciation, for that matter. The issue of basis most often comes up when people are transferring real estate, stocks or other assets in transactions that are reported to the IRS. If your mom did have valuable works, though, transferring them through bequests could be advisable.

Q&A: Refinancing brings tax questions

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Dear Liz: I recently refinanced my house and got $9,400 cash back. I also received a $2,400 escrow check from my previous mortgage lender. Is this money taxable? Should I put away a certain percentage of it to pay those taxes? My plan is just to put it back into household repairs (fireplace, painting, etc.).

Answer: You got cash back because you took out a larger loan than the one you previously had. You have to pay that money back, so it’s not taxable income. The escrow check represents a refund of money you’d already paid to the first lender. You don’t get taxed on that, either.