IRA’s With Alternative Assets And The IRS Crackdown

You may have seen headlines recently about proposals to crack down on IRA’s with large balances and alternative assets. More specifically, Paypal founder Peter Theil has really been in the spotlight with his ROTH IRA balance of $5 billion due to the appreciation of his Paypal stock and then subsequent investments.

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Charitable Giving

If you are charitably inclined, what is the most tax efficient way to give to those charities?

Let us start with standard deduction versus itemized deductions. Your itemized deductions must exceed your standard deduction for any tax benefit. There is a caveat for 2021, cash donations up to $300 for single filers and $600 for Married Filing Joint are allowed as above the line deductions.

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Buying or Selling Your Home

With interest rates so low, many people are taking advantage of this time and buying new homes so that they can lock in a low mortgage rate for 30 years. The advantage to locking in a low interest rate when purchasing (or refinancing) is that the principal and interest is fixed. You may have seen a notice each year from your mortgage company increasing your monthly payment slightly. This is because your total mortgage payment is made up of PITI—Principal, Interest, Taxes, and Insurance. Generally, your property taxes and your home insurance costs go up a little each year. The majority of your monthly payment is tied to your principal and interest which is why it is a good idea to lock that interest rate portion in as low as you can.

Capital Gains

With the increase in housing prices this past year, many people are capitalizing on this and selling their homes. If you have a large gain on your home, it is possible that you may owe capital gains taxes. Many years ago, the rule was that if you used the sale proceeds from your primary residence to purchase another primary residence, then you did not owe any capital gains tax. The current rule with proceeds from the sale of your primary residence has limitations. First, you must have lived in the home for at least 2 out of the last 5 years. If this applies, then you can exclude $250,000 from capitals gains tax if you are filing single or $500,000 if you are married filing joint. These are large numbers but depending on how long you have lived in your home and where you are located, you may still have a taxable gain on your property. If you have ever rented your property, you have other rules with depreciation recapture to consider as well.

Cost Basis

If you think you may be above the excludable limits, then you should look at all your costs to make sure you are including everything allowable in that gain calculation. How do you do that? Start with your cost basis. Your cost basis is the purchase price of your home plus any costs associated with that purchase, such as certain closing costs—title fees, legal fees, recording fees, surveys, transfer taxes and title insurance. Then add to your cost basis any improvements you made to your home. Improvements add value to the property or adapt it to new uses. Some improvements are adding rooms, putting in a new system, adding a roof, etc. What is not included in your cost basis are repairs. Check out Publication 523 on the irs.gov site for more guidance with improvements versus repairs.

Cost Basis = Purchase Price + Purchase Fees + Improvements-Depreciation recapture

Your sales price is the selling price less fees paid to sell it (including real estate commissions and fees associated with selling).

Sales Price –Cost Basis = Gain or Loss

If have a gain in excess of the $250K/$500K limits, then you may have to pay capital gains taxes.

Reporting

Also, note that sometimes your gain or loss is reported on a 1099-S Form for tax purposes. This form, like other 1099’s, is sent to the IRS. So, if you did not report the sale along with your costs, you could receive a bill from the IRS. Do not panic, often times it is just a reporting issue. Make sure you go back to your tax return to see if you have a Form 8949. If you do not, you may have to complete that form, or it could just be a response to the IRS letter you receive.

This was a lot of information but can be an important factor in your Financial Plan. If you have any questions or need assistance with your financial life and goals, schedule an appointment with us today—this is what we do!

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

Biden’s Tax Plan

Following are some highlights from Biden’s Tax Plan. Some have been enacted with proposals for extension and others are still proposals.

Child Tax Credit

  • Enacted for 2021 (starts phasing out for single tax filers at $75K and married filing joint at $150K)
    • $3600 for children under 6
    • $3000 for children ages 6-17 (previously children aged 17 were excluded)
    • 50% of the eligible credit can be received with monthly installments from July thru December of 2021
  • Proposal to extend this thru 2025

Child & Dependent Care Credit

  • Enacted for 2021
    • Up to $4000 for one child
    • Up to $8000 for two or more children
  • Proposal to extend permanently

Federal Income Tax Rates

  • Current Top Tier is 37% Federal.  The proposal is to make the top tier 39.6%

Capital Gains Tax Rates-Proposed

  • For individual earning more than $1M, the top 20% would be the same as the ordinary income rate of 39.6% PLUS the existing net investment income surcharge of 3.8% PLUS state tax
  • Qualified Dividends for high earners would also be at this new capital gains rate
  • This CAN be passed retroactively

No Step Up In Basis

  • This proposal has to do with inherited assets.  For example, if your parent passes away with a house currently worth $500K, under current law the beneficiary’s new basis in the inherited house is the current date of death value–$500K.
  • The proposed change is to not increase the basis. So in the same house scenario above, the basis would be whatever the parent paid for the home.  So if the parent paid $100K for it, that would be the basis.  This matters when you sell the home.  You will have to pay tax on the gain.  In the first scenario, there would be no tax.  In the second scenario, there would be tax on $400K.

We will have to see what sticks with Congress and plan accordingly.  Taxes are just one piece of your financial plan that you navigate through on your Financial Journey.  Every situation is different and some of these will not affect you.  The important part is sticking to your plan and revisiting it on a regular basis to make sure you are on track with your goals and what is most important for you.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

IRA vs. ROTH IRA

Whether you are preparing your income taxes yourself or you have hired someone to do them for you, you will most likely be seeing the question asking if you contributed to an IRA or ROTH IRA for the previous tax year.  By the way, you have until April 15th to make that contribution for the previous year-just make sure it is reported in your filing!

IRA’s

  • Tax Deferred—you get a tax break on the money you contribute.  You will pay tax on all distributions.  If you withdraw before age 59.5, there is a 10% penalty on top of the taxes unless you qualify for an exception.
  • Tax-Deductible Eligibility—If you and your spouse are not covered by a retirement plan at work, then your contributions are tax deductible.  If one or both of you are covered by a work retirement plan, then there are further income tests to determine if the contribution will be tax deductible.
  • Contribution Limits—For 2020 and 2021, the higher of your Earned Income or $6000 ($7000 if age 50+). 
  • Required Minimum Distributions—you are required to start taking money out of your IRA’s every year starting at age 72.   The government gave you a tax break all of these years, now they need some revenue.

ROTH IRA’s

  • After tax contributions—you contribute after tax money.  As long as the ROTH IRA has been open for 5 years and you are 59.5, then your distributions are TAX FREE.
  • Contribution Limits—the same for IRA’s above ($6K, $7K for age 50+).
  • Contribution Eligibility—there are income limits to be able to contribute to a ROTH IRA
  • No Required Minimum Distributions while the owner is alive, however, a beneficiary will be required to take minimum distributions but no tax will be due.

Let’s say you aren’t eligible to contribute to an IRA or a ROTH IRA, but you really like the idea of this ROTH IRA—because who doesn’t like TAX FREE MONEY?! If you have an IRA account you can do what is called a ROTH Conversion.  A ROTH Conversion is the process of converting your IRA account to a ROTH and paying the taxes now.  There are some other things to consider when doing this, so you should consult a professional.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.