/
RSS Feed
Welcome to another episode of the Dr. Friday Radio Show! In this episode, Dr. Friday provides expert advice on navigating the complex tax landscape, discussing topics such as extensions, phantom income, and real estate tax implications. This episode is packed with valuable insights to help you manage your finances better.
Key Points
- Tax Extensions and Deadlines:
- Discussion on the recent tax extension deadline of June 17.
- Importance of filing extensions to avoid penalties.
- Upcoming deadlines for individuals (October) and businesses (September).
- Phantom Income:
- Explanation and tax implications of phantom income.
- Examples in Sub S corporations, 1065 partnerships, or LLCs.
- Recent court cases and controversies around phantom income taxation.
- Pass-Through Entities:
- Understanding pass-through profits and their impact on individual taxes.
- Differences between cash basis and accrual basis for tax purposes.
- Uber and Lyft Drivers:
- Tax tips for ride-sharing drivers.
- Importance of accurately tracking mileage.
- IRS audits and common pitfalls for drivers.
- Real Estate and Capital Gains:
- Tax implications of selling primary residences.
- Exclusions available for married couples versus single individuals.
- Special considerations for retired individuals and those on Social Security.
- Quarterly Tax Estimates:
- Importance of making quarterly estimated tax payments.
- Penalties for underpayment and how to avoid them.
- How to calculate quarterly payments to avoid surprises.
- Inheritance and Taxes:
- Tax treatment of inherited properties and cash.
- Step-up basis and its impact on capital gains.
- When inherited money or property becomes taxable.
Transcript
Hey, this is the Dr. Friday show.
If you want to join the show, you can at 615-737-9986.
615-737-9986.
You’re going to want to open the phone lines.
And we’re talking today about my favorite subject,
which is obviously taxes and anything to do
with basically money.
There’s not been a lot of tax changes, as we know.
Many of you were under extension until 6/17
and that’s already passed.
So hopefully you filed extensions.
That way you’re good until October for individuals,
September for businesses.
And you’ll be able to then make sure everything is filed
and done properly.
I had an interesting question that came in the email bag.
And I thought it was interesting
’cause it was referred to as phantom income.
There’s been some controversy a little bit
on what is phantom income
and should I have to pay taxes on phantom income?
And for anyone that’s actually part of a sub S corporation
or a 1065 partnership or LLC,
you probably know we call it pass through,
but it is income that you’re going to want to,
you will pay tax on, right?
So if a business you’ve invested in as a partner
and you make money, but maybe they can’t distribute it.
So let’s say you own 10% and they make a hundred thousand.
So theoretically your K1 could come to you
with a $10,000 profit,
but maybe the money’s tied up in inventory or equipment.
So it’s not actually tangible.
Therefore no distribution can be done
of that $10,000 of profit.
And so you will pay tax on that $10,000,
even though it’s not in your pocket.
So that’s considered phantom income.
And then it adds to your basis.
And then later, if there’s a distribution,
you may not have to pay tax on all of it
because some of it may be distributed later
from prior profits.
But the question came down was,
should I have to pay tax on phantom income?
It’s not income.
I do my taxes on the cash basis.
Therefore, why am I paying tax on money I didn’t receive?
And that is because the business that you invested in
did make a profit.
They did not make a profit that could be distributed,
but it was a profit,
even on the cash or and or accrual basis.
And the business could be doing it on the accrual basis,
even though you do your taxes on the cash basis.
So there are some numbers or some court cases
and things coming through.
One individual is in a tax court situation
where they are arguing the point
and their numbers are much larger.
It was like, I don’t know, $500,000 pass through.
And they never received a dollar of it.
Therefore, they’re saying they shouldn’t be held responsible
for paying taxes on it.
But it’s not a C corporation, right?
We all know what the C corporation,
the corporation pays taxes.
And then when they distribute,
the individuals pay taxes and it’s double tax,
which is what we all try to avoid in life.
And so the next thing you have is the individual
that has passed through,
which is a sub S corporation and or LLC or partnership,
depending on it’s a hybrid.
So it could be taxed in a couple of different directions,
but all of them do a pass through of profits
from said investment to the shareholders
or members or partners.
And so that is, and again, it does get added to basis.
So later if the business sells and you’ve already paid tax
on the money that’s in the basis,
you will eventually get that money back.
Or if you have big losses, then you pay tax
so that added, so that will give you the ability.
You can’t take a loss on a business, a partnership
or any pass through that exceeds your original basis.
So that is an important thing.
So you don’t, and that’s something I have seen
a lot of people do.
And this really got changed probably back in 17, 18,
when basis actually started being reported on the K ones
so that people could see, hey, my basis is a negative
and now I’ve got a loss.
Now, unless you have a personal guarantee down
on some of these, otherwise that loss is not yours.
You didn’t physically lose that money.
The company lost it and it’s passing through to you,
but it is only a pass through.
You cannot deduct that money off of your personal tax return
unless you physically have a loss
or you’re held liable for that loss
if the company was to go under.
And that’s a really big and important question
because again, I have seen many people
that have taken losses to offset gains.
And then, obviously IRS comes back
and they review these returns and they go,
well, I’ve got a K one with a loss,
but your basis was already negative before that.
You cannot claim that loss.
So if you’ve got questions, maybe you’re doing your taxes
or you’re looking at, many of us are still on extension
for 2023 or you’re working, it’s six months
almost through 2024 and maybe you have had some sales
of real estate, be that primary or rental,
or you’ve invested into something
that has actually now distributed income.
If you’ve got questions, you can join the show
at 615-737-9986, 615-737-9986, taking your calls,
talking about what we have,
as far as what may be affecting your taxes.
I know I have a large number of people
that have taken up Uber or Lyft doing side jobs that way,
which are considered self-employment,
which does mean that you have the ability
to deduct some expenses against those jobs.
Of course, for Uber and Lyft,
the biggest thing is your miles.
But keep in mind, there has been a number of audits done
by the IRS on Uber drivers
because people are overstating miles
that they can’t justify.
It doesn’t mean that they’re not right or wrong,
but if you can’t justify the number on your tax return,
I don’t suggest putting it down.
So if you are using mileage or IQ,
I mean, Uber and Lyft both present a number
that they have paid by the miles that’s been tracked
from their aspect of payment.
But many times there is some return.
Like for example, I flew in last week
and I took an Uber from the airport down to Brentwood
and that driver was going back up to the airport.
He wasn’t picking up a load or an individual.
Apparently there wasn’t something.
So he said he was just gonna head back up to the airport.
Now that would be business miles
’cause he was returning back to pick up another driver.
He wasn’t stopping, he wasn’t going by home,
he wasn’t doing anything for personal reasons.
And if some ride came available on his way
between Brentwood and the airport,
I’m sure he would have picked that person up.
But that’s the kind of thing
that would not have been most likely tracked by Uber
because he was not on their clock.
But if you drive from home to your first pickup is not,
that is commuting, that’s to your first job.
So wherever your first pickup is,
is your actual start of your miles.
And if you were to stop and do the grocery store
or pick up a child from school or daycare or whatever,
any of those miles commuted in there are not business miles.
So again, having something like mileage IQ
that shows every stop and every start
and it has a log is a great idea for any of my drivers,
even self-employed individuals.
If you’re using miles,
have a chart that shows where you stopped,
where you started.
I mean, and again, any individual that has a business
and your business requires you to go to one location,
home to that one location
is never going to be business miles.
For example, my office is in Brentwood.
I live in Spring Hill.
So when I drive from Spring Hill to Brentwood,
I can’t deduct those miles
even though I have a home office and a business office.
I meet my clients at that office
that I choose to have a home office.
And so therefore my real office is in Brentwood.
So my home to business is commuting.
From that point on,
if I were to go to lunch and meet a client,
if I was to drive out to someone’s office,
meet some other person,
all of those would be legitimate miles for business.
But make sure you are tracking that details.
And it does add up every time you go to the bank,
every time you have to go pick up supplies,
office supplies, whatever.
If you are a person that has to run
and do those kinds of situations,
then it’s important that you have that information
at your fingertips and you know how many miles,
’cause at 65 cents a mile, that is pretty darn sweet.
Even for all of us that might drive vehicles
that are not as auto-efficient as,
or petro-efficient as others.
So again, if you wanna join the show, you can.
615-737-9986.
Got another letter here in the email,
and they’re just wanting to know
if the deadlines for 2024 are any different
than the deadlines for 2023.
And I’m assuming they mean tax filing deadlines.
It doesn’t look like it in 2024.
It looks like April 15th will be tax day again in 2025,
as far as I can tell.
So we’ll be able to stick to all the basic normal deadlines.
Also, make sure you guys are making your quarterly estimates.
I have had a number of people that,
for some reason, this is last year,
it just seemed like they were making them
and now they kind of stopped,
maybe because income had changed, sources had changed.
It’s important because the penalties you get
for not paying, it used to, not so bad.
Interest at the IRS used to be about 7%,
which a lot of people were making that in investments.
Now it’s almost 12% interest.
Penalties, of course, start at 5% per a month,
maximizing on most of them at 25%.
And then they charge interest on penalties as well.
So 12% interest is pretty high, guys.
And then the penalties on top of it,
I mean, easily you can have, you know,
five, $6,000 be added to your bill before you even know it.
So again, make sure if you’re making your quarterlies,
all we have to do is pay 100% of the year before basically,
or 110 to completely eliminate all penalties.
And then if you still owe money,
so if you owe 20,000 in 2023,
and you pay in, you know, 23,000 or whatever for 2024,
but yet you owed 40,
there’s not gonna be a penalty for the difference
as long as you pay that by the due date.
But that’s the kind of thing you wanna do.
And then if you overpay,
well, then you can either get it back as a refund
or roll the money over into the next year,
which is what most of us do.
So that way you can actually
reduce your estimates for the next year, right?
So if you overpay one year, just roll it to the next,
and then you don’t have to pay, you know, as much out.
IRS already has your money, which, you know,
anytime you’re self-employed,
I don’t care what anyone else thinks.
I personally think there’s a partner in my business,
and it is the Internal Revenue Service.
They can be often very silent, which is why I like them,
but otherwise they can be quite boisterous
if you don’t treat them
the way they feel the bylaws should say.
So again, if you have questions, you can join the show,
615-737-9986.
I’m Dr. Friday, I’m an enrolled agent,
licensed with the Internal Revenue Service
to do taxes and representation.
So if you’ve got text questions,
or maybe you have something coming down the line
that could affect your taxes,
this is the show you wanna call in.
We’re gonna take our first break.
When we get back, we can get to some of your phone calls,
or you can email friday@drfriday.com,
and I’ll go through the email bag.
We’ll be right back with the Dr. Friday Show.
All righty, we are back here live in studio,
and if you’ve got a question, again,
the phone lines are open, 615-737-9986,
615-737-9986.
Did get a question through the email bag,
and it was a great question.
I’ve had a couple people this year, for some reason,
unclaimed property that you can go online,
you can see if maybe you had an old paycheck,
or some stocks, or a person that they had a 401k
that they forgot about.
And so anyways, if you go in there,
the state and the federal, I believe,
both have places where you can look.
And then you can get that money back.
But the question she had asked, which was good,
was is it taxable, or would it be taxable to her father?
And in my experience, it really depends on what it is.
For example, the gentleman that had a 401k that was lost,
and then they put the money with the state,
he did receive a 1099-R, showing it as fully taxable income.
The person that we had, just recently,
the gentleman had four or five stocks, little stocks.
But when it came out, it was a couple hundred dollars,
and they had sent him 1099-Bs, just like a regular stock.
So, and they showed the sale price.
And of course, we had no cost basis on any of these,
because he didn’t remember buying them.
He didn’t know if they may have been given to him,
’cause he had worked for some of these companies,
and they may have been just part of his job.
And so he didn’t remember them, so we had a zero basis.
So he had to pay tax on a couple hundred dollars
worth of stock that probably, or may have actually
been a loss, as far as we know.
So those things kind of come out in how they come to you.
But again, I’ve had people that had bank accounts,
or banks that closed, and that became non-taxable income.
So that was a good thing.
All right, well, it looks like we have Mike
on the line from Nashville.
Let’s see if we can get Mike live here,
and see if I can help him out.
Hey, Mike, what’s happening?
– Okay, I’ve got a question about paying taxes
on a house that I sold.
– Okay.
– I’ve got, I’m also on social security.
So I’m trying to figure out if the sale of this house,
’cause I’ve lived in it, you know, for about 10 years.
– Okay, so it’s your primary home, or was your primary home?
– Yeah, it was my primary house.
So I’ve sold it, and I’m wondering
if I need to pay taxes on it,
’cause it was less than 500,000.
And I’m married.
– Well, let me ask, are you married, Mike?
– Yes.
– Okay, and did both of you live in there
at least the last two years?
– Well, I did.
I just got married about a year and a half ago.
– Okay, so she’s already living there.
– And now I’m living in her house,
and I’ve sold my primary house.
– All right, so theoretically, two out of five years,
she had to have lived in there to qualify
for the 100% of it.
But I don’t know if we need all of that anyways.
How much did you pay for the house
back 10 years ago or whatever?
– It’s about 125.
– Okay, and what did you sell it for?
– I sold it for 340.
– Okay, so 255,7370.
We wouldn’t even need her exclusion,
because you would get a 250,000 plus your basis,
which gives it 375, so there’s no tax on this house sale.
Okay, the other question that’s combined with that is,
I’m on Social Security.
So, I know I had trouble when I got married,
because they wanted to charge me extra,
I think it was IRMAA or something.
– It’s called IRMA, but yes,
I know exactly what, for your Medicare side.
– Okay, so the question I’ve got is,
is that gonna count?
Is the sale of that house gonna mean
I’m gonna have to pay more on my Social Security
in a couple of years? – It should not.
– Or not?
– It should not.
It only affects when it affects your tax return,
since this is gonna show up as a zero on your tax return,
filing jointly or singly.
I mean, theoretically, if all you have is Social Security
in this home sale, there’d be no tax return required.
In essence, I would suggest filing,
because they don’t know it’s your primary,
unless you tell them sometimes.
But anyways, no, this should not affect your IRMA.
Now, again, depending on your guys’ joint income,
I wanna say IRMA is like 200,000 for married,
100,000 for individuals, right around that dollar amount.
So as long as you guys are under that, you’ll be fine.
– Okay, so that’s fine. – And the house
would not count towards– – So I really don’t need
to send any quarterly payment in on taxes,
’cause I won’t have any.
– Exactly, exactly.
The only thing is, being that you’re married,
your Social Security could become taxable
because of the joint income.
So you might wanna consider that,
but otherwise, you’re in good shape.
– Okay, thank you.
I heard you talking about that.
I just wanted to clarify it,
but before the end of the quarter here.
– Exactly, smart man, just to make sure,
’cause you don’t wanna then later come up and say,
“Oh my gosh, I owe $10,000 or something,
“and that wasn’t prepared.”
– Right, okay, thank you very much.
– No worries, mate.
Thanks, Mike, I appreciate it.
All right, that was a great question.
And so if you do have questions like that,
you can certainly join the show at 615-737-9986,
615-737-9986.
So there are some exceptions to the moving out
two out of five year situation.
Usually it only has to do with health or jobs,
but sometimes you can, or divorce.
I have had several divorces where people
have purchased homes and not made it the full two years,
but had to sell because of the divorce.
And there are some exclusions in there
that’ll give you a day-to-day calculation,
and maybe not all of the 250,
but depending on how close you are to the two year mark,
they’ll give you a portion of that,
which will help you not pay capital gains
on a house like that.
So anyway, so make sure you talk to a tax expert.
If you do have extenuating circumstances,
Mike won’t have to worry about it.
But primary homes are great, I mean,
as far as being able to do the two out of five year
situation, but if you have,
what one of the things Mike brought up,
which is also something I think a lot of people forget,
or don’t even know really exists
until they end up having to pay on it,
which is IRMA, which is, I don’t know,
I probably can figure out, but what it stands for,
but bottom line is they means test Medicare.
So if you’re an individual that’s over 65 or 65 and older,
then you are now on Medicare most likely.
And so your income now is going to affect,
you think, okay, well, Medicare is Medicare.
That’s what I would have thought until later.
And then I found out that Medicare isn’t Medicare,
Medicare is tested based on how much money you make.
So if you were to have a one-time situation,
and I’ve heard different things,
there’s supposedly a one-time exclusion,
but I heard someone from the Medicare office
physically say to one of my clients
that it has to be a life-changing experience.
For example, you now have retired,
not just a one-time situation,
but bottom line is if you make over $100,000,
be it from a sale or your RMDs or anything you have,
social security, 100% is added to that.
All of that, if you make over 100,000,
they’re gonna start charging you more
than the standard tax or the standard Medicare fees.
And it jumps up every 50,000 or so after that.
And I believe there’s no marriage penalty,
so I think it doubles.
But it’s important to know if you’re making a decision
to convert or to sell something,
how is that going to affect your IRMA?
Maybe a question you need to ask.
Hey, Peggy in Watertown.
Hey, Peg, what’s happening?
– Hey, good afternoon.
We have a farm and we are planning
to sell 15 acres off of it.
And we want to know what,
are we gonna have to reinvest that money
within a certain amount of time to avoid taxes or what?
We are both retired on social security.
– So is the farm your primary residence?
I mean, usually they take five acres in the home,
but how big is the farm?
– Well, it’s 50 acres, but we’re selling 15 acres.
– Right. – Not the house.
– Right, you’re keeping the house.
You’re just selling the dirt right now,
it sounds like, just selling off 15 acres.
So the tax law for this is,
it’s not gonna fall under primary home
because it’s not the five acres and the house.
You’re just selling off a portion of the extenuating dirt
that you have or farmland, whatever the proper term is.
So you have two options.
You can do a 1031 exchange
in which you would take those monies,
and I believe you have 90 days,
and then a little bit more if you have the finance
or whatever to buy like kind,
which would be either any type of real estate.
You could do commercial, rental, whatever,
cannot buy a primary home, or you pay tax.
So the question would be is,
is a like kind even gonna be good for what you’re looking at
because you’re retired?
Are you looking to get into real estate
as a secondary investment or is not really?
– Well, we thought possibly a vacation home.
– Okay. – In another state.
Yeah. – Well, that would be great.
As long as it’s a vacation rental,
you can go spend a couple of weeks there or whatever.
There’s different criteria. – Right.
– You can do what you need, but that would be a viable,
I just, a lot of times with people, as we all get older,
sometimes we try to simplify life
and getting rentals is not always,
but an Airbnb version of that and a rental,
a lot of those places handle everything for you anyways,
but you would wanna look and have that kind of pre-setup
so you know, ’cause what happens is it gives a 1031,
so it just goes into escrow,
and then you would close on the rental
once you closed on the dirt or on the acreage sale.
So that would be the easiest way to do that.
So you kind of know what you wanna do with it before
because it’s a very short windows, 90 days,
it’s pretty short to give them the property
that you’re wanting to close on.
So it’d be good to have it in advance
so you know what you wanna do, it’s less stressful.
But yeah, you can do that
and that way there would be no taxes.
– So would we have to reinvest the whole amount
that we make on that property?
– So let’s say you sell it for 150,000, just as a number,
let’s just say you sell it for 150,
you have to go spend 150.
– Okay, all right, well, thank you, that answers my question.
– All right, thanks for the phone call, great phone call.
Thanks Peggy.
– Thank you.
– All right, we’re gonna take a quick break here
and when we get back, you can join us live here
on the radio at 615-737-9986,
615-737-9986, or you can email friday@drfriday.com.
I realize it is a hot Saturday out there,
so you may or may not be sitting and listening to the radio,
maybe you’re driving or whatever,
but if you wanna join the show again, 615-737-9986,
and we’re gonna be right back with the Dr. Friday Show.
– For existing essential and standard customers.
(upbeat music)
– All right, we are back here, live in Beacon,
and if you wanna join the show you can,
615-737-9986,
live here in studio,
and we are lucky enough to have Elizabeth on the line,
so let’s get her on the phone.
Hey Elizabeth, what’s happening?
– Hello, I was needing to know if I have to pay taxes
on an inherited house for my mother’s that I sold.
– Well, when did you inherit it?
– She passed away,
no, she passed away November of the year before last,
and it was sold this year.
– All right, so here’s the answer to that,
whatever the house was worth November of ’22,
it sounded like, year before last, it may have been ’23,
I don’t know, whatever, she passed away, Elizabeth.
Whatever the house was worth is what your basis is.
So if you sold it for more than it was worth
back in November, then you would pay capital gains.
If you sold it for less, then you would not.
Does that help?
– Okay, so it was valued at $500,000
according to the real estate people.
The month that she passed away,
and it was sold for $462,000.
So I guess the answer is no, it won’t have to be paid.
– You got it.
– Thank you so much, have a wonderful day.
– You too, sweetheart.
All right, and that’s a great question.
Again, often have, I mean, when people pass away,
it’s always great when you can inherit residents right now,
or homes, or real estate, because of this step up in basis
that we get to claim.
It is on the table.
I know Biden is trying to eliminate
that particular inherited situation
because of the fact that it is obviously
costing the government a lot of money,
because if mom and dad paid $10,000 50 years ago,
and now we sell it, and we don’t have to pay any gains,
and mom and dad would have had to,
or they would have had at least a smaller exclusion,
it changes the whole tax law.
So the problem with that is,
is none of us know what mom and dad pay for properties.
Most people, you’re lucky if you can truly find
the original documentation where it was purchased or owned,
but if the case comes down where we have to find out
what the original amount is,
then that’s gonna be really hard for most of us.
I’m gonna be honest.
You’re gonna have a very difficult time
trying to find out what the original purchase price,
because in my family, at least many of them,
was laying that they inherited,
and then they built a home on it after or whatever.
And so you’ve got generational situations,
people that built their own homes,
so there was no original dollar amount.
So you could either go to property taxes,
but we all know how those aren’t necessarily correct,
because look at my own property tax.
I mean, it’s not what I paid for the house.
What the property tax says it’s valued at now.
So where exactly do we go with that?
So right now they basically still have,
and I think they’ll continue at least
with that step up in basis.
All right, let’s see here.
It looks like William was on first, so let’s hit William.
Hey, William, what’s happening?
– Thank you for taking my call.
My question is this.
We are retired.
We’re in our late 70s.
– Okay.
– I don’t generate income from a W-2.
– Right.
– I have a corporation I’ve had for 30 years.
We take dividends because of the tax advantage.
However, my question is this.
Could I take a fee, a directions fee or something,
where I’m getting a 1099,
and could I make a contribution to our IRAs?
– It has to be earnings,
but if you can certainly do something,
if you’ve been in this company,
I’m sure you could justify your time.
In any earnings right now, age does not apply, so yes.
And to answer your question, the basic answer is yes.
If you have earnings,
that earnings can then be converted into IRA or SEP
or Roth IRA, whatever your,
you know, I’m not a financial planner,
but any of that basic situation.
– Now, I take dividends, but that is tax-
– But dividends is not earnings, as you know.
That’s an investment.
So it’d have to come through W-2 or 1099.
– Okay, and I can go 75 max?
– 75 max for each of you,
and you can contribute for your wife.
– All right. – I think you’re married.
– We are, but we both own the company,
so we both could take a directors fee or whatever, 1099.
– Yep.
And if it’s a 1099,
you have to back out the social security
that you’ll still end up paying on that,
because as you know, it only washes earnings for earnings.
So you might want to distribute eight grand to get to 75
if you’re putting 75 in.
– Oh, okay.
Okay, take more than that to make the difference.
– To offset the difference, yeah, exactly.
– All right, thank you.
– No problem, great phone call.
Thanks, William.
All right, let’s hit Jeff real quick.
– Well, hello, Ms. Ardo. – Hey, Jeff.
– Hello.
I’ve been down under, but I didn’t pay taxes down there.
Now, I have a couple of acres in Georgia
that’s unimproved land.
And I live with my father, take care of him,
and rent my house out for $900 a month.
But I live on a HUA disability check.
Now, I will be the inheritor of his property when he’s gone.
And the question is, if I sell the property in Georgia,
and I spend that money on improvements or repairs
to his property, do I still have to pay taxes on it?
– Yep, yeah, they eliminated the reinvestment situation.
So you would either have to have lived in the house,
and I don’t know when this all happened,
but if it’s still your primary,
meaning you lived in it two out of the last five years,
so you could have had it as a rental
for the last two and a half years,
and before that you lived in it,
you would still qualify for the exclusion
on the primary home.
– Well, the property in Georgia is unimproved land.
– Okay, but you said you have a home
that you were gonna sell.
No? – No, no.
I wanna sell the unimproved land.
I’m gonna continue to rent out my house.
I live with my father now, and my house is next door to him.
– Totally sorry.
Okay, so the unimproved, yes, you would qualify for that,
would be what’s called a 1031 exchange,
if you wanna not pay.
But again, you can’t sell that
and make improvements on your home or your father’s home.
– Well, the thing is, his house needs a roof,
and the only way we can afford it is for me to sell that land.
– So you’re gonna have to sell it, pay taxes,
and then fix the roof.
– Yeah, I don’t like that.
I haven’t paid taxes since 2011.
(both laughing)
– I’m not saying it’s the best plan.
I’m just telling you how it’s gonna shake down.
Yeah, there’s no way of avoiding,
hopefully, I mean, hopefully you’ll make a nice profit on it.
Is it in your name, Jeff, just out of curiosity,
jointly with you and your father, or how is it titled?
– No, the property in Georgia is just in my name.
– Okay, all right.
But you’re on disability, correct?
– Correct.
– So you do have to be careful
when you do something like that.
If it’s a big enough sale,
it could mess up your disability.
– Okay, now here’s another question on the same property.
It’s two acres, and there was an old,
fallen apart house on it when I bought it.
I bought it to put an RV on to live for a few months
because I had no place to go.
And what I paid for the property
was 4,000 in cash plus a Harley Davidson.
(all laughing)
– Okay, did you have a basic value on that Harley?
– I don’t.
It was, at the time, it was a, what, six years old?
– Mm-hmm.
– A six year old Harvester that I bought new.
– Well, I mean, obviously, I’m assuming that they said,
“Okay, you know what?
I’ll take the Harley and this,
and it’s basically 10 grand,
and I’m gonna count it as that.”
I mean, there’s a value there somehow
you’d have to come back into to deal with that.
You know what I’m saying?
– Well, the owner and I,
the previous owner and I kinda sort of halfway agreed
on the Harley for 4,000 and then the 4,000 in cash,
so $8,000.
– So you paid $8,000 roughly for the property,
and what’s it worth today?
– Well, I’m paying taxes on about 9,000.
– Oh, okay.
So theoretically, you’re looking at paying tax,
which at your income would be zero
for a profit of $1,000.
You’re under $50,000,
so capital gains has a zero capital gains rate
’cause you’ve owned it for over a year,
so you could sell it for 25,000 theoretically,
depending on how much you get for disability and all that,
but I’m just saying you’d be at zero tax.
– I don’t get much in disability.
I get like 1,300 and something a month.
It’s impossible to live on it.
And then 900 on the rental,
so I’m making about 2,250 a month total.
– Okay.
So as long as your overall income is under 50,000,
including whatever the capital gains would be on this,
then you’d pay zero tax on that capital gains.
– Oh, it would be way under that.
– So it doesn’t sound like to me
that it should be a problem for you.
– Okay.
I just wanted to check with you.
I’ve never called you.
I visited down under. – I appreciate it.
– And you’re the only one from down under
that I ever listened to.
– Well, thank you so much for listening.
I appreciate it.
– Well, tell me one thing.
Even while we’re still in there,
where are you from down under?
– Armadale, about 70 kilometers north of Sydney.
– Okay, well, we pulled into,
I just forgot.
(laughing)
Somewhere on the East Coast.
We’ve just decided to have a session with me.
– Gotcha.
– It’s good to meet you, even if it is on the radio.
– Thanks.
Appreciate you, Jeff.
All right, let’s see if we can get Elizabeth
back in really quick before we hit the break.
Hey, Elizabeth, what can I do for you?
– Sorry to bother you again.
I needed to ask, do you have to pay tax
on inheritance from checking and savings account money?
– No, the only thing that usually happens
is any interest that’s been earned would be taxable,
but the money that’s in the bank
is already assumed to have been taxed.
– Okay, and then one more question.
Does the money have to be re-spent
in a certain amount of time?
– If you sell the acreage?
– To pay taxes on it?
– Are you talking about the land sale?
– Yes.
– Okay, yes.
It’s called the 1031 exchange.
So you have a limited window, about 90 days,
to list the property that you want to exchange,
the property that you sold for, to the new property.
So there is a very small window that you have
to actually find the property that you want to buy
once you sell the property that you’re selling.
– Okay, but since I don’t want to buy any property,
what will I have to do?
– Then you pay tax.
I mean, whatever the difference between,
we’d have to come up with the basis
because you paid so much for the 50 acres and the home,
and then whatever the difference is,
you just pay either 15 or up to 23% tax.
I don’t know your income bracket or anything about it,
but if you need help, you can call me.
– Even though that was inherited,
I’d still have to pay the tax on it.
– Oh, wait, wait, wait.
Maybe I’m getting the subperson.
You have an inherited,
this is the home you inherited from your mother?
– Correct.
– I’m so sorry.
So this one you said was like $462,000 was the value?
– Right, but it was split between me and my sister,
so I only got like 230.
– Okay, but how much was it valued
at the time that mom passed away?
– 500,000.
– Okay, so there’s nothing on that one.
That’s all zero.
You don’t have to do anything with that.
– So even though I’m not, just put it in the bank,
it won’t cost taxes or nothing?
– That’s correct.
The only thing you’ll, just go earn some interest.
Yes, ma’am.
– Thank you so much.
I love listening to your show every week.
– Thank you, I appreciate it.
All right, we’re gonna take a quick break.
When we get back, we’ll get to Jake
and anyone else that wants to join the show
at 615-737-9986.
We’ll be right back.
– Services, planning, business, and IRS negotiation.
Visit drfriday.com.
(upbeat music)
– All righty, we are back here live in studio.
We’ve got a few people waiting on the show.
So we’re gonna wade right in with Jake
that’s waited all the way through the break.
So let’s do it.
Jake, what can I do for you, sweetheart?
– Yeah, thanks for taking my call.
Hey, I was wondering if you have a home that you live in
and you sell it for, say you sell it for 250
and I’m on disability and my wife sells self-security.
Will they allow you to keep that money you receive
from the sale of that home?
Or do they expect you not to have that much in the bank,
you know, disability?
– Right, well, I’m not gonna claim
I’m an expert at disability,
but for one, you paid something for the house.
It was just 100,000 whatever.
And I do know, so, you know,
there’d be no capital gains.
But the answer is, my understanding is
it can only keep like $3,000.
A person on disability can have like 3000
or something in the bank and that’s it.
Now, since your wife is not on disability,
I’m assuming there may be some way of doing this
where, you know, the money’s, you know, for her.
I mean, obviously she shouldn’t be penalized
by what happens with the other.
So I would definitely, before I decide to do that,
I would definitely try to talk to someone.
And I don’t have an individual myself,
but someone that really knows about,
’cause what I would hate to have
was mess up your disability in getting that money, right?
I mean, that’s what I was trying to say.
Because if you sell something,
and I’ve had people that have lost their disability
because they’ve inherited money.
So I’m gonna assume that that can mess you up,
but it’s your own home that you’re selling.
So I’m thinking that you might have some sort of
a safety or exclusion, Jake,
but I would definitely do a little research before I did it.
I’m not helping.
I can tell you it’s tax free,
but that doesn’t help your answer.
Sorry, I don’t know the exact answer on that one.
– It’s sad to say when you’re down, they keep you down.
I’ll put it that way.
– No, I hear you, buddy.
I know it doesn’t seem to be a win-win situation,
but thank you.
Good luck.
– All right, thanks for your help, bye.
– Thanks.
All right, that’s it, Brian.
He’s got a tax question.
Hey, Brian, what’s happening?
– Hey, Dr. Friday, thanks for taking my call.
– Sure.
– I had a question.
So I’ve got a 401k, it’s a Roth 401k
that I’ve been investing in for some time
for a company that I’m currently leaving.
The new company I’m going to has a 401k plan
that I could roll it into, but they don’t match it.
So I think I’ve decided to take those funds out,
just take an early disbursement.
And from what I’ve read,
you have to pay, I think, 20% on what your earnings were,
but not your contributions,
and then a 10% penalty when I have to file taxes.
Is that correct?
– Right, well, depending,
the 20% would depend on your tax bracket, right?
But the 10% is the early withdrawal penalty,
and then whatever your tax rate being,
probably averaging 20 sounds about right,
then you’ll pay on just the gains.
The investment, you had already paid tax on when it went in,
so you don’t have to pay tax on it coming out.
– So they were saying that when they go
to give me the disbursement,
they will hold the taxes out.
Does that sound right?
– Yes, and that’s where the 20%,
because I think there’s like a mandate
on the federal tax law that tells them
they have to withhold 20%,
and then, you know, and as long as your tax bracket fits that
then we’re fine with that.
If you need a little bit more though,
because if they’re taking 20 plus 10,
that would be 30%, which would be fine,
but a lot of times they’ll only take 20,
which would mean 10% penalty plus 10 for federal,
and that might be a little shy
if your income bracket is over $50,000.
– So I would just need to basically,
once they take the 20% out, keep 10% back out of whatever.
– That’s a smart man.
Yep, that’s what I like.
Yes, good plan.
– And then I’ll just,
and then we’ll pay our other taxes as normal.
– Yep.
Perfect.
– All right, perfect.
Thank you so much for your help.
– No problem, thanks.
All right, well, I’ll try Valerie.
Hopefully we can make it, if she can talk fast.
Hey, Val.
– Hi, hi, Dr. Friday.
Thank you for taking my call.
I wanted to ask basically if I have to pay taxes
on an inherited amount of money from my mom
with the cell phone house.
So basically I was her power of attorney,
the month long process eventually led to the house sale.
The house was sold.
And then unfortunately, a few days later,
my mom passed away and the,
basically Medicaid has already cleared everything
with nothing needed to be paid to them.
With some of that money from her house sale,
her remaining debts were paid with her,
like even after her passing, her remaining debts were paid.
And so that leaves X amount of dollars with the proceeds.
And I didn’t know if taxes needed to be paid.
– So Val, yours is a little different
because the house sold prior to your mom’s passing.
So this would actually be on her personal tax return.
So she would fall under that personal exclusion.
Let’s just say mom brought the house for a hundred
and it sold for 200.
She would be zero tax to mom,
whatever’s left in the bank,
’cause that’s what you’re inheriting
is the money in the bank theoretically.
And so the tax burden is on mom’s personal tax return,
not on the estate.
As long as whatever mom paid for the house
plus 250,000 added on top of whatever she paid,
as long as the house sold for less than that,
there’s no tax to mom,
therefore no tax to the estate.
Does that make sense?
– Okay.
– Okay.
– I believe so.
– Yeah, so if you need more help,
you can always call me Monday or whatever,
and we can talk, I know it’s on the radio is a little hard.
But just the biggest thing is you just need
to get the number, find out how much mom paid for the house.
And then we can work from there.
You know how much it’s sold for,
but that would have to fall on her personal tax return.
And then the fact that you paid everything off or whatever
would be outside of the tax law.
So that would be your big thing.
– Okay, I really appreciate that.
And yeah, definitely might call you more in depth
to talk about it, but I thank you so much.
And I believe that makes sense though.
So I really appreciate it.
– Thank you.
All right.
And unfortunately we’re gonna be taking a quick,
the show quits in about a minute and a half.
So I can’t get to Joe, but Joe, if you want,
you can call either my office on Monday at 615-367-0819.
Again, 615-367-0819.
Or you can email me your question at friday@drfriday.com.
Again, friday@drfriday.com.
But if you have tax problems,
maybe you’re dealing with love letters coming in the mail,
not sure exactly how to move forward,
what you’re gonna need to do,
then you can give our office a call.
We’re an, I’m an enrolled agent,
licensed by the Internal Revenue Service,
been doing this for about 25 plus years.
So if you need help figuring out what’s the best plan,
just calling one of those companies you hear,
I know on the radio,
but you need to be able to do a face-to-face.
You need to know who’s helping you
and you need to understand what your choices are.
Don’t just pick up the phone.
And then the first thing they always tell you,
I think it’s amazing is, oh, sure, we can help you.
You need to pay a set dollar amount.
And it’s often based on how much money
you owe the IRS at the time.
Sometimes you don’t even owe that money to the IRS.
So you need to make sure you’re dealing with someone
that’s gonna help you get through this.
And if you need help with that, again,
you can call our office on Monday morning at 615-367-0819.
615-367-0819.
You can also check us out on the web at drfriday.com.
That’s D-R-F-R-I-D-A-Y.com.
Or you can email friday@drfriday.com.
As an enrolled agent,
we are licensed by the Internal Revenue Service
to do taxes and representation.
That is all we do.
We do tax preparation and we do representation.
Well, I shouldn’t say that.
We also do bookkeeping.
My brother handles that part of the business.
But if you need help and you’re a small business owner
and you’re trying to get into,
we’re certified QuickBooks advisors.
So we can help you also get your QuickBooks going.
And then you have the good information to give to me
to do your taxes.
See how it works.
But if you do need help dealing with the love letters
or payroll issues, or just getting your taxes in line
and just making sure you’re on track,
you can call my office 615-367-0819
or Friday@drfriday.com.
Totally hope you’re enjoying this Saturday.
and as we say in Australia, cop you later.
(upbeat music)