Join Dr. Friday, your go-to financial counselor and tax consultant, in this May 17, 2025 episode. Dr. Friday addresses pressing IRS concerns, including “love letters” for late business filings, processing delays, and the crucial three-year limit for claiming refunds. She dives into strategies for handling back taxes, the realities of the Fresh Start program, and settling tax debts. Callers bring real-world scenarios, discussing Tennessee’s unique tax filing extension, RMDs while still working, capital gains on property sales, and smart IRA withdrawal strategies in retirement. Get practical advice on AMT, the importance of wills and trusts, 1031 exchanges, and making informed financial decisions.
Topics Covered:
- IRS “love letters” for late business tax filings (LLCs, S-corps) and first-time penalty abatement.
- Current IRS processing delays and potential impacts of budget cuts.
- The three-year statute of limitations for claiming tax refunds.
- Consequences of filing multiple years of back taxes, especially regarding older refunds.
- Strategies for dealing with IRS debt, including the Fresh Start program and Offer in Compromise realities.
- Rules surrounding bankruptcy and its application to tax debt.
- Tennessee’s special federal tax filing extension to November 3, 2025, due to storms, and its impact on individual returns and estimated payments.
- Explanation of the Alternative Minimum Tax (AMT) and who it might affect.
- The importance of having a will or trust for estate planning.
- Caller question confirming the Tennessee tax filing deadline of November 3rd.
- Discussion on making quarterly estimated tax payments, especially with the extended deadline.
- Caller question about Required Minimum Distributions (RMDs) for a self-employed individual still working and contributing to retirement accounts.
- Caller question regarding capital gains tax on the sale of an investment property, including calculating basis and tax rates.
- Caller question on how much can be withdrawn from an IRA annually to minimize or avoid income tax in retirement.
- Brief mention of 1031 like-kind exchanges for investment properties.
- Considerations before using 401(k) funds to pay off a mortgage.
- The importance of seeking tax advice before making significant financial decisions.
- Overview of various IRS penalties (failure to file, failure to pay, failure to make proper estimates).
FAQ about the Episode:
- Q: Is there a special tax filing extension for Tennessee residents mentioned?
- A: Yes, Dr. Friday confirms a federal extension for Tennessee residents to file their 2024 individual taxes and make certain payments by November 3, 2025, due to severe storms. This also applies to 2025 Q1, Q2, and Q3 estimated payments.
- Q: What is the time limit for claiming an old tax refund from the IRS?
- A: Dr. Friday states that you generally have three years from the due date of the return (or the date filed, if later) to claim a refund. For example, 2019 refunds would likely be unclaimable by May 2025 unless specific circumstances apply.
- Q: Can I really settle my tax debt with the IRS for “pennies on the dollar”?
- A: Dr. Friday explains that while programs like Offer in Compromise exist, they have strict eligibility requirements based on your assets and income. It’s not a simple negotiation, and having significant assets (like home equity or retirement funds) can make qualifying difficult.
- Q: What advice does Dr. Friday give about handling IRS problems?
- A: She advises addressing IRS issues promptly, understanding the specific processes involved (like penalty abatement or the Fresh Start program), and being aware that resolutions can take time, especially with current IRS backlogs. She stresses seeking professional advice before making major financial decisions that have tax implications.
Transcript
[00:01] Announcer Intro
Announcer: No, no, no, she’s not a medical doctor, but she can sure cure your tax problems or your financial woes.
She’s the how-to girl.
It’s the Dr. Friday Show.
If you have a question for Dr. Friday, call her now, 737-WWTN.
That’s 737-9986.
So here’s your host, financial counselor and tax consultant, Dr. Friday.
[00:30] Dr. Friday: Show Introduction & IRS “Love Letters” for Businesses
Dr. Friday: G’day, I’m Dr. Friday and the doctor is in the house on this beautiful Saturday At least here in Tennessee, it sounds like it’s been pretty nasty in some of these areas So hopefully you guys are all staying safe, if you can hear us down that way I don’t know, have family down that way, so hopefully they’re staying safe So if you have questions, I know it’s not tax season But I have had a couple people sending over love letters from the Internal Revenue Service because the IRS extended, obviously, Tennessee due to storms and other kind of damages, but it actually went, in effect, April 2nd.
[01:12] Dr. Friday: March 15th Deadline for LLCs/S-Corps & First-Time Penalty Abatement
Dr. Friday: So if you have an LLC that is multi-membered or a sub-S corporation, then you are required to either file an extension and or file your return by March 15th. So, and if it’s the first time you’ve had this issue, you can normally call them and deal with it. And it looks like the love letters I’m seeing at least, it looks like that these people were like waiting until March 15th. I’ve had that many times. And a lot of times with our clients, if we have been doing you for a while, at least we usually try to file the extension because sometimes people think of April 15th as the deadline, right? because you think, well, hey, I’ve got to have all my taxes done by April 15th. Even franchise excises do April 15th. So, again, if you’ve received a letter saying that your taxes were late, and this would be most likely a business tax return, a 1065, 1120, then 1120S in most cases, then you might want to call the government because you can usually get that waived if this is the first time you’ve ever had this penalty.
[02:18] Dr. Friday: Common Reasons for Late Business Filings
Dr. Friday: If you’ve had it multiple times, then you know that the due date is March 15th. So I think a lot of times it’s just new people, first year, just got a business, started it, didn’t realize that they couldn’t file it at the same time they filed their own personal tax returns. So if you need help, give us a holler and we’ll be more than glad to help you out with that. It’s not a difficult process, but just needs a little extra work on it.
[02:42] Dr. Friday: IRS Staffing Cutbacks and Processing Delays
Dr. Friday: And sometimes I will say I did talk to a revenue officer this week, And I thought it was an interesting conversation only because he was saying that his particular division, he was having big cutbacks. Apparently, they reduced his division by 15 people, which was almost half of the staff that was there. So something that would normally take 60, 90 days, he told me on the phone this could take up to 400 days for them to resolve this issue. And I was a bit surprised. I would have thought that, but at this moment, I guess a lot of these different divisions within the IRS is cutting back, or maybe they’ve gotten cuts because of the budgets and things. So all I’m putting out there is if you have an issue with the IRS, I would definitely pursue it, talk to someone, see what you need to do. But once you get that answer, you may find out that that issue could take a year to resolve what normally would have taken maybe 90 to 120 days. So just putting that on the table if you’re in the midst of doing.
[03:50] Dr. Friday: Statute of Limitations for Claiming Tax Refunds (3-Year Rule)
Dr. Friday: Now, another thing, I’ve had a number of phone calls this week on two different cases that the people were trying to track refunds from 2019. One was actually the parents. She had filed them and did everything correct. Then they sent back saying that they needed a different signature because it hadn’t been signed properly. And then she had submitted that back, but that was like in 2020, 2021. And she was now finally circling back because life gets away from you sometimes. And she was finally circling back around trying to figure out what was going on. And I told her, I mean, basically, you only have three years to collect the money from the IRS, your refunds. You have three years. So if you are looking to try to collect your 2019, unless it’s been in the midst of an audit or some other reason that was held up and you have a legitimate cause, they’re most likely not going to give you that refund.
[04:55] Dr. Friday: Current Refundable Years and Filing Back Taxes
Dr. Friday: So just putting that out there that right now you’re looking at 21, 22, 23, basically, obviously 24. So usually if you had filed an extension, it would have went through October of this year for the year of 23. If you had filed it without an extension, then April would have been the end of 2021 for collecting your refund. So, you know, if you’re basically on a regular filing system, then you’ve got 22, 23, and 24 that you can easily get. Again, 21 is a possibility, but 19 or 20 would not be collectible at this point. That’s why a lot of times people will come in and they haven’t filed taxes for years, right? I mean, I have people that come in and they haven’t filed for 10, 15 years. And so to get them into compliance, theoretically, we have to at least go back six years, sometimes more than that. but at least six years to make sure everything is good and if the IRS hasn’t assessed, then et cetera. So out of those six years, if you have refunds in the earlier, let’s say 19, 20, and 21, you have refunds, but you owe for 22, 23, and 24, you’re not going to get those refunds from 19, 20, and 21, right? Because you didn’t file them in time. You weren’t within the code, but you’ll still owe for 22, 23, and 24.
[06:19] Dr. Friday: Lost COVID Stimulus Money and Timely Filing
Dr. Friday: So, you know, there is, and a lot of people, many people had refunds from 20 and 21 because of COVID and some of the stimulus money and things like that. That money is off the table now. So again, just trying to put out there, it’s kind of one of those deals where you got to make sure, I mean, I have a couple of people that truly come in pretty much every two to three years, right? They know that they’re getting refunds. They’re not in a big rush. They just don’t like to deal with it. And so they just basically wait. Then they come in, do all three years, and then they get their refunds. And, you know, as long as their timing is good, there’s no issue. So you just want to make sure, though, when dealing with all that, that you don’t wait too long. Because, again, if you haven’t filed for a number of years, some of those years you may have lost money, especially the stimulus money. Because sometimes people did not get the stimulus and they would have had to file to get it. And now you’ve left $1,400, $1,800, $2,400 on the table for an individual, which could have went towards paying off something else or even filing and paying off old tax bills. So, you know, it really just comes up to what you want to do.
[07:26] Dr. Friday: Dealing with IRS Debt, Offers in Compromise, and Fresh Start Program
Dr. Friday: But we can help you deal with IRS. We can help you deal with these tax issues. There is smart, you know, where they have the ability to restart your software and your calendar, I guess you would say. And you can renegotiate. I get calls every day on, oh, I’ve heard on the radio that I can settle for 10 cents on the dollar, or I want to make a deal with the government. I have $5,000. I can pay them today. Will they take that and pay off my taxes and everything? It doesn’t quite work that way, guys. There is a system. There is forms. You know, this is the government full of paperwork, right? You can’t just go in there and say, hey, I’ve got this much money and I want to give it to you. I want you to the rest of the taxes, even though I have a 401k, I have a house with a lot of equity in it. I have access to other money, be that through credit cards or loans, but I want to give you this cash and I just want you to make a deal with me. They’re not going to do it. And if you think when you call one of these other on the radio kind of things and you find out the reality is there is a system. And I mean, I talk to people all the time and it’s like, you’re not going to qualify for that 10 cents on the dollar.
[08:42] Dr. Friday: IRS View on Assets When Considering Debt Settlement
Dr. Friday: You have a house that’s fully paid off or mostly paid off. The government’s looking at that equity as the money you could have paid them, but you chose to pay off your house. If you’ve got money in a retirement plan or you’re still contributing money to a retirement plan, but yet not making payments to the government, they’re looking at that money as money you chose to put into retirement and not to pay the taxes. Those aren’t choices you really have. So they are going to collect one way or the other.
[09:15] Dr. Friday: Negotiating Payment Plans, Non-Collectible Status, and Bankruptcy Rules
Dr. Friday: Now, there are ways of negotiating and there are ways of payment plans or partial payment plans, even being non-collectible at a point. I mean, I have a number of people that right now it would be impossible due to things that have happened in their lives right now for them to make any kind of payment to the IRS. It doesn’t mean the IRS is going to stop collecting, but they have agreed that for this next period of time, they’re not going to have aggressive collections. They’re going to put a hold on collections and then let these people rebuild their lives to see if they can figure out. And of course, bankruptcy is on the table for some people, but you can’t just go in. I filed last year’s tax return and now I want to go ahead and file bankruptcy because I can’t afford to pay the government. Again, guys, there’s rules. The rule is you have to have 33 months of collections or of it being filed and worked by the government before they’ll even consider giving you a bankruptcy leverage on that money. So you’re looking at three years minimum, basically.
[10:20] Dr. Friday: Fresh Start Program is Not New; Process and Timelines
Dr. Friday: So understanding what your options are, not just going into, oh, well, this guy said I could do this or, you know, there’s this Fresh Start program. Oh, my gosh, it’s brand new. Well, it’s not. We’ve had Fresh Start out there for a number of years. It’s a great program. Don’t get me wrong. But it’s not something new. It’s not something some of these people have invented. It’s something that the IRS has had out there. It’s a way of people getting, quote, a fresh start. Sometimes things happen in life. Sometimes, you know, you ended up with a big tax bill because you didn’t know that you took the money out of your 401K and that they were going to charge you that kind of tax. or you used it to pay off medical bills, or whatever these things might be, bottom line is you still ended up with a tax bill to Uncle Sam that is unreasonably or almost impossible for you to pay back. We can help you with that. But understanding that this isn’t some sort of magic wand. There is a process. Most Fresh Start programs take eight months to two years to process.
[11:23] Dr. Friday: Impact of Life Changes (like Marriage) on Fresh Start Eligibility
Dr. Friday: So if you’re wanting to get married, I’ve had this twice so far, people are coming in because they just found out and they’ve already got plans, they’ve already got weddings. Yeah, you can’t just expect that the IRS is going to say, oh yeah, here, here’s your paperwork, let’s do this so you can go get married. One, they probably prefer you to get married because now you’re going to have a harder time meeting the fresh start. Even though the person you’re marrying may not be legally obligated to pay your taxes, they now are bringing money in the house that you were using to support yourself when you were single. Now more of your money could go to pay Uncle Sam. Therefore, the deal is not going to be the same if you’re married than if you’re a single person supporting yourself.
[12:06] Dr. Friday: Call-in Invitation
Dr. Friday: All right, guys. So if you want to join the show, you’ve got a question or you have some sort of situation you want to run through, The phone number here is 615-737-9986, 615-737-9986. Number here in the studio. We’re going to be right back with the Dr. Friday Show.
[12:32] Dr. Friday: Back from Break & Alternative Minimum Tax (AMT) Explanation
Dr. Friday: All righty. We are back here live in studio. You can join us if you want. 615-737-9986. 615-737-9986. During the break, someone texted me over a question, actually an email, over a question, and they were asking about the AMT tax. And a lot of times people don’t really understand the alternative minimum tax because it doesn’t really affect a large number of people. But bottom line is you can take someone that’s in the tax code. Let’s just say that you’re married filing separately or married filing jointly. Let’s do married filing jointly and you basically make over $240,000. And you’re like, well, that’s like what, 22% tax bracket. That’s not too bad Friday. And you then turn around and let’s see here. Married filing jointly. There we go. I haven’t got a cheat sheet here, guys. So if you’re really going to do $240,000, you would be basically barely into the 22%, 24%. You would be in the 24%. But with AMT tax, you’d be in the 28%.
[13:48] Dr. Friday: How AMT Works and What Triggers It
Dr. Friday: Because the alternative minimum tax is supposedly a way of making the playing field more level, meaning people that get a lot of money through capital gains, through earnings that aren’t necessarily earned through W-2 or 1099, right? So you have capital gains, dividends, interest. So if you have a person that makes a lot of those earnings, they basically say, wait a second, you’re probably trying to bypass the system. And so we’re going to hit you with AMT tax, which usually starts at about 26%. And then anything over like 244 married couple would be 28%, which is still two to 4% more than you would with ordinary income tax. So what triggers it a lot of times, like I said, the biggest thing that usually triggers it is capital gains.
[14:41] Dr. Friday: AMT Exemptions and Application to Trusts
Dr. Friday: But sometimes it can be interest or dividends that can trigger it. Those are the kinds of things that you have. There are exemptions. In 2025, the exemption for married filing jointly is the first $137,000. After that, you could trigger it. A single person over $88,000. Married filing separately, they basically split it in half, $68,000, $650,000. And AMT tax can be on a trust.
[15:09] Dr. Friday: Importance of Wills and Trusts for Estate Planning
Dr. Friday: I know a lot of us, and I personally enjoy or think it’s a smart move to have a trust when I pass away. I’d rather have a trust than a will. My opinion from what I’ve heard from other attorneys and people that deal with financial planning and stuff is that it’s so much easier to leave everything more organized in a trust than to have to go through probate and all of that that can take time and more money because it costs money to set up a trust. But when you pass away, it’s really doesn’t cost a ton. Well, I guess it depends on how complicated it is, but it doesn’t necessarily cost a ton to put together where if you have to go through probate, it can, depending on how big the estate and everything that could take a long time for it to go through. And it could cost a lot of money. So you can reduce someone’s estate pretty quickly if you want to consider that kind of situation. So again, just, um, keep in mind that, uh, you know, if you’re going to have something, if you, and when do you think I’m jumping around a little bit because I’m thinking out loud and that happens sometimes. But I’ve also had people when they come in the office and they’re fairly young, they’re in their twenties and thirties and they’re like, oh, I don’t need to have a trust. I don’t need to have a will. I have people in their fifties and sixties that don’t have wills or trust either. I’m just pointing that out. If you’re listening right now and you’re sitting there going, well, I don’t think I’m going to need to have something like this. I’m not an attorney guys. I’m thinking tax wise, but I can tell you that the state and the federal government have a plan for you, which you probably aren’t going to like if you do not have a will or trust. It’s that simple. Why do you want to have the government involved? Why not just sit down? And I mean, again, I’m not an attorney, so I’m thinking legal Zoom, probably easy, or go to a local place where you could probably have an attorney write up something fairly easily. But I just think you need to make sure you have that situation going.
[17:03] Dr. Friday: Taking Caller Keith – Tennessee Tax Filing Deadline Confirmation
Dr. Friday: Okay. I do see we have a caller. Keith is on the line. Let’s see if I can get Keith on here. Hey, Keith, what can I do for you?
Caller: Hey, Dr. Friday.
Dr. Friday: Hello.
Caller: Hello. I was told on the television that the actual date for people in the state of Tennessee, the last date to file legally, is November the 3rd. Is that true?
Dr. Friday: Correct. The federal government gave us an extension one time only, so don’t confuse this with any other years. But for individuals that had the due date of April 15th, theoretically, they now have until 11-3. And that also includes making your SEP or your IRA or paying your estimated estimates for first, second, and third quarter. So, yes, it’s true.
Oops, I lost him. I blew him away with my knowledge.
[18:00] Dr. Friday: Clarification on Business Return Deadlines vs. Individual Extension
Dr. Friday: So it is true, but I want to circle back to the people that did have tax returns that were due in March for business returns. Normally partnerships or sub-S corporations are both, I know for a fact, are due unless you have a fiscal year end, are due on March 15th. Those particular ones were not extended. And the state of Tennessee said they would only extend case by case. They are not doing any kind like the federal government basically just said, hey, we’re going to do all 90 some counties. We’re just going to make this because almost every county had had some sort of severe storm, tornado, hail, all kinds of different things that have happened last year in our weather. So basically they turned around and said, hey, we’re just going to do this. We’re just going to do this blanket.
[18:51] Dr. Friday: November 3rd Deadline Includes 2025 Estimated Payments
Dr. Friday: But 11-3 is good. And again, it’s not just for 2024, but for all of us that make quarterly estimated payments, the government said, hey, we’re going to extend that as well. So 2025 estimates. Now, I only suggest this to individuals that actually normally make the payments. And maybe you’re putting it in a high interest bearing account where you can make a few dollars. If you are a person that usually has a tough time getting that money together, just continue doing what you’ve always done. Pay the quarterlies on time. First one was April 15th. The next one’s June 15th. The next one after that, September and then January. Theoretically, any of you that have, like myself, that pay quarterlies, I can put that money in a high interest account, make money, and then on November 3rd, send all three quarters, send anything else so that I have everything paid on time. I will tell you, I’ve already told all my clients October 31st. Let’s not waste those three days. Let’s just make sure everything is done by that date so that we have everything accepted and filed and processed. So that is a great thing for anyone that’s listening.
[20:03] Dr. Friday: Using the Extension to Catch Up on Taxes and Estimates
Dr. Friday: It is true, and it is something that this would be the year to get together, right? This would be that one year where you’re like, oh, wow, what if I could pay it? What if I could file my 2024 and get my estimates together for 2025 and have it all paid by October 31st? this would be the year you didn’t get hit with all those penalties i mean seriously that’s the whole purpose of the estimates right is that you won’t have to get penalties now i had another person filed their taxes and they said why did i have to pay a penalty because they did not make their estimates in 2024 on time or make them at all so they were still penalized in 24 for not making proper estimates. That penalty still exists because they should have made them all before they gave us this extension. So again, keep in mind that this is not something that’s a blanket.
[20:57] Dr. Friday: Advice for Those Who Struggle with Saving for Taxes & IRA/HSA/SEP Contributions
Dr. Friday: And if you are a person that has a difficult time, because not everyone’s great with money, we all know that, go ahead and pay it like you always have. Go ahead and pay your taxes. I have people that’s calling me all the time. I’m like, well, you can wait. They’re like, no, I want 2024 off the table. I want it filed. I want it paid. I want it done Friday. And it’s like, that’s perfect. That’s your choice. Um, so do what you need to do and how you might want to do it, but make sure that you, um, are paying and have that money ready to pay, um, when you are ready to file this situation, because you do not want to be late, especially after all this, um, you want to be able to make sure you have 24 paid, 25 the first three quarters, as long as you’ve got all that by October. And like I said, you can even still make your IRA payments, which normally would have stopped on April 15th. Your, what is it? HSA, health savings account. And you can make your SEP payments all until that deadline. So this is the year to catch up, guys. I had a young lady that went ahead and made her IRA payment. And she’s like, I’m already paid up for 2025 Friday. And we haven’t filed a 24 yet. And I said, well, you know, we can, she goes, but I just paid it last week. I’m like, you can still use that one for 2024. And she could still put another seven or 8,000 or whatever it was into her IRA. So she was very excited because she’s working hard to try to build up some retirements and get that squared away.
[22:36] Dr. Friday: Call-in Invitation & Topics Like Selling Homes/Inheriting Property
Dr. Friday: All right. So if you’ve got questions, You can join the show, 615-737-9986, 615-737-9986 number here in the studio. And I realize it’s a beautiful Saturday and not a lot of people want to be out there just listening and have a lot of tax questions, especially in May. But if you are looking at a situation where you’re selling a home or you’re inheriting property, those are often sometimes can be confusing situations. Always better to ask before than after. Sometimes we can help you figure out what your tax liability is. I had a person that was fortunate enough. They were selling something and they were fortunate enough to be able to figure out how all that was going to work. But they were going to end up paying about $160 in capital gains tax. We talked a little bit about a 1031 exchange, and it wasn’t for them, and it’s not for everyone. I mean, at certain times of life or certain reasons, you may not want to get back into other real estate situations. It may be a lot easier to just wait and pay your taxes today, and then that way you can go do whatever you want whenever you want.
[23:43] Dr. Friday: Taking Caller Dan – RMDs and Contributions for Self-Employed Still Working
Dr. Friday: You know what? Let’s see if we can get Dan on real quick if you want, and then we can see if we can get to the end. Hey, Dan, what’s your question?
Caller: Hey, Brady. Question is, this year I turned 73, had to take my first RMD, required minimum distribution from my 401k and SEP, but I’m still working. Can I continue to contribute to it?
Dr. Friday: You can, and you’re not required to take it out of the 401k that you have at the work you’re still working at.
Caller: I’m self-employed.
Dr. Friday: Oh, well, there you go. Okay, life is good. Well, if you’re self-employed, you might want to check with your financial planner. Now, if you’ve got other 401ks, SEPs, or IRAs that were prior to the SEP that you have today, most likely it’s a SEP. But if you’re still working, I don’t believe the time clock goes in, to be quite honest. But you can definitely contribute, answer to your direct question. But you might want to find out if you actually have to take it out.
Caller: My understanding is that at 73, I have to take my first RMD.
Dr. Friday: Well, that’s because that’s what they say to everyone. but you’re still working in the business in which the SEP was set up for.
Caller: Well, when you say, one second, you say set up for, I’m self-employed. I have a SEP and I have a 401k. I’ve been mostly funding the 401k, but I’ve never, ever had a job. I’ve never, ever gotten a job.
Dr. Friday: You’re like me. You’ve never had a real job. Isn’t that great? Okay. Love it. So, yeah. Exactly. I need to. So, let’s just work with the idea that, yes, at 73, you’re going to have to take your RMD, but you can still contribute as long as you’re working you can as long as you have earnings you can still contribute under the current law
Caller: perfect all right cool yep thanks dan
Dr. Friday: all right we’re going to take the break and then when we get back we’ll get to steve who’s in murfreesboro if he can hold through this break we’ll be right back with the dr friday show
Announcer: Coming out to live, live, live, live
[25:36] Dr. Friday: Taking Caller Steve – Capital Gains on Selling an Investment Property
Dr. Friday: All righty, we are back here live in studio. We’re going right to the phone for Steve. Thanks for writing for the break. I appreciate that. What can I do for you, Steve?
Caller: Yes, that’s Friday. I am selling an investment house to a property. Had for 10 years. And on the basis, like when I bought it, including repair stuff, I had to do before I could rent it out. It was like maybe about $105,000 or $110,000. Estimated sale price now is about $380,000. So I’m thinking about $360,000 after commission and all the stuff, the expenses. I’m putting about $15,000 into the house to fix it up to get it ready to sell. Does that only factor into the annual tax as far as my income tax, or does that have any impact on the capital gains?
Dr. Friday: It would definitely have an impact on the capital gains because most likely that improvement is being done for the sale, which would be a reduction or an addition to your basis, however you want to think of it. So you would be adding that to that roughly $100,000, $510,000, that additional $15,000, along with any of the closing cost fees, which you kind of talked about from $380,000 to $360,000. So you’d be looking at still around, I don’t know, $250,000 profit in the taxable profit thereabouts. Not profit, but taxable income.
[26:59] Dr. Friday: Discussing 1031 Exchange with Steve & Capital Gains Tax Rates
Dr. Friday: are you wanting to get out of the real estate business or are you thinking of just potentially a 1031 where you wouldn’t have to pay tax
Caller: well i’ve thought about a 1031 but i think i’m just i have several other real houses and i think i’m just gonna not bother with you know replacing this with another one kind of you know so um but um so um if i’m in the tax bracket where my wife and I are, you know, like $70,000 a year. Is it 15% capital gains then?
Dr. Friday: So you’re going to pay 15% until you get up to $250,000. So you’re going to be over the, and that would include your total income. So you’re going to be over the $250,000 because you’ve got your earnings plus the capital gains, roughly estimating here. But let’s just say it’s $250,000 capital gains, another $70,000 for your earnings. So that’s going to put us at right around $320 total income. So for the first $250, it’s going to be 15%. For the remaining difference between the $250 and the $320, you’re going to be looking at $18.8 or a $3.8 tax.
Caller: Okay. Okay. And does the state have like a 1.5% tax as well on something?
Dr. Friday: No. We have no tax.
Caller: Oh, okay. There’s nothing else there. Okay. All right.
Dr. Friday: Small advantage to living in Tennessee.
Caller: Well, it’s actually a big advantage, but anyways. Yeah, okay. Okay, great. All right, I think that’s it. Thank you so much.
Dr. Friday: Hey, thanks for calling. I appreciate it, Steve.
Caller: Thanks. Sure. Okay, bye-bye.
Dr. Friday: Thanks, bye.
[28:32] Dr. Friday: Taking Caller William – IRA Withdrawals to Minimize Taxes in Retirement
Dr. Friday: Let’s go to William, see if we can figure out what I can do for him. Hey, Will, what’s happening?
Caller: Well, I’m retired. I’m just turning 74 years old. And then my wife, we got social security and a few pensions. I think our total income with Social Security and the pensions is about $48,800. And usually I take about $10,000 every year out of my IRA account. And my question is, how much could I take out of my IRA every year without having to pay taxes? I’m not having to pay the income tax right now because my income is not high enough yet.
Dr. Friday: Right, and you’re right on top of it. Too much, Al. Yeah, you’re right on top because basically the income between you and your wife, your standard deduction would be right around $34,000. So the first $34,000 would be zero. And then you only pay tax on 85% of your Social Security, so you get a little break there. so you’re like right on top of the 0% tax.
Caller: Yeah.
Dr. Friday: Anything you do above, which I still, you know, depending on your situation, I mean, theoretically, as long as your total income keeps under $100, you’d be in less than 12% tax bracket. But right now, you’re probably paying nothing or very little.
Caller: Right. That’s where I kind of want to keep it. And my question was, instead of getting $10,000 every year out of my IRA, say if I was to get $15,000 out, would I still be in the tax bracket where I wouldn’t have to pay any income tax?
Dr. Friday: How much of your income is Social Security out of that $48,800?
Caller: It would be $38,200.
Dr. Friday: That’s $32,000, so you have $32,000. That’s Social Security now. Right. Well, the reason I’m asking about the Social Security, William, is because you don’t pay tax on 100% of your Social Security. You only pay tax on 85% of it. So I was trying to get to your taxable portion. For simple math, we’re going to call it $32,500 out of your original number. That pretty much puts you at the $0 amount. And then you’re adding in your remaining, what, $12,000 with your pension?
Caller: And I get $10,000. 500 in pensions.
Dr. Friday: Okay. And then you’re taking another 10,000 out?
Caller: Yeah, that’s 48. And I pulled 10,000 out every year, so that puts me at 58.
Dr. Friday: Gotcha. All together. Yeah, so my math wasn’t coming through quite. Okay, so we have 32, which puts you to zero, no tax on Social Security yet. But then with the other 20,000 coming out, you’re now being taxed at still about less than probably 30% of your Social Security is coming out. But you are actually, I don’t think you could take out more than 10. I mean, with the simple math without really putting it into a tax offer. But the simple math is you’re right on top of that maybe 1,000 or 2,000 more. But I don’t think you could take out 15 without having to start paying taxes.
Caller: That’s right. Okay.
Dr. Friday: I think your math is pretty darn close.
Caller: Yeah. I think you’ve done good keeping yourself in that zero.
Caller: Okay. Yeah. I’m tired of paying taxes. I’m alive.
Dr. Friday: Don’t blame you, buddy. You’ve paid in. Yeah, you’re 74, you said, so I’m pretty sure you’ve paid your share. But good to be able to keep the math going that way. But, yeah, good call, though. Good question.
Caller: Thank you. Okay, thank you, ma’am.
[32:25] Dr. Friday: Analyzing William’s Tax Strategy and Inheritance Considerations
Dr. Friday: I like it when people think about how they can actually reduce taxes, right? I mean, when you have a W-2, you don’t have that flexibility. Or when you have certain amounts of fixed income, you don’t really have that flexibility. But in his case, being able that their Social Security is really their biggest dollar amount. And Social Security only becomes taxable when you have other earnings. So he’s basically trying to play the game with how much can I get of other earnings, $10,500 from his pension. And then how much additional can I take out? Because at some point, you’re taking out a dollar for Social Security, basically for a dollar that you take out of your IRA. and keeping it all below the standard deduction because that’s the only way he stays at zero. But you have to admit, it’s a fun game. And if you have the ability to live off that income at this point, he’s retired, so he’s paid off everything, and he’s able to do that, it’s a great way of doing it.
[33:23] Dr. Friday: Roth Conversions and Stock Portfolios for Heirs
Dr. Friday: The only thing I would probably put into that conversation or thought would be is if you have a healthy IRA and you might have family members that will be inheriting, and most of yours is probably in a traditional IRA, you might want to consider taking out a little extra, moving it into an after-tax stock account, because if and when you pass away, you and your wife, whoever inherits, and a lot of one doesn’t want to think about that sometimes, but whenever you inherit that money, the next person is going to have to pay tax, and if they’re at the 22% and you were at the 8% or 6%, you would have been saving a lot of tax dollars in converting this either to a raw or converting it into a stock portfolio because either way it would be pretty much tax-free to the next person that’s inheriting and you would be doing it at a much lower tax bracket than potentially the person that is going to inherit. But again, not knowing anything on that, it would really suggest the game you want to play when you have a certain amount to play with. But otherwise, I like the game William’s playing.
[34:31] Dr. Friday: Call-in Invitation & Recap of 1031 Exchanges
Dr. Friday: All right. So let’s see here. We’ve got a few minutes still left of the show. So if you want to join the show, you can. 615-737-9986. 615-737-9986. We’re going to take your calls talking about taxes, talking about best ways we can save money, like William. He’s doing a great job in saving money. Also, the gentleman had called in before him, Stephen, and he was talking about selling a piece of real estate. It sounded like it was a rental property. And I was asking him about a 1031. And I know I talk a lot about it, but if you’re a new listener, you may not have known what I was talking about. A 1031 is what’s called a like-kind exchange. And so if you want to or if you have the ability to, you can always buy a property. In his case, he’d have to go spend $380,000, and then he can then not have to, he can re-put the money that he sold this house for into a new house or multiple houses. You can buy up to three houses, but right now the way the dollar and the real estate market, I don’t think you get more than one house for that nowadays, maybe two.
[35:47] Dr. Friday: Real Estate Investment Strategies and Debt Management
Dr. Friday: But anyway, so it’s something to think about that, you know, if you want to stay in the game, but it sounds like he already has multiple properties and that he was going to use that money to possibly pay off or to do things with other properties, which being a person that owns a multiple number of real estate, I know how that feels. And at some point here, I’m thinking, well, maybe I just need to consolidate and get everything kind of paid off. I always joke around because one of my favorite clients, he’s a guy that has, I think he’s close to 300, at least 300 probably rentals. And his game has always been take the money out, rent them out, let someone else pay the mortgage. And it’s a great game. And it’s done very well for him and very well for me. But you get to a certain age and then you’re sitting there going, well, wouldn’t it be easier not to have any debt? know and you’re getting to a point where you’re like okay maybe uh maybe in the next 10 years i’m gonna you know pay everything off i have no intention of ever retiring guys i don’t need to and i don’t want to but
[36:47] Dr. Friday: Caution Against Using 401k to Pay Off Mortgage
Dr. Friday: um but sometimes it’s nice not to have quite so many things going on in one’s life so um i understand when people now the one thing i don’t understand if you’re listening and you one of these people i don’t understand taking money out of your 401k and paying off your whole mortgage. Now I get it. You’re getting close to, I mean, many times I have people walk in and they’re getting close to retirement and they’re like, Hey, I just don’t want to have the mortgage, but you’re going to pay a big chunk of money to uncle Sam that could be controlled and paid less over time. The money’s still in the IRA and that’s the concern. I get it. You, you know, the way the market is, sometimes your IRA is up, sometimes your IRA is down and you’re concerned that if something happens to the market, you will lose a ton of money and you won’t have your mortgage paid off.
[37:37] Dr. Friday: Considering Tax Implications of Financial Decisions (Rosie the Dane Interjects)
Dr. Friday: As you guys know, Rosie is in the office because she’s apparently sharing her opinions. Sorry, that’s my Dane, my great Dane here. But anyways, so just I think that there are ways of putting your money in safe places. I am not a financial. I’m not an attorney. I do taxes. And I just think if you don’t have to pay taxes today, and, you know, that may be a good idea. But I’ve also worked with a lot of financial planners that are like, let’s pay today because it’s lower. And then let’s deal with the capital gains and things later. So I just want to put out that you have to figure out what’s going to be best for you. How’s the easiest way to go? You know, all of that’s going to be a matter of opinion. But you just want to make sure you thought it all through, I guess, what I’m really saying.
[38:25] Dr. Friday: The Importance of Thinking “What If” Before Financial Moves
Dr. Friday: I just want to make sure that this whole show and many shows like it are really out there, I think, for many people to just think, right? What if? What if I did this? What if I did that? Maybe this person has an idea that I haven’t thought about yet. What if I tried this or that, right? This is what I’m saying. My goal in life would be to have someone think, what if, before, because I can’t tell you. This is my 30th year in business here in Tennessee. And over the years, I’ve had many, many unique people walk in and have some really unique questions. And, you know, sometimes it’s like, well, I’ve done this. Well, if you’ve already done it, I can’t help you because tax law doesn’t work backwards. Very few things in life, especially in the world of taxes, can you go backwards and change something? It has to be done prior to. So if you’re thinking about doing something, it is always best to get advice prior to. And I can think of many things in life that that would be a good idea on. But you really do. You want to make sure that you have this information and you have it at your fingertips. So when you’re making a decision and, you know, some of these decisions, I don’t want to say they’re always life changing. Let’s see. Buying a house, selling a house at the time might feel like the biggest decision you have ever made. But over time, you’ll find out that that is not going to be your biggest decision in life.
[39:49] Dr. Friday: Self-Employment vs. Traditional Employment and Accessing Information
Dr. Friday: changing jobs. Sometimes it’s a good decision, sometimes not. But again, I have been very, very lucky where I’ve been able to be self-employed. And that makes for a good life. But, you know, it’s not for everyone. I have siblings that have tried self-employment and it has not worked out very well for them. They are much better off in a position where they have a certain job, a certain structure. It’s not for everyone, just as working in corporate America isn’t for all of us. It’s the same kind of situation you have on both sides. But what I do want to make sure is that we have the information and that you’re able to get to that information. So if you need help making these decisions, at least as far as tax questions, you can give my office a call. We’re in Monday through Friday. then you can always call us and we’d be more than glad to try to help you figure out what we need to do and or what you need to do and if there’s anything we can do to help guide you in the right direction, right? Just making sure everything is working that way.
[40:54] Dr. Friday: Recap of Tennessee Tax Extension and Maximizing It
Dr. Friday: If you’re making these decisions and you’re not sure, then you need to at least have the first guess. So I wanted to run through again just because right now with such a unique year, right? We never, in the 30 years I’ve been doing this, even with COVID and all of that, we’ve never had just the state of Tennessee. And I think there’s actually three states that fall under this, but in the state of Tennessee, where we had a federal extension, they gave us, you know, all these extra months until November 3rd to file your taxes. So put some thought in, how can I maximize that, making sure that you’ve paid your estimates?
[41:30] Dr. Friday: The Mandate for Quarterly Estimated Payments
Dr. Friday: I have people that basically, again, it’s a personal choice, but it isn’t really a choice. As far as I’m concerned, the IRS is a mandate that says if you are self-employed or you’re retired, you have earnings of over, if you owe the IRS more than $500 in a given year, you are required to pay quarterlies. These quarterlies would be coming up April, June, September, and January. Every year we have to do those. And that isn’t just a choice. A lot of times people will come in and say, well, I don’t really want that. That’s not a choice I want to make. It’s not a choice. You will pay a penalty if you do not do this.
[42:10] Dr. Friday: Penalties for Underpayment of Estimated Taxes
Dr. Friday: Now, sometimes people get lucky because they have jobs. And so the W-2s have enough money come out where the self-employed side doesn’t affect or if you have a farm or maybe taking out certain monies. But this last year, I have noticed a number of people that the year before they did not get a penalty. This year they did because their earnings went up this year, which means you have to pay 110% or at least 100% of the money you owe to IRS before they’re going to waive any penalties, meaning you don’t owe the IRS. And if that isn’t the case, then you have to consider right now interest for the IRS, I think it’s like 12%. Penalties are usually 5% per month, up to 25%.
[42:53] Dr. Friday: Compounding IRS Penalties and Interest
Dr. Friday: There are a few. The one that I was talking about making estimated payments is 0.5% per month. So that one’s not as bad as many. But when you consider you’ve got failure to file, failure to pay, failure to make proper estimates, all these can add up where it seems like you’ve got 20, 25, 30% going out. I mean, after a year, it’s easily 30% to 40% increased your bill. So if you owe $10,000, now you owe $14,000 or thereabouts. And if you wait over the total year or two-year period, I mean, I have people that 2020, 2021, their bills have practically doubled. So they owe $10,000, now they owe $20,000 with interest and all the penalties and everything.
[43:41] Dr. Friday: Penalty Abatement Considerations
Dr. Friday: Now, sometimes we can get some of those penalties waived. That’s not an impossibility, but if you’ve already had penalties waived, you’re not going to get them. If the penalty is $50 or $100, you probably aren’t going to waste your one-time get-out-of-jail card for free thing, basically, to do it. So there are times when you’re going to pull that and times when you’re just going to have to buy it and pay it. So, again, it’s really just up to you what you want to do and how you want to do it.
[44:12] Dr. Friday: Break Announcement
Dr. Friday: Oh, we’ve got another break. Take a break. This is Dr. Friday Show. We’ll be right back.
Announcer: Your Money Coach with Dr. Friday will return in a moment.
[44:24] Dr. Friday: Contact Information
Dr. Friday: All righty. We are back here. We’re going to have just a few minutes since I over-talked that last one. So let’s go to my contact information. If you want to reach us, you can at 615-367-0819. That’s the direct number to the office, 615-367-0819. You can also email. Nowadays, it’s a lot easier than tax season. The email is Friday, just like the day of the week, F-R-I-D-A-Y at drfriday.com, Friday at drfriday.com. If you have questions, if you need to set up an appointment, just call us. It’s the easiest way. We can set you up on the calendar, Make sure we’ve got everything going for you. A lot of times we can answer the question over the phone, so it’s not a big deal. Just want to make sure that we’ve got everything taken care of.
[45:16] Dr. Friday: Offering Tax Filing Assistance and Enrolled Agent Services
Dr. Friday: If you haven’t filed your taxes for 2024, we can try to help you get that filed as well. I know we’ve got a big time clock, but time flies and we’re having fun. It will not take very long for us to do that. So again, if you want to reach us at the office, it’s really easy. Pick up the phone, 615-367-0819, 615-367-0819. Also, you can email friday at drfriday.com. Or if you have no idea who I am or what I do or that I’m an enrolled agent, which means I’m licensed by the Internal Revenue Service to do taxes and representation. It’s exactly what I do every day. So, you know, bottom line is I’m kind of a shield between you and the IRS ways to help you get your tax situation resolved, ways to help make things easier and move things forward for you.
[46:11] Dr. Friday: Closing Remarks
Dr. Friday: I’ve been doing this for almost 30 years right here in the Brentwood. Basically my office is in Brentwood, but I cover most of the state. But if you have questions or you just want to get our initial consultations are always free. So again, 615-367-0819. I hope you guys enjoy this Saturday. It’s a beautiful day outside. And just take some time. Enjoy the family. I know Memorial Day is coming up next week. So we’re going to, as we always say in Australia, cop you later.