Welcome to another episode of the Dr. Friday Radio Show. In this episode, Dr. Friday gets into pressing tax topics, including a potential new bill affecting overtime and tip income, strategies for handling property sales, and essential advice on IRS dealings and estate planning. Listen in as she tackles caller questions live!
Topics Covered:
- Potential new federal bill: “No tax on overtime and no tax on tips” – likely a deduction, income limits, and only for income tax (not Social Security/Medicare).
- Caller Question: Determining if tax filing is necessary based on Social Security and other income.
- Primary Home Sale Exclusion: The two-out-of-five-year rule, $250,000 (single) / $500,000 (married) exclusion, and capital gains tax (including the 3.8% net investment income tax).
- 1031 Like-Kind Exchanges: Not applicable for primary residences; rules for converting investment properties.
- Inherited Property: The benefit of “step-up in basis.”
- IRS Issues: November 3rd tax deadline (due to disaster), estimated tax payments, penalties, first-time abatement, and strategies for resolving tax debt (OIC, payment plans, asset considerations).
- Estate Planning: Importance of wills and trusts, dangers of quick-claiming property (loss of step-up in basis), and having a team of professionals.
- Caller Question: Clarification on home sale capital gains and inheritance.
Episode FAQ:
- Q: What’s this new bill about no tax on tips and overtime?
A: It’s a proposed federal bill (not yet law as of May 31, 2025) that might make income from tips and overtime non-taxable for income tax purposes. Social Security and Medicare taxes would still apply. Dr. Friday suspects it will likely be a deduction on your tax return, potentially with income limits.
- Q: I’m selling my house. Will I owe a lot of tax?
A: If it’s your primary home and you’ve lived in it for at least two out of the last five years, you can generally exclude up to $250,000 of profit if you’re single, or $500,000 if you’re married, from capital gains tax.
- Q: What’s a “step-up in basis” for inherited property?
A: When you inherit property, its cost basis for tax purposes “steps up” to its fair market value at the date of the original owner’s death. This means if the heir sells it relatively soon after inheriting, there’s often little to no capital gains tax to pay. This is why Dr. Friday advises against quick-claiming property to children before death, as that can negate this benefit.
Transcript: Dr. Friday Radio Show – May 31, 2025 (Segments 2, 3, & 4)
Dr. Friday:
[00:02] All right, we are here live in studio.
Dr. Friday:
[00:05] And if you want to join the show, you can at 615-737-9986, 615-737-9986. I know we’ve had a little bit of a test going on this morning, but I think we’re good to go.
Dr. Friday:
[00:20] I’m not too sure if you guys were able to hear everything that I was saying earlier, but just wanted to make sure that if there was any questions, we are talking a little bit about the new bill that could be passing about. It’s the one big, beautiful bill, I believe it’s what it’s called now, you know, with Donald Trump. But, you know, are your taxes, are you going to have no tax on overtime and no tax on tips? Big question.
Proposed Tax Bill: No Tax on Overtime and Tips
Dr. Friday:
[00:50] Everything I’ve said, even if it passes and it goes into law, which I’d say we have a 50-50 chance, it looks like that it’s going to become a deduction on your tax return. So it looks like you’ll still be paying the tax throughout the year. You’ll still be claiming and reporting all of your tips and everything. And then you’re going to have a deduction available on your personal tax return where you’ll get that money back potentially.
Dr. Friday:
[01:22] I think it’s going to be all based on dollar amounts of how much money you earn. They’ve already basically said overtime for anyone that’s getting overtime over 160 will not get any credits for overtime. But then again, I’m not too sure. Most people that are making $160 or more are probably salary-based, not really based on am I clocking in every hour and then being paid overtime? I don’t think that’s something.
Dr. Friday:
[01:47] There are some states, several of them had no tax on tips in overtime. Some say, like Alabama, North Carolina, New Jersey have also proposed similar legislation. So if you’re in some of those states, Alabama being next door, obviously, it may be able to get it in either state. So we’ll just have to figure out which one will accept. First, we got to get the federal to pass, and then we’ll see if the states will follow suit or if they will not.
Dr. Friday:
[02:17] So if you have a question, because I’ve gotten a lot of emails on this, actually, you know, and I wasn’t too sure if it was going to be something most people were curious, but I have gotten quite a few. And a lot of people think it’s already passed. It has not. We have not gotten that through yet.
Dr. Friday:
[02:33] So one of the things I did see on one of the bills said the tax deduction amount is for $25,000 or under if you’re making tips. Again, this has not passed. This is just a lot of people guessing on what will pass or how it will affect individuals.
Dr. Friday:
[02:51] So I think it’s going to be really interesting because the Fair Labor Act, The Department and Federal and State Departments of Labor have worked so hard to get people to reporting tips so that they can actually see how much money people have been being paid. And now, if this is some sort of change, now will people not be reporting it or not be reporting as much on that or not? I’m not absolutely sure.
Dr. Friday:
[03:19] So we’ll let’s go ahead and hit Matt in Donaldson. Thank you for calling because they’re crazy morning. What can I do for you, bud?
Caller Question: Tax Filing Threshold with Social Security Income
Caller:
[03:30] federal income tax can i give you some numbers and tell me i did good
Dr. Friday:
[03:35] I’ll do my best yes
Caller:
[03:37] total amount was 30 700 social security was 28 000 of that and pbc was another 2 000
Dr. Friday:
[03:48] okay so the 28 000 is that the 85 or 100 of your social security
Caller:
[03:54] It was actually 28,704. That was the total.
Dr. Friday:
[04:00] So taxable amount would be 24,4 for simple math. And did you actually file taxes or are you thinking that you’ll be under with this dollar amount?
Caller:
[04:12] I did not file. I just want to know if you think…
Dr. Friday:
[04:15] I don’t think you should have. I think you did the right thing.
Caller:
[04:20] I’ll go with that.
Dr. Friday:
[04:21] You got it buddy. I think you’ll be just fine.
Caller:
[04:25] Bye-bye.
Dr. Friday:
[04:26] Bye-bye. Thanks. So that’s a great question. He was just basically wanting to see if, you know, again, there are very few times in life that we don’t have to file taxes. I can’t tell you how many people in their 80s and 90s come in my office and say, hey, Friday, when can I stop filing taxes? Thinking that age would be the determining information and that is not you, you know, death and taxes. We’ve all been raised on that comment, two things you have to do or two things that will be done, pay tax and die.
Dr. Friday:
[04:59] And you will be paying taxes until you die, unless you get fortunate enough to plan your income where you either have Roth IRAs or other sources of income that are completely non-taxable. And then obviously like social security, social security itself is not taxable. It only becomes taxable when you have other things that come into play. And that’s why with this gentleman with 24,000 or only 28,000 of the 31 that he actually earned being social security, he didn’t earn enough to qualify for taxes. So it’s a nice thing. It’s a, it’s a beautiful thing if it happens. Unfortunately, most of us will not have that happen. So we just don’t know which way we’re going to go with that and make sure that we’re, you know, on track or whatever. So we’ll just keep moving.
Dr. Friday:
[05:46] I’m not too sure if I should be taking a break or we’re just going to go straight through to the next one because the commercials let me know. So I’m going to keep talking. But anyway, so if you have questions, you can join the show. 615-737-9986. 615-737-9986 in the studio.
Primary Home Sale Exclusion and Capital Gains
Dr. Friday:
[06:05] So maybe you have a situation where you’ve either had some inheritance. Maybe you’re thinking about selling some property. Maybe it is not your primary or maybe it is your primary. You’re not sure if you have taxes due. This last few years, we’ve had a number of people that have had their primary home because of the exclusion. They still have ended up having to pay tax. And that’s, thanks guys, I got it. That’s the important part.
Dr. Friday:
[06:35] So let’s talk about that exclusion really quick because I know a lot of times, first thing, you have to meet the two out of five years, which means unless there is some reason, a medical, a working, something that comes up that creates a reasonable reason for you, divorce, then you have to have lived in this house two out of the last five years. Then you have to take whatever you purchased it and then the difference of whatever you sell it for.
Dr. Friday:
[07:01] So let’s use some basic numbers. Let’s say you purchased it at 200 and you sold it for $450,000, then as a single person, you would pay zero tax on the additional $250,000. That’s your exclusion. And that’s doubles when you’re married. So it’s a $500,000 exclusion when it comes down to knowing what you have, right? So again, if you brought a house for $200,000 and you sold it for $700,000 and you’re married, then you’d also be in a zero tax situation.
Dr. Friday:
[07:34] But I have had a number of people that either they’ve married someone and the second spouse has not lived in that house two out of the last five years. So they don’t qualify for the exclusion. Yet the house is purchased at $200 and sells for $700. You cannot claim your spouse lived in the house for two years if she didn’t or your husband or whatever. So in those cases, you know, you have $200,000 investment. The one person would get the exclusion of $250. So 450 of the 700 would be tax-free. The remaining difference would be taxable income or $250,000. And that would kick you into not only past the 15% tax bracket, most likely hitting the 18.8.
Dr. Friday:
[08:20] And I know people will go, there’s no 18.8 in capital gains, but there really is. Anytime people tell you that the capital gains tax is 15 and 20, they are totally bypassing the 3.8 tax that we have on investment income. And it kicks in basically once a single person hits 200,000, including everything, all of their income, or a married couple making 250,000, a little marriage penalty there. So, you know, and then it kicks in. So then you have another 3.8, which makes capital gains tax at that point, 18.8. So let’s let the numbers be what they are.
Dr. Friday:
[08:56] So anyway, so that’s the kind of ways we want to sit down. We want to calculate, make sure that we have prepared for that tax because then what happens is a lot of times people go out and they, this happens in multiple things, but they go buy another home and they think, well, as long as I’ve invested all my gains into another house, I don’t have to pay tax. That is not the tax law. If you buy a house and you sell that house, you have to either pay tax or you meet the exclusion. And then you can, if you wish, buy another house. It is not mandated. That was back, goodness, 20 years ago, I think, when I first started, even before that. But where the tax law basically said you had two years to reinvest the gains from your home and it wasn’t taxed. That is not the tax law. You do not have to buy another home. But what you do have to do is report the sale and either pay tax or get the exclusion. So making sure you’re on the current tax law and making sure you understand.
1031 Exchanges and Inherited Property
Dr. Friday:
[09:55] And also you cannot do what a lot of people, I heard a gentleman talking the other day and he’s like, well, as soon as I sell, because he brought a home back in Franklin 25 years ago, it’s now worth like 1.5 million. He paid like 250,000. And he’s done some improvements and things, but all in all, it’s the land, it’s the property that’s going to be worth that money. And so he’s turning around and he’s like, well, I’m just going to do a 1031. This is his primary home. And he cannot do a 1031 or a like-kind exchange on your primary home. That’s specifically in the law.
Dr. Friday:
[10:32] And you cannot take an investment home, buy a like-kind, and turn it into your primary. At the time that you decide to make it or you report it as your primary home, you have to now pay the tax that you deferred during a like-kind exchange or what we refer to as a 1031 exchange.
Dr. Friday:
[10:51] So there are ways of deferring tax on investments, and then there are ways of deferring tax on your primary home, but they don’t really work together. You can’t do a 1031, but you don’t get the step-up-in basis or the exclusion of the tax $250,000 or $500,000. So making sure you understand, A, what you have, and then you can do certain things.
Dr. Friday:
[11:17] I mean, obviously, if you inherit a piece of property, that’s always nice because you have normally the step up in basis. So what I mean by that is that if I inherited something today from a family member and that person passed away, whatever that property was worth at the time that I inherited it, then you’ll be able to deal with what you want to do and go for it. Got it.
Dr. Friday:
[11:46] So again, just making sure that we know how the taxes are going to work. So you know, if I sell this or if I exchange this, what is going to be taxes and what is not going to be taxes and how you’re going to make it work. So you put more money in your pocket. I mean, that’s really what the game is. You need to understand the tax law. So that way you can keep more of the money and be prepared to pay because I’ve had a number of people that were not prepared to pay when they actually had it come up. And then next thing you know, it’s there on top of it. And you’re like, oh my gosh, I owe this much money. Where am I going to get? Because now the money’s tied up in something.
Announcer:
[12:21] All right. We’re going to take a break here. You can join the show at 615-737-9986. 615-737-9986. We’ll be right back with the Dr. Friday show.
Announcer:
[12:31] We are back here live in studio. You can join us at 615-737-9986.
Clarification on “No Tax on Tips/Overtime” Bill
Dr. Friday:
[12:43] 615-737-9986 is the number here live in studio. And I did get an interesting email where someone says, well, will I not have to pay any tax on my tips if this goes through? And I do want to clarify, you’re not going to pay income tax. They will still be charging you Medicare and Social Security on tips and overtime. These bills are only talking about income tax.
Dr. Friday:
[13:12] So just keep in mind that you’re still going to have 7.65% of your wages going towards your Social Security and Medicare. So I just think that was important to point out because a lot of times people are thinking, oh, I’m going to get this money free. It’s just going to be completely without any tracking and, you know, now people can go with it and what, you know, what’s going to change. So it’s going to change a bit.
Dr. Friday:
[13:31] So, you know, you must be able to report that tips without paying tax have to be making as much as $20 or more in tips or something. There’s some, I haven’t got the details yet. And again, this has not passed law. So we’re going to keep you in the loop as things go and make sure we understand exactly, you know, what’s going to happen. And they’ll give us a, they’ll give us a lowdown once, once it actually passes, we’ll have a much better idea of what it is.
Dr. Friday:
[14:00] But I do know a lot of people work for tips and, uh, you know, a large number of people get overtime. Um, and you know, again, without being taxed, I don’t know if that’s still going to require, because I mean, the whole reason for overtime was to make sure people were getting paid, um, you know, for their time, right. Anything over 40 hours, time and a half. And then there’s holiday pay and different things. And that’s part of the federal department of labor. And then them saying not being paid on overtime, does that mean just that half, you know, there’s still, you’ll still be responsible for paying tax on all of the ordinary income. And then over time, the time, the half, just that half, or are they talking all of the overtime, the time and a half? I don’t know. These are questions that are being asked and I do not have the answers yet. So we’ll just keep you the loop.
Tax Deadlines and Estimated Payments
Dr. Friday:
[14:49] If you’ve got questions or something on your mind thinking about how this is going to work, feel free to join us here live. I know it’s never too scary or maybe it’s a little scary to call a radio station, but trust me, we’re not tracking or doing anything. You can just reach us at 615-737-9986, 615-737-9986, taking your calls, talking about my favorite subjects.
Dr. Friday:
[15:18] We all know that we have a little different deadline. November 3rd is the deadline here. Now keep in mind that also does not change for states. So if you happen to have to pay a Kentucky state or if you’re a business owner here in Tennessee and not really directly affected by the storms, but you’re under the federal disaster situation, then you need to make sure that you filed your business license and especially your franchise excise because the extensions already come by. So you need to really just file and you’ll be getting some wonderful love letters on that if you haven’t already filed it. So that way you can make sure that you’re getting and staying in compliance. That’s the important part of all this.
Dr. Friday:
[15:58] And I’m telling people, this is a great year to really play catch up. Normally, you know, if you don’t pay your first estimate by April, your next one by June 15th, the last, you know, the next one in September and the last one in January, you know, there’s penalties, right? We all get hit with some decent sized penalties if we don’t pay these on time. And I know a lot of people think that making estimated tax payments is an option. It’s a choice. It is not a choice. It is tax law. And there are penalties if you choose not to do it. And that’s your choice. Again, that is where the choice comes in. Your choice is if I don’t want to pay taxes until April 15th, then that’s perfectly fine, but you’re going to pay penalties and interest.
Dealing with IRS Penalties and First-Time Abatement
Dr. Friday:
[16:41] I had a gentleman, we resolved his tax issue as a 2021 issue and it took us forever. And he kept getting, he said, they haven’t resolved it. They haven’t resolved it. And finally, I saw the letters they were sending him and they had resolved his tax issue, but the penalties and interest on the issue was another $10,000. And so he was thinking he still was getting collected on for not doing the correction. But it wasn’t. I mean, he only owed like 20 and it’s a 50% penalty by this point, because it’s like three years old. And he didn’t find the mistake until last year or whatever, or the IRS found the mistake for him. And of course, at that point, the penalties and interest had already started. We’re going to see if we can reduce the penalties.
Dr. Friday:
[17:24] And you can do that yourself. If you get a love letter. Now, the problem is a lot of times people kind of start, I don’t want to say freaking out, but they basically get all wound up about a $50 penalty. And I get it. No one should have to pay a penalty, period. But it’s fact of life. But when you have a $4,000 or $5,000 or $6,000 penalty, and that can also happen, you don’t want to waste your one-time, you know, first-time abatement is what they refer to it as. I call it the one-time get-out-jail-free card. But either way you want to look at it, that first-time abatement, you don’t really want to waste that on a $50 deal. Okay?
Dr. Friday:
[18:00] you know you might want to just see what you can do because it just seems like in life you’re most likely going to have something more than $50 that is your problem now if you’ve never had a problem and that $50 is the one time you’ve ever had well yeah sure go for it and all you have to do is call the IRS and and I will have to say I’ve called them a couple times this last week and it could be an hour hour and a half before you get through to somebody but there is I had the I mean I hate to say this, but I had the nicest revenue officer the other day on the phone and she actually acted like she liked her job. She did not make me, and I mean, a lot of times when, because I’m a representative, you know, they make it a little harder sometimes. She’s, you know, she was all about resolution and about trying to figure out how to get it done and making sure that we had the tools to get everything done. It was a refreshing situation. I will be quite honest with you.
Dr. Friday:
[18:57] office in Tennessee is great. Um, you know, I have used them for gosh, 20 years. Um, and they have, you know, most of the time been able to deal and resolve the issues, but I was able to do something. So I’m going to say call, if you don’t like the person that you get on the phone with the IRS, they always say, hang up and try again. Cause the likeliness of you actually getting the same person twice is pretty rare. So this way you’d be able to at least see if what you have or where you’re going with it or whatever.
IRS Resolution and Asset Considerations
Dr. Friday:
[19:24] So, um, but yeah, so if you have love letters and you’re not sure what to do, you can certainly come to us. I’m an enrolled agent licensed by the internal revenue service to do taxes and representation. I’ve been doing this for about 30 years here in Tennessee. And so if you need help or you’re just not too sure where to start, you know, sometimes people hear about all these ads on the radio and they’re like, oh, we can resolve all your issues for 10 on the dollar and all of this. And I’ll be honest, I’m probably the most truthful you’re going to get.
Dr. Friday:
[19:56] There’s a lot of people that think just because they don’t want to pay the IRS, they shouldn’t have to pay the IRS. It doesn’t work that way. It truly is based on your assets. How much money do you have in the bank? How much money? I have a case right now. The guy has four cars. He’s a single guy. The IRS values those cars and they come back and basically say, well, you got $60,000 worth of extra vehicles, you know, that you could sell. And, you know, in his case, he didn’t have a lot of others, but these cars, which are very nice cars, and he’s got them all paid off, you know, have become, well, the IRS is basically saying, hey, you purchased these four cars, but yet you couldn’t afford to pay us. So, you know, give us our share of those cars. So in essence, sell those cars or get loans because you’re going to owe us the equivalent of blue book value if you decide to make a deal with us. And that’s the kind of thing I like a lot of people don’t know about.
Dr. Friday:
[20:54] I mean, even your 401k and IRA, even though you, the IRS cannot force you to take the money out of those accounts. The IRS does look at it as if those monies are theirs because you put money aside in a retirement account when you had a balance due with the IRS. Most of the people that come into my office, even though they say they can’t afford to make payments to the IRS, most of them are making 401k payments on their paychecks. They’re having money come out and depositing that into their 401ks. And so it’s like, okay, that’s probably a bit of a problem, right? Because if you’re making payments to the IRS or into a retirement account and you’re not making payments to the IRS, they’re sitting there going, well, that money is ours. So we need you to take the equivalent of that and either take a loan against your 401k and pay us off, or you need to, you know, take the cash out of the 401k and pay the taxes and then give us our share. So that way we are not your loan officers because we don’t want to be, you know, and penalties and everything that goes with that are very healthy, much worse than if you just went to the bank.
Dr. Friday:
[22:10] And again, houses. I have a large number of people that come in my office and they have one, two, $300,000 worth of equity. They owe the IRS 50 grand. You can do all you want. I mean, there are certain things, certain criterias that the IRS may waive some of that on, being that you have no other money and that you’re 70 years old and your house is your retirement account, you may be able to argue some of that, maybe, really depending on your personal assets and things. But just want to make sure that you are in a good place, right?
Compliance and Lifestyle Choices in IRS Negotiations
Dr. Friday:
[22:50] I mean, so reality needs to sink in. If you have your kids in private school and it’s not for medical or health reasons of some sort where you might be able to say, well, they’re special needs. They need to be in this school because it’s the only one and my doctor suggested it and it’s a healthy place for them or whatever. That’s a choice, right? You’re choosing to spend 12, 15, $20,000 a year for a private school. And yet you owe the government $50,000. Well, it doesn’t really make sense. They’re not going to give you credit for that. So, you know, you have to make these smart decisions. You have to understand the system. If you can understand the system, you then can understand how are you going to keep things going and making sure things are going to be the way you want them, right?
Dr. Friday:
[23:36] So when you’re looking to figure out how to get yourself back on track with the IRS, first thing is compliance. You need to be in compliance, which means you have to have at least filed the last seven to eight years of taxes. You need to make sure there are no, If you’re making quarterlies, again, which started this whole conversation, if you’re self-employed or you’re an individual that has multiple jobs and you’re not having enough taxes come out, you are going to need to either, if you’re a W-2 person, you just need to make an adjustment. Have the money coming out every week or every two weeks or once a month, whenever you’re getting paid, is a smarter idea than to have the IRS contact your employer and say, this person has to claim single and zero. That’s the highest and that’s what they can mandate. And they can mandate that. I’ve got a number of married people that right this second are claiming single and zero on their tax returns because the IRS has went to their employers and they’re having to do that, which means they’re creating a very healthy refund. And by doing that, they’re trying to make the things work for them. You know what I mean? So again, making sure that you understand how that works and what you’re going to do with it is so important because if you don’t understand what the IRS is looking at, you don’t understand the whole thing’s going to turn out. Then you end up turning around and saying, oh, wait, well, why aren’t they giving me credit for this?
Dr. Friday:
[25:03] And, you know, I had, again, I have a number of people that come in and they want to make a deal with the IRS. And they’re like, we’re living off credit cards. We barely have anything. But yet the balance on those credit cards, they still have 30 or 40,000 that they can charge. Guess what? The IRS says you charge that 30 or 40 and pay us. Then you can worry about how you’re going to make the payment to the credit card companies.
Dr. Friday:
[25:24] these are facts of how the system works and what you want to do with that system but um you know as an enrolled agent and what we do is we basically shield you know one we’re a shield between you and the irs but more importantly we’re a resolution right we’re trying to help you figure out what’s going to be the easiest way for you to get resolution is it going to be an offer and compromise partial payment plan a full payment plan non-collectible you know there is different for different people and not any one plan is going to work for everybody. So I need you to make sure that you understand. And before you go and pay somebody 500 or a thousand or $1,500, make sure you understand what they’re going to do for you.
Dr. Friday:
[26:11] I mean, I never understand. I mean, if anyone comes in, you guys will all know if you’ve ever used my services. One, we basically collect a small fee to pull transcripts to even see what you apply for. If, if, if you can’t have an offer in compromise and you’re not sure if you’re going to be able to stay with a payment plan, then there’s nothing I can do for you. I mean, there’s really only a handful of things. We can try to reduce penalties on something we can, you know, but all in all, the reason you’re trying to get your life back together, especially if you’ve got children and they need to go to college and all these different things and you cannot have this open, um, debt to the IRS. Cause sooner or later, I mean, I have people that have reached retirement and have levies against their social security, right? I mean, they’re taking money out of these people’s social security checks because they can, and that they haven’t had resolution. And this is the last straw for a lot of them. I mean, this is what, you know, and yes, there are hardship filings, but in some cases it’s not really a hardship. I mean, you know, So the government will find a way to try to find the way to pay your debt to them. And that’s the important part. So understanding how it goes and what you’re going to do with it and why you’re going to make it happen, that’s where it really comes into play. And I just want to make sure you can understand.
Announcer:
[27:31] Okay, so we’re going to be taking another break here. You can join the show live. We’re going to be going into our last break, I think. You can join the show live at 615-737-9986, 615-737-9986. We’re live here in studio. So if you want to join us, this is the Dr. Friday show and we’re going to be right back.
Estate Planning: Wills, Trusts, and Step-Up in Basis
Dr. Friday:
[27:55] Alrighty, we are back here live in studio and hopefully you guys are enjoying this wonderful Saturday. It is absolutely beautiful outside. I got a chance to go out and play with my bees. I have beehives now, so I’m enjoying having my first pool of honey. So we’ll see how that all goes. Kind of exciting when you have bees. And also a field of lavender, which is actually growing. So I’m win-win right this second. I think all that rain has really helped me at least. So we’ll see how it keeps going. And hopefully you guys are enjoying this weather and being able to think of different things to be able to do out there.
Dr. Friday:
[28:32] But when it comes to taxes and finance and all of that, the only other thing I wanted to bring up really, someone sent me a notice asking me if I knew anybody that did estate planning and I do not do that I’m not a financial planner and I’m not an attorney but Russ Cook is a very good estate attorney and right there in the Brentwood area and has handled my stuff for 30 plus years and you know one of the things I always loved about Russ is that he is a pretty down-to-earth guy and And he knows how to deal with pretty much all the uniqueness that goes with a lot of different estates.
Dr. Friday:
[29:11] Because one of the biggest things I always ask people when they come in, nothing to do with taxes, guys. I get it. But do you have a will? Do you have estate planning? If something were to happen, gosh forbid, and this does not have an age on it. I know a lot of times people think, oh, wait, I’m not old enough. I don’t really need, I don’t really have anything. But you’d be amazed. At least a will would be very. And if you have children, you’ve got to think of them because a lot of times, I mean, I think a lot of people realize this, but, you know, a lot of times people think, well, my mom will take care of them if something happens to us or this. But if that’s not in a will, if that is not in a legal document, your mom may not have the authority to take care of your children, even if that is your wish, because the courts may have a whole different plan. And that’s what’s going to win the battle is the legal language, you know.
Dr. Friday:
[30:05] And so, again, if you’re thinking, what can I get done this year and accomplish something, no matter your age, it should start out with a simple, it may just be a very simple will. You can do that on probably legal Zoom for almost nothing. And, again, I’m not an attorney. I’m not saying that that’s the best way. But as you get older and you have more assets, there are ways that you can help your children by doing it the right way.
Dr. Friday:
[30:31] And there’s some, I mean, I can’t tell you again. I had a case that just came in a little while ago, about four or five weeks ago. And the mother had signed over her house to her daughter because she wanted to make sure her daughter got it. And then mom ended up in a nursing home and then eventually passed away. And so then the daughter was thinking she was going to get a step up in basis, right? This house was, again, a very nice house, but mom was so afraid. So when mom quick claimed that house over to her daughter, she then eliminated what we call a step up in basis.
Dr. Friday:
[31:12] So now when mom did that, she basically said, I paid $200,000 for this home. I’m quick claiming it at that exact value to my daughter. And if you don’t know what that person paid, that value could be physically zero because you don’t have any documentation showing what the par value or the value of that home was at the purchase price. So unless you can find that, you could end up. And then she sold this home for like $800,000. And now she’s paying tax on $600,000 in this particular case. Where if mom had just set it up in a trust and then been able to just leave it to her daughter at the time of her passing, it would have been a zero tax. So we had almost a $200,000 tax bill go from 200 to zero by just understanding how taxes work and how you should be using it to better your tax situation.
Importance of a Financial Team and IRMAA
Dr. Friday:
[32:12] And, you know, again, having a team of experts, a financial planner, a good estate attorney, a good tax attorney or a tax accountant, an EA like myself, then you will then have a team that will help you. Because sometimes estate planners will say, well, we need to do this. But sometimes that’s not always the best for taxes. And sometimes that’s fine. I know I deal with Hank Parrott a lot. A lot of you guys probably know him as well. He’s been on the station and things. But state and financial strategies, Hank Parrott, he is one that will often put together this plan. And so for a couple of years, we may end up paying decent taxes, doing conversions and things like that for the big picture of paying little to no taxes, because now all the monies are in Roths or less, and therefore they maintain being in like the 22% instead of the 30% tax bracket as they hit retirement.
Dr. Friday:
[33:07] Again, understanding how those brackets affect you. Also understanding what happens if right now you’re married, but if you lose one, because again, we often have a situation where somebody’s getting a pension, but that pension will not go, sometimes people elect to make it go to the last person, which would be the spouse that’s still living, or it ends with the person that had the pension. They just took the 100% pension for themselves. Now that person that’s still living doesn’t have the pension, loses a portion of the social security because you usually had two people getting social security. Now you’re getting one, even if it’s a step up. And so the cost of living hasn’t really changed. You still live in the same house, still have the same utilities, still have the same cost. But what you don’t have is the same income. So making sure that all that is done with a good estate planning and good attorneys that can help you understand what you want to do and how and making sure that if you’re selling and dealing things that your Irma is not going to be messed up because that’s what you pay in medical. So you end up with a lot of money that can go into Irma and then taking that out of the way and making sure you have that situation.
Dr. Friday:
[34:18] So there are so many little things you can think, oh, okay, I’m going to keep my tax down. And the next thing you know, you get hit with something for Irma, or I’m going to just pay everything and get it all into this one hit. And again, you can end up with something that will change on the other side of it. So making sure you understand your, your personal situation is the way it’s going to make it best.
Dr. Friday:
[34:42] All right, guys, we have about four minutes. Let’s see if we can get Karen on now, if you don’t mind. All right. Hey, Karen. What can I do for you?
Caller Question: Home Sale Capital Gains and Inheritance Clarification
Caller:
[34:50] Okay, my question is, if I own a house and I bought it at $200,000, but it’s now worth $600,000, and I go to sell it, and I have to pay a capital gains tax, when does that come in first and who made that legal? And is it legal? I think that’s just so ridiculous. You pay property tax? You pay marriage tax?
Dr. Friday:
[35:12] Well, I mean, yes, you do pay capital gains. Now, are you married or single, Karen?
Caller:
[35:17] I’m married.
Dr. Friday:
[35:19] Okay, so theoretically if you guys sell it, you brought it for $200,000, you’d have a $500,000 exclusion. So you could sell that house for $700,000 and pay zero tax.
Caller:
[35:30] Okay. So it’s only when it exceeds those numbers that you’ll pay capital gain.
Dr. Friday:
[35:33] So right now you guys would pay no tax.
Caller:
[35:37] Okay, and like you were saying, if we wanted to leave that to one of our children, because we’ve got a rental home and a regular house. Right. If we wanted to leave that to one of the kids, what were you talking about? Quit claiming it?
Dr. Friday:
[35:48] Do not do that. I said what you want to do is leave it in a trust or a will so they get what’s called a step-up in basis. A lot of people like to do quick claims, but quick claims eliminate step-up in basis.
Caller:
[36:01] Okay, what’s a step-up in basis? I don’t understand that.
Dr. Friday:
[36:03] That means that you pay $200, and let’s say when you die the house is worth $700, your children will inherit it at $700 and not pay any gains.
Caller:
[36:13] Okay, perfect. Got to understand. Okay. All right, well, thank you.
Dr. Friday:
[36:17] All right, bye. Thanks, Karen. Bye. Great questions, actually. That was great. And so, yeah. And so you have to think about that and especially rental properties, because a lot of us have already depreciated. I know I love my rentals, but it would be better for your children to inherit than you to sell. Not always a choice. But right now, under the current tax laws, better for kids to inherit property and allow that step up in basis so they don’t pay the tax and you don’t pay the tax because we all have, you know, capital gains built into all of our rentals. So we want to make sure that we don’t have a situation where we have the rentals that are going to be, you know, coming back at us to be able to make sure we know what we’re doing or whatever.
Closing Remarks and Contact Information
Dr. Friday:
[37:04] All right. So, um, again, so if you have questions, you can certainly give us a call. I think we’re going to be at the end of the show here pretty much. So I don’t think we’ll be able to grab a second phone call, but, um, if you need help, you can always call my office on Monday morning at 6 1 5 3 6 7 0 8 1 9. 6 1 5 3 6 7 0 8 1 9.
Dr. Friday:
[37:30] And again, I’m an enrolled agent licensed by the Internal Revenue Service, so I’ve never, ever worked for the Internal Revenue Service. I am licensed. I’ve taken all their tests to represent you guys, my customers, in front of the IRS. And that’s really what I like doing. I mean, just to make sure that we have representation, making sure that you understand what your rights, as well as what your responsibilities are to dealing with the IRS, because that’s the important part, right? You need to make sure that you’re doing everything right so that you don’t have it come back at you and you’re like oh my gosh how i didn’t know that i thought i could do this and you know the internet is awesome but sometimes some of the things i’ve seen and heard out there it’s like where are these people getting their information you know some of it is just straight out wrong and some of it is more of a stretch um sometimes it could apply properly but other times maybe not quite so much.
Dr. Friday:
[38:21] So again if you want you need help you want to set up. Our consultations for first time visitors are always free because I want to make sure that A, I can help you and B, that the help I give you is what you need. So you can call the office Monday morning, 615-367-0819. You can also check us out on the web, drfriday.com. That’s D-R-F-R-I-D-A-Y.com. Or you can email me, Friday at drfriday.com. Again, Friday at drfriday.com. Hope you guys have a wonderful Saturday, beautiful day. And as we always say in Australia, cop you later.