Before your tax woes become TAX-ic, come and take a listen to this yet another insightful episode of Dr. Friday Show. For this episode, Dr. Friday takes calls, answers questions, and talk about anything under the taxation sun. Here are the following topics touched today:
- New Tax Season Is Coming
- Complete Everything Before January 1st
- Selling Your Property as a Land or Commerical Property?
- Property Exchange Defined
- Taxing Charitable Gift-Giving
- What Is Recapture of Depreciation?
- Wholesale License – What Is That?
- Reminder for Those Who Have Health Flex Spending Account
- Property Tax from Another State
- Inherited IRA from a Family’s Trust
- When to Start Taking the 401k?
- Got Tax Issues? Ask a Tax Person Before Doing Them!
- How to Do Itemization
- When Can You Get Something off Your Medical?
- Are There Any Mds on Roths?
- Allocating Investment Money to Spouses
- Deducting Residence Space as an Office Space
Transcript
Announcer 0:01
No, no, no, she’s not a medical doctor, but she can 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.
Dr. Friday 0:29
Good day! I’m Dr. Friday and the doctor is in the house. It is an awesome Saturday out there and I know it’s just about that time for Turkey day. So you know, it’s also that time that we have to start thinking about a new tax season, right? We got through October 15th. It’s time for us to start thinking about what are we going to do for the 2019 tax season? Is there something we should be thinking about? Because once we hit Thanksgiving, you have a couple of weeks that you might be able to do something and then you start hitting the holidays for Christmas. And it’s very difficult to get a hold of people to get things done. So if you’re thinking about a Roth conversion, or you’re thinking about doing something even setting aside the money for an IRA, remember, you can only contribute an IRA up to April the 15th. So you just need to make sure that you have it all worked out, you want to plan in advance what you’re going to do, is it really worth putting your money in a regular deductible IRA? Or should you really think a Roth IRA for the next few years? Because I mean, let’s be honest, tax brackets are really low right now.
Dr. Friday 1:32
And if you’re a married couple making $100,000 or less, in my humble opinion, I’m not your financial planner, but saving 12% if I put it into an IRA and deferring it paying the 12% now and then when I retire, it’s grown tax free and I will probably be in possibly the 12% or even higher now there’s no guarantee I don’t know your financial situation. So but think about it, talk to somebody, but business owners. Let’s take a talk and see what we have. We’ve caught very soon, we’re going to be getting ready to do 1099 and W-2s. We have to have them done, completed out the door by January 31st, which basically means as soon as we’re back from the holidays of New Year’s, we are starting to obtain that. all through the year though, you need to be making sure that you’re obtaining the information for your subcontractors, you hire somebody. And this also includes you with rental properties. If you hire somebody to do a repair and it’s over $600, that handyman, that AC company, because many of them are LLC, which means we still have to 1099 them any kind of that roofing company if it’s not a corporation, we were supposed to be issuing 1099s for those jobs done. So the same thing with all business owners any kind of service if my firm is a corporation, but if it wasn’t the people that I actually have are monthly clients or tax clients. And if you paid me more than $600 you should be 1099-ing me.
Dr. Friday 3:00
So if a company is not a corporation, that means if it’s a limited liability, a sole proprietorship, a partnership, any of those types of entities, you still need to be issuing 1099s. There are fines out there, there are penalties for not doing it and it can be up to 50% of whatever you paid that person. So, you know, that can add up relatively quickly. So, you know, you want to make sure the information to the best of your ability is correct. And you want to make sure you’re doing it right. If you’ve got questions about receiving or doing 1099s, you need to call the show. 615-737-9986 615-737-99864. For all of you that haven’t heard me before. I’m an enrolled agent license with the Internal Revenue Service to do taxes and representation, which basically guys means I do taxes. And if you have trouble with Uncle Sam, or I should say really the Internal Revenue Service, then I can help you out. I’m kind of like a shield. I help represent you in front of them so you don’t have to do it all by yourself. I will let people know that the offer and compromise process if you’re going to work with it is going to take you somewhere between 6 to 12 months to actually get through the system.
Dr. Friday 4:15
And that’s assuming you don’t have to do a second offer. So it’s not going to be fast. So if you’re thinking, Hey, you know what, I want to go buy a house or I might want to remarry. And right now, I’ve heard that I might qualify for an offer and compromise. This isn’t something that’s going to happen overnight. There’s no quick fix for you. So you need to make sure you understand what your responsibility is, and also what kind of time you’re looking at and what do you need to be doing. All you entrepreneurs out there, you need to be paying quarterly estimated tax payments, unless it’s coming out of a paycheck from a spouse or a second job and you’re having enough come out, then you need to be making estimated payments and our last one is just around the corner on January 15th. All right. Let’s go to the phones. We’ve got Pat. Hey, Pat. Thanks for calling.
Caller 5:02
I have a question about a 1031 exchange. I have two pieces of residential rental property. And the value of the property is really in the dirt, not necessarily the buildings sites. And so if I buy something with money if I sell on, does it have to be residential rental property or can it be land?
Dr. Friday 5:32
Well, it has to be, my understanding, would have to be rental for rental, it could be commercial rental, or it could be, you know, residential rental, but it would have to be rental for rental. I don’t know if you could just invest into land, I’m not going to tell you 100% and you would have to spend the value of whatever the purchase price was for the two properties that you’re selling. So if you’re selling for $500,000 you have to go spend $500,000.
Caller 6:00
So I have to spend it all?
Dr. Friday 6:01
Right or go back into debt for but yes, the value of the new property has to be equal to the value of the property sold.
Caller 6:09
Can I put some of it in like (inaudible) or something and like have a period of time to spend it?
Dr. Friday 6:16
I believe you have 90 days to get the properties listed. And then I think there is an extension for if you have to get financing, something like that. But I believe you have to have the properties listed within 90 days of the sale of your property. Alrighty, Thanks, Pat.
Dr. Friday 6:34
And what Pat’s talking about when he said a 1031, for some of you, that might not be sure what we were talking about, that is a property exchange, you can do that for businesses, you can do that for most of the time. It’s a property. So I have people that may have rental properties, and instead of, you know, selling the property, paying the taxes and then go buy another piece of property, the law allows us to actually just go from selling a piece of property and buying another piece of property and not have to pay the taxes at this time, allowing us to keep that money and keep investing it. A little bit like a 401k, where we just keep investing in and when we sell finally at the end, the idea is you will pay taxes on it at that time. So that’s something that you really need to look into. Sometimes it’s a good investment, sometimes it’s really not. There is a fee to doing a 1031. And then sometimes depending on how much your real profit is in your earnings if you’re in that 15% tax bracket. So again, for a married couple hundred thousand or less or an individual $50,000 or less, including the capital gains, you would have a zero capital gains if it’s long term.
Dr. Friday 7:44
So something to think about if you only have a profit of $20,000, but you’ve actually paid off that property. So you’re like, well, if I sell this, I can go ahead and get $300,000 but really, your gain is only that difference of 20, $30,000 and you didn’t really make much money this year. It may be something that you can look at to, to do at the zero percent otherwise, you probably, you know, especially if you want to invest in another piece of property, it might be a very smart idea to consider a 1031 exchange to do that. Alright, so we were talking about 1099, W-2s, also something to think about is the charitable gift-giving you can give up to $15,000 a year, a lot of times that this is the time of the year that many people kind of like to gift that money to their family. So if your husband and wife and you have a child, you can give them $30,000, 15 from you 15 from your spouse, and then that person can can have $30,000 that is gift-free, which basically means that the person receiving a gift does not pay the tax.
Dr. Friday 8:47
If there are any taxes due, it would fall on the giver. In most cases, people are giving money from their own personal assets. So, therefore, they’ve already either paid tax, the money’s in the bank, or they’ll be paying tax depending on the type of transaction it was, when you’re giving that. You don’t have to always give cash, there are people that will gift a portion of a house. Eventually, a house will be inherited by a child with a value because they’ve been gifted it or there are stocks, but stocking stocks. GIFs are a little different. So you want to make sure you get somebody that really understands how that’s going to work. And I had a client contact me the other day. And apparently, she’s Catholic but the church basically said, well, we want everybody to contribute so much money so that we can update the kitchen in the church. And she was asking me, she’s in her mid-70s and she was wanting to know, you know, because she knows that her charitable contributions really aren’t high enough now under the current tax laws for her to actually write them off and I was telling her she has required minimum distributions. She does RMDs, many of you that have IRAs hers is about $11,000 a year. And so we are going to take and maximize that with her charitable contribution. So the nice thing about when you have a requirement on distribution and let’s say you do give two, three, well, whatever you whatever your requirement, her case $11,000, she could give all of that to a qualified charity and never have to pay tax on it.
Dr. Friday 10:23
So instead of doing what she usually does, which is takes the money and then puts it in the bank, and then every week or every month, she writes the check to the church. And then at the end of the year, she has a little slip that says she’s donated this much money. And then we try to write it off on our taxes are not well under the current tax law, she doesn’t have enough to actually qualify her. So in her case, now she’s going to be able to use the giving it through the RMDs. And that is a way that you might want to definitely do. If you’re not doing that, if you are receiving qualified requirement on distributions, you need to talk or sit down and think about it. If you’re writing checks every week to the church, maybe doing it once a week, once a year paid through your other will be completely tax-free money. And again, I know people don’t give money to charity for the fact that you’re giving money to charity, but why not get tax-deferred and give to charity at the same time? There’s nothing that says you can’t do that. So again, very, very important to look at what you can do, and how that’s going to help you. And that’s going to help the charity too, because you might put a little bit more in because normally you had to give them after-tax dollars. So you know, you could give another few dollars every month because you’re saving that money on taxes and Uncle Sam is not in the middle of it all.
Dr. Friday 11:40
Alright, so if you want to join the show, it’s really easy. 615-737-9986 615-737-9986. We’re taking your calls, talking about anything pretty much to do with taxes if you’re buying or selling real estate, especially if you’ve seen sold some real estate, maybe you have some large capital gains because not only you’re going to be looking at capital gains, but you also have the surtax on net investment income. So it’s really important that you consider what you have. Make sure you make the best choice and also be prepared. There is nothing worse than telling somebody, hey, you owe money. And you were thinking, Oh, it’s only 15%. And I’m coming back and saying, No, no, it’s really 24%. So it’s important to understand how much money you really owe. If you’ve got questions, this is a show 615-737-9986. We’ll be right back with the Dr. Friday Show.
Dr. Friday 12:46
Alrighty, we are back live in the studio. I’m Dr. Friday, an enrolled agent license with the Internal Revenue Service to do taxes and representation. And we’re going to go right to the phone lines. Let’s see we have Jana and Tom, they both called. Hey, Jana?
Caller 13:01
Hi, how are you?
Dr. Friday 13:02
I am great.
Caller 13:04
So I’m calling to find out about tax capital gains tax. My husband and I sold a rental property this year. And we’re just wondering what we might possibly be facing.
Dr. Friday 13:14
So can you tell me what’s your income before? Just give me a ball? Is it more or less than $100,000? Before the rental sale?
Caller 13:23
Well, I ended up changing a job this year. So it may end up being over 100,000. This year, we’re going to be really close. I’ll kind of be brought on the line there.
Caller 13:31
Alright. So on the rental property, you’re going to have a couple things. One, how long have you owned it? Again…
Dr. Friday 13:38
Oh, goodness, probably nine or 10 years.
Dr. Friday 13:39
Okay. So you every year would take what’s called depreciation. So whatever that is, we have to do what’s called recapture of depreciation, which is called… bottom line is you got to deduct it off your tax return, assuming that you were able to some people’s income is too high. But if you were, then it basically comes back as ordinary income. Back to you. So if you took $2,000 a year, times 10 years for simple math, that’d be $20,000. They’ll be added back as ordinary income. And then, you also have what did you spy a foreign versus what you sold it for? Any idea?
Caller 14:15
We bought it. Yes, ma’am. We bought it for 58. And we sold it for 130.
Dr. Friday 14:21
Okay, and you might have had some closing costs, fees, and stuff in there that you might not have had. Okay. So that is going to be around $70,000. A little under maybe. So it’s going to still keep you under the and you had it for that long says could be long term capital gains, and you should still be that’d be $170,000. Roughly. You should still be under 250. So you will only have a 15% tax.
Dr. Friday 14:49
Okay, all right. Well, I appreciate it.
Dr. Friday 14:52
Thanks, Rebecca. got a long way to get there didn’t I? Hey, Tom!
Caller 14:57
Hey, thanks for it. So I own a car dealership, it’s a single lot. And most everything that I buy that’s going on car parts and floor mats, things like that. I can use a tax-exempt certificate and I don’t pay taxes. But there are some places where I do pay the sales tax on something that I’m reselling. Is there a way that I can recoup that either filing my monthly sales and use tax or at the end of the year filing my taxes?
Dr. Friday 15:25
Nope. Well, I mean, you recoup it in the fact that just increases the cost basis of that piece of equipment or cost of goods. So, it’s just a part of the additional costs. So whenever you look at it, whatever you’re paying, if it includes sales tax, well, then that’s just 10% more if it’s Tennessee tax almost what 9.75 and Williamson. You know, whatever the cost is, so no, there’s no way of actually like getting it back saying, well, I already paid tax on this product. So you either have to get a tax-exempt and that’s when you won’t have to pay it or itt just becomes caught party across the goods.
Caller 16:02
Gotcha. Okay. Thank you so much.
Dr. Friday 16:04
No worries. Great question. Thanks. And that is a great question. And for some of you that may or may not totally followed it, it’s pretty straightforward. But most business owners, a lot of times you in Toms case, he’s buying a car. So he’s fixing that car up. He’s putting floor mats in it, maybe buying parts for the engine, whatever it is to make their car, a good car. He’s buying it wholesale, basically. So when we buy the car, we’re paying sales tax on it. In that way, there’s only one sales tax being collected on that vehicle. But if you have a store, a business, any business in which you’re collecting sales tax on the total cost of some product, then you need to make sure you’re using your wholesale license, which is your sales tax number. And that way, then the government knows, Hey, he’s used this tag. This person is not paying sales tax because they are going to resell this and then they’ll actually mark it up and pay sales tax on the total price of that. So If you’re a business owner, and you’re paying sales tax when you buy something and collecting sales tax on the other end, you might be actually losing, like I said, depending on where you’re at in the state between 9.25 and 9.75 profit on that particular piece.
Dr. Friday 17:15
So just make sure you are maximizing the use. Because I have sometimes people will turn around, say, Oh, it’s the one at the play with it, or I don’t want to mess with it. Well, you know, that can add up over a year. So just be smart about some of those things. Quick reminder to some of you that may have the flex plan spending health flex spending account, unless your employer has given you a grace period of two and a half months or a $500. carryover. Remember, December 31st is the last day and you have to spend all the money on it. That’s the standard there. There is some new exclusion. So if your employer has implemented a two and a half month grace period or a $500, carry overrule, and that has to be something your employer has implemented in the plan. Otherwise, you must have that account emptied or you lose it. So again, we’re getting down there last six weeks of the year. So just think about that and make sure you’re not messing up. And also, sometimes you have year-end bonuses, or even, I have several clients that will actually take their last paycheck and put all that money into their 401k. So in 2019, you have $19,000, that you can do, if you’re over the age of 50, you have $25,000.
Dr. Friday 18:32
This is how much you can put into your 401k. If you haven’t done that, and keep in mind, here’s a big, I mean, this is for me, if I keep using that number. But if you’re a married couple, and let’s say that your income right now would be $107,000 versus $100,000. And that’s $7000 is it would be taxed now at 22% instead of 12%. And let’s be honest, if it’s something that you can live without now, that’s not always the case. But if it’s something that the money would be normally just set aside, you’ve got enough money in savings to offset it. Think about contributing that money to a 401k. Then you just saved, what 10% on that money going in beside the 12%, you actually save 22. But just the difference of keeping you in that lower tax bracket at this point. So, and again, if you’re if you have a 401k and you’re making less than $100,000? You might want to think, is it should it be a standard 401k? Or should it be a Roth if you have that option? I’m not a financial planner. These are just tax advice of what’s the best way sometimes we always look at what can we do. My job is usually instant gratification. I want to know how much money I can save my clients every year, in that year.
Dr. Friday 19:46
But as you know, a lot of times I have my financial planner on the show and Hank is always talking about the big picture. And on that you want to make sure that you’re looking at, not only sometimes, what you can get this year but with the lower tax brackets. Are you maximizing what you can take now and expand into so it grows tax free possibly, or you have a lower income bracket to look at it to see what is going to be the very best thing for you, and how you’re going to do it. We’re also going to have Russ Cook in and Hank, on the next couple weeks here. Russ Cook is an attorney that does estate planning. And we’re going to talk a lot about some of the different things that you might want to make sure you’ve got taken care of, because the last thing you really want to do is leave your estate in a situation where, I mean, I have people walking my door all the time where there’s tax issues.
Dr. Friday 20:38
There is all kinds of things left undone. I guess, you know, homes, people don’t even know. I had one client that there was a house that no one even knew was in the estate. Property Tax people from another state contacted them saying, you know, their father owned this house, and no one knew that he still owns it. He wasn’t in his paperwork and And they had already closed the estate. So then they had to try to sell the house and had to reopen it. It was just a lot of work making sure your information is in good shape, know and understand what you have and where it’s at. So that way when someone steps in and does something, it’s really important that you know how to do that. We’re going to talk a little bit about business owners here next section. Talking about don’t forget the new 20% deduction for the past two-income. What really is passed through how does it qualify, and what doesn’t qualify? Sometimes people are thinking, Well, hey, I invest in this or I invest in that or I make this much money. And maybe by making that much money, it’s not always going to be our benefit to be able to maximize those deductions and how it works for you and making sure that your business is getting you the very, very best.
Dr. Friday 21:51
You know, tax breaks because more money in your pocket means more money in the economy, which means more money moving through the economy to actually help grow your business versus paying way too much money in taxes and then finding out later that you know what, you can’t do it and I had someone come in seriously, they had someone doing their taxes, and the person didn’t take all the tax deductions and they had justification and they actually had the documents. And of course, I can only go back three years. Three years they couldn’t I couldn’t go back and get all the money. Now in the long run, they may get some more money or wasn’t completely a total loss because of it was through depreciation but him on make sure that your information is right, make sure your documentation is correct, because sometimes when you sit on my side of the desk, you’re taking the word or you’re looking at documents that you think everyone else has seen or read, and you’re not sure exactly how something’s going to work. So if you’ve got questions about how to set up your taxes, what you need to do, you can start a new business are you doing the right type of entity, if your partnership or I should say a limited liability or partnership multi-member? Are you taking payroll? Should you be taking payroll? What does Uncle Sam say about you taking payroll because according to them, your partner’s your single members, you I mean, you’re a sole proprietorship in their eyes, even though you’re a partnership, which means partners cannot make payroll.
Dr. Friday 23:15
But that’s very difficult. So that means you have to be a corporation to actually be receiving a paycheck from your own company. So what do you do about that? Is that something that needs to be corrected? These are the kinds of questions you want to make sure that you’ve got the right answers on. So you’re complying with what the government wants, but also the government wants their money, which means you have to start paying quarterly and I can’t tell you, I stay in business because so many people do not pay estimated taxes. I mean, to be honest, my you know, when you’re dealing with the IRS, the number one reason normally is either something large gets sold and people just weren’t prepared for the tax bill. Or something, you know, you’re self-employed individual and you you know, even though you only made $30,000 but when you owe $12,000 of that to the government, you’re saying I can barely survive. You’ve got to understand you always have a partner in business when it comes to the self-employed in that partner is the Internal Revenue Service. And they are at least 25%. partner. All right, we’re going to take a quick break. You want to join the show you can at 615-737-9986, 615-737-9986. We’ll be right back.
Dr. Friday 24:34
Alrighty, we’re back live in the studio. I’m Dr. Friday, an enrolled agent licensed with the Internal Revenue Service to do taxes and representation and we’re going to go right to the phone lines because I do love my phone calls. Hello, Matt.
Caller 24:49
Hey, thank you for taking my call. I have inherited an array that was in my father’s Living Trust. And I am 55 but for some reason, I think I read somewhere that I would have to take an RMD on it every year even though I’m only 55.
Dr. Friday 25:17
You are a hundred percent correct, Matt Yes. And the year after in which you inherit because usually a year which the person she’s the year after someone passes away, the first year you have it, you are required to take the RMB Yes, sir.
Caller 25:31
All right. Is there a way of… do I… what’s the best way to get around? Like still do that? Or do I take it as a lump sum and then debt all income the first year?
Dr. Friday 25:43
Right There’s no penalty, but there it’s all income and I’m not too sure. I mean, obviously it’s no other convenience, but it would continue to grow. If you have a tax free if you keep it in the IRA and depending on how much is in it. The RMD is gonna be fairly minimal and expected versus completely cashing it out. Now, if there’s only maybe five or $10,000 in the whole thing, it may not be worth the conversation. But I don’t know your income and I’m not too sure you know where you stand on your own retirement but all in all, most people, you’ve answered your own question as far as yes, you do have to take the required distributions depending on how much money, you know, what income bracket you are you could… I think it’s in the first year you inherit, you can take it out tax-free. I mean, I’m sorry, penalty-free, but after that, if you were to take money out of it, you’d have to pay penalties for early withdrawal
Caller 26:37
And had my second question or follow up on that, would I be able to move that into a living person myself and or not?
Dr. Friday 26:51
Well, I mean, you can make the beneficiary your own living trust and debt, you still are going to have to take the RMDs.
Caller 26:58
Okay.
Dr. Friday 26:59
But yes. You know, you could put them as the beneficiary so the next person may inherit, depending on the situation.
Caller 27:05
All right, thank you so much.
Dr. Friday 27:06
Thank you, sweetie. Bye. Great questions. And I think it’s always important that we always are, I mean, you need to think about some of that sometimes. And again, I have had individuals that they, for whatever reasons, didn’t have very much income in one year, and they inherited and they have like a five or $10,000 IRA, and it’s at a minimal tax, go ahead and pay off their debts, whatever with it and washes out. But if you’re making more than 50 as a single or more than 100 as a married couple, and including whatever the conversion would be, my personal opinion without going to a financial planner is to think twice before you do that because you’re jumping into a 22% tax bracket. Now there are people that, Hanks always telling stories about and that’s why financial guy, but he often says things about, you know, even though it may kick even into the 22% tax bracket it may come down to where, you know, when they hit retirement, they’ll either not have to because they’ve done the conversion or whatever is it most of the time it’s an IRA to a Roth conversion. But you do want to make sure you sit down with a good financial person, get the information, make sure it’s right, because numbers I’m going to give you normally would be great for taxes, right? What’s good for a tax question.
Dr. Friday 28:22
But sometimes paying taxes today is good, because when your retired or whatever else, you may not have to pay any taxes or you’ll be in the very lowest tax bracket, but still continuing to live the lifestyle you’ve always lived. So, again, I don’t think a tax person is a person who are great to help you like the first caller or I think it was Jana, that called asking about taxes on a rental. I do that all the time, probably at least once or twice a week with my clients that someone’s thinking about or has it on the table. If I sell this for this much. This is how much or how much will I owe and taxes? These kinds of questions are really really important that you know because if you owe $30,000 in taxes because of the tax bracket and everything, is it something you’re definitely going to want to consider alternatives, you know, 1031 is one of those. All right, let’s go to the phones. We got Gil. Hello, Gil.
Caller 29:19
Hello! This is Phil, not Gil.
Dr. Friday 29:21
I’m sorry, Phil. That’s a typo on my side. What can I do for you?
Caller 29:26
Dr. Friday, I am one of your clients, you handle our taxes for all three of our businesses. And I just wanted to call up and tell you again, how much we love having you take care of all of our taxes.
Dr. Friday 29:39
I know which Phil this is…
Caller 29:44
I’m not gonna I’m not going to give you a shameless plug for my company. But I do have a question for you today. When should I start taking my 401k?
Dr. Friday 29:55
Well, in your personal case, I’d say we probably wouldn’t do it until we needed to take the RMDS which is at 70 and a half. Because you could take it out without penalty anytime, okay, at this point. You’d have to pay ordinary income tax but it’s growing at this point and depending on your, you know, something changes are for investment purposes, you want to rechange the investment. But other than that, you know, probably at this point, know how hard you work and know your income bracket, so it’s not going to benefit us to start cleaning out our 401k
Caller 30:32
Very good. Alright, thanks again. All right.
Dr. Friday 30:34
Thanks, Phil. Bye-bye. Phil Soholt. Soholt Roofing. And he’s got a couple other roofing company. So if you need a good roofing, I can refer him. Alright, guys. So if you have some questions about taxes or making decisions, the biggest thing I can tell you always is ask before you do it, because if you decide, saying I don’t know, let’s say I don’t know Phil, and someone calls up and says, Hey, I’m going to cash out my 401k and pay off my mortgage. So I don’t have to worry about it. But what does that really mean in tax dollars? I know what it would mean in Phil’s. And that would be something he wouldn’t want to pay right this second. If he had a goal to pay off something, it’d be like, okay, let’s do so much every year for the next number of years, because that we keep him in a lower tax bracket. But in everyone’s situation is different. So making sure you understand what kind of taxes you’re going to get would be a whole big question, you know? So you need to sit down, and you need to figure out what is it you want to do with the money? How is it going to grow? Because, you know, money in the retirement accounts is a good thing. It’s not a bad thing, people and sometimes people will see that money over there. And they’re like, oh, well, I could pay this off and I could pay that off. But Uncle Sam is a part of the money that’s in your 401k or your IRAs right now.
Dr. Friday 31:51
And as long as we don’t have to take the money out, we keep growing our money with Uncle Sam. Once we start taking it out, we don’t. So again, Uncle Sam is a part of our business, is a part of our retirement. And you really need to understand that to make sure that you know where to keep your money, how you’re going to keep your money and what you want to do when it comes to doing your taxes or understanding how the best place to put your money. So make sure you talk to your tax person before you sell a piece of real estate. If you don’t have one, you need to call me but you need to talk to someone that’s going to say, hey, this is how much money is going to cost you. And you know, in some cases, if you’re making more than 250,000 for a married couple, then you might be looking at an additional 3.43 point yeah, 3.8 I’m sorry, 3.8. Tax, you also have, you know, a possibility of long term capital gains that you’re now you’re crowding into the 20%. So I mean, again, you want to know what the sale of that property in this case is. If you sold it for $200,000 gain, then you might be looking at some good taxes on that, even though it’s you know, even though you only invested 50,000, and you sold it for, you know the same scenario we have with Jana. Let’s say you sold it for $400,000 and you only paid $50,000.
Dr. Friday 33:11
Now you’ve got a good gain and you’re most likely be looking at 20 to 24% tax almost on it. So it’s it’s important to understand your numbers. I have people that have been here in the Nashville area for their entire family, born and raised here. And so they inherit the family farm or family land. And that happens to be in the middle of Bill Mead, which is now full development. And so the property that you know, great, great granddaddy had and you inherited at you know, $10 a share or $10,000 an acre, whatever you want to say. And now it’s selling for more like $100,000 an acre. You know, we have some interesting tax situation. So don’t just jump out there and do something. Make sure you understand how it’s going to affect you and how we’re going to be able to save as much as possible. That’s when start getting into the 1031 exchanges. Also want to talk a little bit about how you can itemize. So itemizes a lot harder we all know $12,200 this year 2019. $24,400 for the standard people under the age of 65. And you might say, I couldn’t itemize, I can’t do this. Well, you can possibly depending on how much money you give to charity, depending on how large your mortgage interest is. But if you’re a married couple, let’s just say your mortgage interest is $12,000 or $13,000, it’s interest only.
Dr. Friday 34:33
Your property taxes are usually let’s just keep it simple $2500 a year. So and then you give to charity, maybe you give to charity $4,000 or $5,000 or even just $2,000 or $3,000 a year. So the goal would be how do you get over $24,000 and part of that’s going to be paying your property taxes twice because in the state of Tennessee, we receive our bills, usually in October, early November, and they’re not due until Friday. So you could pay your bills twice in one year. So instead of $2500, you now have $5000 that you would have there, you also would have your, still, your $12,000 or $13,000 in just mortgage interest that we have. And then you would also have your charitable contribution. So as long as that charitable contributions came up to not more than $8,000, you would be itemizing. So if it’s $4000 a year you’d itemize because you would double it up every other year. So every other year you itemize and every other year you don’t. So I do even odds, so every even year I itemize every odd year I don’t. I also think about any kind of major medical situation. It is very hard, if not impossible, in many cases to actually do it because before you get $1 in medical, keep in mind, you have to have more than 10% of your adjusted gross income. Simple math, you make $100,000 a year so the first $10,000 of medical you won’t get $1 off. Everything you pay above $10,000 will start adding to your itemized number. So it’s really important, to think about that.
Dr. Friday 36:07
So if you have any major medical, you might need to go do something as far as working that into the budget as well as that’s the year you’re going to want to itemize. All right. If that’s possible, we’ll come back. We’re almost done with the show. So if you have been holding your breath, you’re like, oh, I have some questions but I’m so crazy. I don’t want to call the radio. Don’t worry, I’m gonna give you ways of contacting me off the radio show. But if you want to join us, because every time one of you guys call in and ask a question, proven fact, hundreds of people are listening. Thousands of people want to know the answer to that question, but they just don’t have the nerve to call a radio show. And I’m kind of one of those people. I’ve never been really big on calling radio shows. But I’m always listening because people are asking a lot of the questions I would love to ask. So if you’re one of those people that’s brave enough to call, you can call 615-737-9986 615-737-9986. And we’re going to be right back with the Dr. Friday Show.
Dr. Friday 37:10
Alrighty, we are back live in the studio. Like I said, this is the last part of the show. So if you want to join us 615-737-9986, 615-737-9986 and we’ve got Jim on the line. Hey, Jim!
Caller 37:28
Thanks for taking my call. I have a multi-prong question. And then if possible, my non-related question. My first question is if you have a Roth retirement account, a Roth IRA, Roth 413, 401k, are there are MDS on those?
Dr. Friday 37:49
No, there isn’t. That’s why we like Roth.
Caller 37:51
Okay, fantastic. I guess the next question is, if unrelated if I’ve got a moment. If you have a spouse that doesn’t make a lot of money but you have quite a bit of investment income, can you allocate part of that to your spouse to increase her wages for Social Security calculations?
Dr. Friday 38:15
Well, investment income isn’t calculated for Social Security so probably wouldn’t help. So fortunately yeah. You can you could contribute to, if you’re working depending on your situation, if you have earned income you can contribute to an IRA for your spouse if they’re not working. But other than that, no one help.
Caller 38:35
Okay, thank you. Appreciate it.
Dr. Friday 38:37
No worries. Thanks. All right. Let’s go to JR! Oops, wrong line. Hello, Jr. Oops. I just hung up on everybody. JR. Please call back Friday’s handling the phones. It was only a Friday accident but apparently I hit the wrong line first and I tried to fix it. So sorry JR. If you can dial right back, my engineer will put you right back on the line here. Anyway, so meanwhile, while we’re waiting to see if JR will call us back, you can obviously when we’re talking about a few things, we’re going to talk a little bit about business owners, and also considering the shifting of income and expenses from 19 to 20. Is that a good plan? Is it something we don’t want to plan but I’m hoping JR. is back on the line. I’m so sorry, JR, you gotta watch a blonde by the phones. Okay.
Caller 39:27
I’m back on the line.
Dr. Friday 39:30
Thank you. Okay, what can I do for you?
Caller 39:33
Well, I have a regular job. And I have a rental home. And I have a farm. My question is deducting my primary residence as an office space isn’t a good idea? Is it something I should do or not?well, um,
Dr. Friday 39:54
So if it’s a true working farm, meaning one that is actually making money, showing the profits, then you could and you are running that farm from your home then the answer is yes, we could take it off the farm. Rental properties you really don’t have a place they don’t have, they just don’t consider Schedule E rental property something that people have homes, rental homes or rental offices that an office to do it. If there’s a management fee, then you can charge that and then that would be against you to come in. But that would be kind of silly, self-employment can’t, you know what I mean. That wouldn’t work.
Caller 40:29
Okay. Yeah, I mean, I do conduct business of my rental home and keep the books and do all that stuff.
Dr. Friday 40:36
Right. There’s just no place on the Schedule E, unless you consider yourself a manager to actually put it on there. Got it. But there is a place on a farm. Obviously, you could easily have a farm office, an office in which you’re handling if it’s livestock or crop rotations, whatever. You know, and then you could as long as it’s showing you cannot have… A home office will not allow you to go into a negative. They won’t account it at that point.
Caller 41:03
Okay, yeah, I won’t go into a negative, I’m just looking for some more deductions for the farm.
Dr. Friday 41:06
Yeah, no. As long as that’s where the papers are kept, is where you’re managing the farm information, again, I don’t know what you’re growing or if you’re raising but all of that. As long as that’s being done in that office and that office doesn’t have a bed or a TV where it looks like it’s a guest bedroom that you’re now trying to write off as an office.
Caller 41:26
Okay. Are there pros and cons versus when I sell my primary house?
Dr. Friday 41:32
So I will tell you, I do not use the depreciation on home offices. It’s a personal my clients, I mean we do on some clients when I’ve explained to them. But my opinion is you have an exclusion on your home, right? So if you sell if you’re a single guy and you sell your house you can sell for $250,000 more and if you’re married, you can sell for $500,000 more and pays zero tax. But if you depreciate it you will still have a recapture of depreciation.
Caller 42:00
Okay, so I can deduct some…
Dr. Friday 42:03
Utilities. Yeah, utility mortgage interest, property taxes, homeowners insurance, lawn care housecleaning, percentage based on square footage and all of that.
Caller 42:13
Gotcha. Okay, that sounds good. I’ve heard, kind of heard, do not deduct your office and that follows suit with don’t depreciate your house, because of it.
Dr. Friday 42:26
Yeah. Now there is the simplified method as well, JR, that you can use, which is $5 a square foot up to 300. And there is no tracking of expenses.
Caller 42:35
Oh, that’d be nice.
Dr. Friday 42:37
If you’re looking at the home office, you have two choices now: simplified or actual. And sometimes it’s better but you know, depending on the square footage, so that might be just an easier way of doing it and still give you some money in your pocket.
Caller 42:50
Okay, all right. Very good. Simplified, it’s $5 per square foot.
Dr. Friday 42:54
Up to 300 square feet.
Caller 42:56
Yeah, no, that would help a little okay.
Dr. Friday 43:01
Yeah, you got it, bud. Thanks. All right, we’ve got… Hello, Vicki.
Caller 43:09
Can you hear me?
Dr. Friday 43:10
I can hear you now. Yes, ma’am.
Caller 43:12
Oh, good, good. So I’m so impressed with your knowledge. And I’m one of those callers that you encouraged just a few minutes ago. I’m really kind of not really shy, but I feel so… And so my husband and I got a love letter, as you call it, the IRS. And it is because, in 2017, I started collecting Social Security but was also still working. He, he’s very smart, he hoes our taxes. I don’t think he’s going to do this again. I think we’re going to use you from now on. But what happened is there was $30,000 that we didn’t declare, or I don’t even know the right term. And we have a love letter that we owe $8,400 in penalties, interest, and taxes. So I told my husband, I couldn’t, I tried to find your number online. And I just said, the grace of God, I listened to you on Saturdays when I’m out and about. So I got in the car and there you are. And I’m thinking, I have to call. This is meant to be, and I want to make an appointment and come in because it’s probably every year after this. I’m not sure how long I’m going to work. But I get about $30,000 a year.
Dr. Friday 44:30
Yeah, we’ll probably need to talk. And again, you can have federal withholdings come out of that Social Security Security, Vicky. So you know, personally, you’re probably going to want to have some money come out because 85% is going to be taxed while you and your husband are working.
Caller 44:48
Okay, so they can you can actually make an arrangement with Social Security? Oh, I did not know.
Dr. Friday 44:55
Yeah. So we can help you have that conversation because if that happened in 2017, you’re gonna have 2018 and we’re getting ready to do 2019, right? I mean, we’re at the end of that. So you may need to correct 2018 as well.
Caller 45:12
Yeah. So, anyway, somebody told me, oh no, you’re taking Social Security and you’re not paying taxes? And he asked, why didn’t you listen to me? About that. So do I need to call your office on Monday and set up an appointment?
Dr. Friday 45:30
Yes, ma’am. Yes, ma’am. And that way we can help you get that squared away. And you might feel get some of the penalties waived because it wasn’t on an intentional situation. It sounds like you’ve always had, so you might be able to work with some of that as well. But we can cover that when we get ready to go. Thank you so much for being brave enough to call. All right, Vicki.
Caller 45:46
Oh, thank you. I’ll see you this week.
Dr. Friday 45:48
Okay, thanks. Bye. All right. This is the Dr. Friday Show and if you want to reach me Monday morning, it is pretty easy to do. 615-367-0819, 615-3678-0819. You can also check us out on the web drfriday.com. That is D is in David, R as in Richard, F is in Frank, R… well like the day the week people okay? You know how to spell Friday. Also if you want you can email friday@drfriday.com The website is new, you will be able to start wow first of December to set your appointments up if you’re not an existing client. If you are an existing client contact our office ASAP. We’re setting appointments now. Call you later.