Welcome to the Dr. Friday Radio Show! In this episode, we have tax expert Dr. Friday take on the latest tax updates, answer the caller’s questions, and talk over the following topics:
- Should We File for Married Filing Jointly or Separately?
- Penalties to Keep In Mind When Married Filing Separate
and much more!
Transcript
Dr. Friday 0:00
No, no, no, she’s not a medical doctor, but she can sure cure your tax problems or 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. 615-737-9986. So here’s your host, financial counselor, and tax consultant, Dr. Friday.
Dr. Friday 0:30
G’day, I’m Dr. Friday, and we are here live in the studio. And it is a nasty cold day outside. Great day for us to all be at the radio listening and talking about my favorite subject, taxes, or how can we put more money in our pocket? Oh, we’re going to have some other things that we’re going to be needed to deal with? Maybe looking at some of the tax things that may be expiring, but most of that I’ll be quite honest, isn’t going to happen until 2025. But we will be able to move forward and see what we have as far as other credits. And if maybe some people that maybe think get health insurance found out maybe there is some health insurance still out there in the marketplace. But you just have to figure out which way or the best way to deal with those situations.
Dr. Friday 1:17
So let’s go ahead and hit Joe. Let’s hit Joe, while we’re on the line here. Always love my callers. First we’ll get back to my conversation. Hey, Joe, can you hear me?
Caller 1:27
Yes, ma’am. Okay, well, my wife and I had a trust. And we still have a trust. But unfortunately, she passed away back in April. And I’m seeing if I can go through the stocks that are in the trust and increase the value for tax purposes. At one half of what the value was at the date of her death.
Dr. Friday 1:58
Well, was this an A B trust? Or was it? I mean, normally…
Caller 2:03
Its a family revocable trust.
Dr. Friday 2:09
Okay, so the answer is at the time of her passing, everything basically went to you, but they didn’t trust, correct?
Caller 2:16
That’s correct. So you into trouble. I’m sorry, the trust continues other than the fact that she is no longer a trustee. Of course, I’m still a trustee of the trust.
Dr. Friday 2:32
Right, but this is a revocable, which means that you’re able to take stocks in and out or any assets, you still have full control of the stocks in there, correct?
Caller 2:43
That’s correct.
Dr. Friday 2:44
Right. So in that situation, you would have a half up, step up and basis if it was held, normally, and most stocks, I mean, you are husband and wife, but if it was in her name alone, you would have a full step up. If it was in joint tenancy, then you would have a half step up.
Caller 3:02
Great. Okay. Well, that’s what I thought I just was just trying to double check on that. Thank you for your help.
Dr. Friday 3:09
Oh, yes, sir. Thanks. All right, let’s hit Jamie in Winchester. Hey, Jamie.
Caller 3:18
Hey. So we sold a house this year, it was our rental property, not our primary residence. Unfortunately, it fell outside of the mayor’s lenses for two out of the past five years, I believe we’re subject to the full capital gains, our bases 89,000. And we sold it for 159 was the asking price however, we gave them on the spot 6000 and concessions paying towards the closing costs. And I’m wondering where our actual basis for the capital gains might be?
Dr. Friday 3:57
Well, based on that simple conversation, it would still be basically your basis would still be the 89 the original purchase. Now this is making the assumption that you haven’t done any major improvements. And we also have to talk a little bit about recapture of depreciation since it was a rental. But for the there’s two sides when we sell a real estate investment property one is capital gains. One is recapture which is ordinary income. So on the capital gains, it would be basically the 89 and any other major improvements that you may have put on less than 159 which brings you down to basically 70. Then you would have a cost of sale. $6,000 So that would bring you down to roughly 74,000 on the capital gains rough numbers there.
Caller 4:45
64 or 74? Would it go down from 70 down to 64.
Dr. Friday 4:51
Down to 64.
Caller 4:54
Okay that was the math I was looking at. I was just because we didn’t have any major capital It changed to it. And we were going to have a professional do it, I just wanted to make sure that we had an idea of what I was looking at when it came back.
Dr. Friday 5:07
Right. So depending on your income, if you and your wife make less than 250,000, including this game, you’d be at 15% tax on that property. I mean, as far as the capital gains tax, if you look at recapture, because most people when they did their taxes on the rental, they would have depreciated that property. And now you have to recapture that ordinary income.
Caller 5:33
Okay, is that only for the current calendar year, or next year?
Dr. Friday 5:39
Up unless unless it’s over 20 years old.
Caller 5:42
Okay. Now, wait, we didn’t have it that long. All right. Well, thank you very much, I appreciate it.
Dr. Friday 5:49
No problem. Thank you, appreciate you. So whatever you’re looking at taxes, obviously, and the IRS likes to make things more challenging probably than necessary. When you’re doing a sale of a rental property, we have two sides, we’ve got the capital gains, which is what he was talking, in his case be around 64,000, possibly at 15%. Again, depending on how much income along with that capital gains income bracket they’re in, if they’d been over 250, but less than 475, then it would be 18.8% tax on that, then you have let’s say he’s had this rental. I mean, obviously, his purchase price was 89 out and know how much of it was land.
Dr. Friday 6:32
So he’s probably have very low depreciation, but Let’s even say it’s $1,000 a month for the last 10 years, it’s been a rental, he’d have $10,000 ordinary income, he’d have to pick up for tax purposes. So he has the capital gains of 64, plus a $10,000, ordinary income tax that he would have earned if his income taxes at 25%. Well, there’s another $2,500 in tax above the capital gains. So you know, again, never simple math, whenever I have one of my clients selling usually I suggest calling because it’s good to be able to work up some of that information to be able to see what we have, and where we’re gonna go.
Dr. Friday 7:11
Let’s get Laura in Nashville, Laura, what can I do for you, sweetie?
Caller 7:16
Oh, hi there. I am POA on my mother’s finances, and she has some annuities, as well as some IRAs. And I’m wondering if there would be any advantage to looking to transfer the annuities into Roth IRAs and the regular IRAs and Roth if it can be done? And if so it would be advantageous?
Dr. Friday 7:36
Well, I guess, first, let me put a caveat, I’m not a financial planner. But from the tax standpoint, one of the biggest things you’re going to look at is a is mom using this money to live off of now, you know, I mean, or is it basically reserved for, you know, emergency or for you to eventually inherit, because there’s a cost to converting and also what income bracket is mom in because I have quite a few seniors that we have found that they’re they’re missing out on conversions, there’s money in IRAs and annuities, but they’re not touching it, they just want to leave it there.
Dr. Friday 8:08
But if they converted it, it would have been less than, you know, 6% to do some conversions, which is a lot lower than if you have to inherit that money, what you will be paying today, most likely. So I would definitely say you need to look at those numbers. This mom needs this money to live?
Caller 8:27
No.
Dr. Friday 8:28
Okay, so this is reserved money for just in case or whatever. So then my suggestion would be go talk to Hank Parrot, or one of those financial planners, he’s mine, but somebody that will give you a free consult that would let you know, first and foremost, is this even a conversation you should be having. But anything you convert into a Roth, the nice thing is you inherited tax free, which would make mom and you happy probably and also maximize her possible lower income brackets again, not knowing your mom or not, but you know, we want to maximize lower income brackets before we get hit with the higher ones.
Dr. Friday 9:07
So you know, I honestly I think it’s a great that, you know, you’re actually stepping up because so many people have POA but they don’t seem to do a whole bunch. So that’s awesome. But anyways, if there’s any you can call my office, I’d be more than glad to help you crunch tax numbers, if you decided to go that direction. But I would suggest probably the tea of a financial planner, anyone she deals with maybe about some of that just to ask. If there’s an annuity sometimes you can’t do certain conversions. There’s reason I’m asking IRAs pretty straightforward. I’m not sure about an annuity.
Caller 9:40
Okay, yeah. And she does he’s semi retired and she and I are both clients of yours and we’ve got an appointment set up with you for March.
Dr. Friday 9:48
Oh, wonderful. So we’ll crunch some numbers for Mama then and just see what might be an advantage. But you know, we don’t want to lose out this year. So if you want to give me a call Monday or Tuesday just for us to do it over the phone, you know, get some ideas, I have no problem with that, sweetie.
Caller 10:02
Okay, thank you so much.
Dr. Friday 10:05
Thanks. Thanks for calling. All right, we were taking your calls here live in studio 615-737-9986. We are talking about my absolute favorite subject, which is taxes. And we’ll see what’s going to happen. I know, we have had a number of clients about the the forgiveness of up to $10,000 of student loan payments or interest, whichever it is. And I know we just heard before the show started that there has been a hold and they’re not going to be accepting any more.
Dr. Friday 10:45
I don’t know what’s going to come of that. Really don’t. And with the current elections, we’ll I don’t think we, depending on what side of the border, I don’t know which way we’re going to go with any of that to be quite honest. But all I can say is, you know, I don’t feel a mistake. It’s fair to be paid people student loan off. But that’s not my decision. Because again, what they do with our tax dollars, all we can do is vote the right people in and then hope they make the right decisions.
Dr. Friday 11:12
We don’t have the ability to make any other decision or choice. That’s just the way it is. Can you imagine how many lawsuits would be out there if that wasn’t the case. So that’ll make things interesting. All right. So itemizing as the most has changed a lot, right? In the last couple of years up until 2025. The whole mortgage interest if you pay, you know too much, or your property taxes. I mean, unless you’re single, and you have more than 13,000. If you’re married more than about 27,000, combined charitable interest, mortgage, terrible charitable contributions, mortgage interest and property taxes and or sales tax, depending if you have a state or sales tax number.
Dr. Friday 11:57
Those all add up and remember your sales tax. And property tax cannot add up to more than $10,000, which is a problem many of us, because we used to do even odd in the days before we had these numbers, we were able to put our property taxes in every other year, we pay them January and December in my case, and then we would also maximize any major purchases in those years. And then we’d actually have a higher deduction, we can’t do more than $10,000.
Dr. Friday 12:23
So there is limitations to what we have the ability to do, and deducting that. So we used to be able to brunch up things, the only thing that we can really do, as far as bunching or doing even odd, even or odd years is charity that if you have the ability to do now, first I want to put a caveat if you are 70, or older, and you do have to take RMDs. Even if you’re not required to 72, you can start taking the requirement on good distribution at the age 70. And take it as a qualified charitable deduction, this is absolutely the best way to give to charity and save on taxes, you can give up to $100,000 to the charity through your qualified your RMD on a qualified charitable deduction, and it is completely tax deferred or tax free.
Dr. Friday 13:16
Because it basically doesn’t have to go onto the Schedule A for itemizing, it automatically reduces the income on the 1040. So if you are 70 or older, and you have required minimum distributions and you give to charities, I don’t care who your tax person or financial planner, you need to talk to them. Because I mean, if you’re in the 12% tax bracket, every $1,000 is gonna save you $1,200 I mean, every 1000 They’ll save you $120? It’s worth doing and it doesn’t cost you and that may be mean you can give more to charity because of it.
Dr. Friday 13:49
Because a lot of times we have to worry about taxes when we’re doing these things. So anyways, it’s a great way but otherwise you can do bunching and put up to 60% of your income on a Schedule A. Alright guys, we’re gonna take our first break and we come from that break, we’ll get back to more of your phone calls 615-737-9986 We’ll be right back with the doctor Friday show.
Dr. Friday 14:26
Bold Texas and representation. So basically guys, all I do is Texas, and I love them. So let’s talk to Eugene and see if I can help him out with his situation. Hey, Eugene, what’s happening?
Caller 14:42
All right, yes, I’m about to sign up for Social Security. And on our version income moment, we file our taxes man, my wife together is married. And we’re going to be way over the $44,000 limit. I’m asking about the A standard deduction when you have an income is that still at 24,000 Take off, and the IRS to help me get down.
Dr. Friday 15:12
It’s 27, if you’re over, both of you are over 65, it’s almost at 28 and a half. And I don’t know your ages, but every year it goes up, obviously. So here’s the deal. You don’t have to file you could file married filing separately. And you know, your wife could file hers, and you can file your zip that may make your social security, not tax. But you if she itemizes or you itemize, the other person has to itemize, which means they may not qualify for the full half of whatever the dollar amount $13,000, or whatever.
Dr. Friday 15:47
So I am going to suggest if this is the first year when this happens, if you have a person that does taxes, I think it might be good. We do this a lot where we file we prepare them both ways to see which way is better. Sometimes I have people that have a husband or a wife that’s retired and all they have is Social Security, and then the other one is still working. And then there’s sometimes some interest in investments and things like that that may be coming out.
Dr. Friday 16:13
So it really comes down to just making sure because it’s there’s no black and white perfect thing saying okay, well, if you’re making 70,000, it’d be best not to be filing married filing separately or together, I personally think that the best answer to that question would be is to get someone to crunch the numbers for you. So you have a really good idea of, of which way you will you will be going, you know, I’m saying as far as is it better for you to still file jointly? Or would it be better for you to file separately? And if so, you know, how much are you saving one way or the other to see if it’s even convenience or even an idea you want to follow through with, if that makes sense.
Caller 16:58
I’m in a rush to do stuff, I was just trying to figure out a way to keep some associated money.
Dr. Friday 17:05
Oh, I hear you know, and that’s the downside, but I would definitely try this year just to see again, that knowing your personal situation, or if I do I don’t need to know it right on the radio, but either way, you need to see because it sounds like you’re just starting so securities that right?
Caller 17:21
Um, I’m signing up for next week gonna start it in January.
Dr. Friday 17:26
Okay. So what you might want to find out is whenever you do your taxes this year, are you still going to be working? Or have you retired?
Caller 17:34
I’m retired.
Dr. Friday 17:37
So you know, it’s gonna be a different change versus what you might have had, but either way, I would just play with the tax software and just say, “hey, if I had done this, would this still cost me as much?” Because sometimes people are like, well, I don’t want to file taxes go there. Let’s pay it. So security. But filing married, filing separately, has certain penalties and certain things that you end up paying more money, even though you’re paying tax on your Social Security is more than one it is filing separately. I’ve had that happen more than once, because they used to think, “Oh, no, no brainer, we’ll just separate the two but one person pay tax and the other person that’s paying any,” but it doesn’t always save you tax dollars.
Dr. Friday 18:13
So again, just I would play with it this year. Now that you’re starting Social Security, you know roughly how much you’re going to have. Put it in the system as an entry just in the you can always delete it, but put it in and see what it means. If you had done that as a married couple, just to find out what kind of taxes you’re looking at. Because you could have them take out taxes to Eugene, if you need to. I know you don’t want to pay taxes, but unfortunately, it’s fact most of us have. Okay?
Caller 18:41
I’d rather pay taxes in the beginning and get hit me and I’ll tell you. Thank you very much.
Dr. Friday 18:47
No problem. Thanks for call. I appreciate it. All right. Let’s get Bob in Greenbrier. Hey, Rob.
Caller 18:59
I’ve got a piece of property I’m selling his rental rental property. I was wondering, can I take that money and buy another rental and not have a 41% Capital Gain?
Dr. Friday 19:12
That’s an awesome question. And thank you for asking, because I think I’ve even mentioned that the last gentleman Yes, you can 1031s are still on the table. And that’s what Rob is talking about. So you can do what’s called a 1031. Now, you have to do at the time of closing. And then the money basically goes into escrow and then they use that same money to go buy the second property and then if you have to add money or whatever, you have to buy more than what you sold. And there’s a few little rules there but I love it. I do it and as long as you want to stay in the rental business, I think it’s the best way to do it.
Caller 19:46
Okay, so I can I can sell this property, close on it, put the money in escrow and then go look for the property.
Dr. Friday 19:58
Yes, that’s but make sure at the time of closing that they have an attorney that does the 1031. You cannot touch the money.
Caller 20:06
Okay, great deal. I do appreciate that.
Dr. Friday 20:10
Oh, thank you appreciate it. All right. Well, Julian, Hey, Jim, what’s happening?
Caller 20:17
Thanks for taking my call. Years ago, I had a business of my own, and I had a small industrial piece property. About a 3500 square foot warehouse, I closed the business about 10 years ago. But I’ve been kind of made a giant man cave out of it. And I haven’t sold it but eventually want to sell it. I’ve been paying property taxes on it every year, it’s paid for. Can I when I do sell it? Can I recover any of those property taxes in any way?
Dr. Friday 20:48
Well, this will let you know. I mean, I don’t know how you’ve been doing your taxes. But property tax on all property is deductible every year. It’s not just based on your primary.
Caller 20:57
I have an itemized and I don’t really record where I’ve itemized.
Dr. Friday 21:02
So you cannot recapture that property tax? Because it would have been a tax deduction, even if it doesn’t fit in. And most of us can’t itemize it because it’s not big enough enough. I have all that but under the current tax law, you can’t now you any kind of repairs lawn maintenance, you know, any electricity, it I mean, anything it took to maintain the building? The answer is yes. And I know property taxes would be in some people’s mind maintaining it, because you lose it if you don’t pay it. But
Caller 21:29
I’ve kept every receipt for everything I’ve done to it since I’ve had it so good,
Dr. Friday 21:33
because that’s what you’re gonna need. And it’s not a rental. So really, it’s just sitting there as an investment. I mean, in theory, or is it a rental? Do you rent it out sometimes or no?
Caller 21:43
No, my wife would wish I do. But by the time I moved in some old cars and motorcycles and boats, and a few. A few other things. And my buddies come over every now and then and sit around.
Dr. Friday 21:57
Exactly. Got a couple of toys that you get to play with and keep them out of the rain. So I hear you.
Caller 22:01
Exactly. Exactly. So it’s really I’m not doing anything with it. But I in property taxes on it.
Dr. Friday 22:07
Right. And I mean, you’ll have some insurance and stuff. But again, all of that is tied to it. And anyway, the answer to your question is no, you can’t take the property taxes.
Caller 22:18
But I can take any of my improvements and maintenance and things like that.
Dr. Friday 22:23
All that, yeah.
Caller 22:24
Fantastic. Thank you so much.
Dr. Friday 22:27
No worries, thanks for calling. Right? All right. Good. I am Dr. Friday, an enrolled agent licensed with the Internal Revenue Service to do taxes and representation, which basically means guys, I deal with the IRS all the time. So that’s why you’ll see me you’ll see my hair so short. Because you know, right now, I know many people are like, “Oh my God, they’re going to be hiring 85000,” which I find it hard to find that they’ll starting at 5000 people that want to work for the IRS, bad enough, train them and get them done, I will know the state has done some filing or has done some hiring because I’m dealing with them on a couple audits and, and I know every you know, they bringing new people in and training them on how to do the audits and things like that. So it’s going to be a little bit of a growing but the other side of it is you actually get to reach and speak to individuals. I mean, the one thing you have to say about Tennessee Department of Revenue, not sure if you need I mean, not everyone likes to deal with any office like that. But they do answer their phone, they do respond to emails, they do give you some guidance on what you need to do or move forward with. No one likes to be audited. And certainly never a good thing for anyone.
Dr. Friday 23:37
But when it is being done, you would need guidance, and you need people to help you and talk to you and respond. And that’s what we’re not getting from the IRS. I mean, we keep getting love letters from the IRS about different things. And in many of the cases, even myself after 25 years, you’re sitting there going this doesn’t explain anything. You know, I’ve amended a tax return, I gave you the explanation behind it. And they sent back and saying, Well, this gives you reason to amend the tax return. It’s you know, again, some of the letters that come out are so non helpful that you’re sitting there wishing I mean, I have to give the tax Advocates Office a huge thank you, if nothing else, because I know I’ve sent many clients that direction to get resolution and it’s not necessarily the man I know it’s their job, but their job is taken on a lot bigger job because of again, we’re not able to reach anyone at the IRS. We can’t get any resolution because we can’t reach a human to actually even ask a question. So you know, when it’s important, people are getting liens, lovies there, they’ve been waiting two years for refunds, or whatever, you know, tax advocate office is the direction you’re gonna want to go.
Dr. Friday 24:45
All right, we’re gonna take our second break here. You can reach us here live in the studio at 615-737-9986. We’ll be right back
Dr. Friday 25:05
All righty, we are back live in studio. I am Dr. Friday. And this is the Dr. Friday show you can join us here in the studio at 615-737-9986. So I just wanted to bring in for all of you that like to give charitable, not charity, but give a gift to your kids or in the family. It’s great estate planning, sometimes it’s up to $16,000 instead of 15. So that went up this last year. And that was in 2022. And then if you have two kids and one grandchild, you can give them up to 32,000. But bottom line is, that is $1,000 more this year. So make sure that goes into the numbers when you’re working on all of that. And also we talk about capital gains, I always want to bring up the idea that if you’ve got long term capital gains, and you have a small gain and your other income, so if your taxable income, on long term are dividends doesn’t exceed 41,675, or for single 55,800 for head of household or 83,350 for a joint filer that capital gains tax is zero. That’s right.
Dr. Friday 26:27
So the trick is or the problem is that number also includes not just what you have in capital gains, but what you also have for all other income. So if you have income, even even the fact that if you’ve got capital gains, it could make your Social Security taxable. So there is a calculation that you need to make sure, but there are times when people have some long term capital gains that are, you know, smaller, and maybe they make 20,000, they’ve got a $30,000 capital gain, and that could still as a head of household or married person, that could put you into zero capital gains.
Dr. Friday 27:05
So just putting it out there, you might want to take that into consideration to make sure that you have, you know, again, if we can do something, sell something in smaller steps and keep you in a 0% capital gains. It was like one of my earlier callers, when she was talking about a conversion for her mom, or her annuities or her IRAs. Again, those are great tax planning things. Because if we can convert at a lower dollar amount and let the money grow tax free in a loss, and then the children eventually will inherit, hopefully long time down the road, that’s a lot better than growing it in an IRA that has the IRS tax dollars, and then depending on the children, how much their tax bracket is going to be.
Dr. Friday 27:46
And now there’s a window of only what 10,010 years to cash out all of the IRAs. So if you have a large inheritance of IRAs, you can put yourself in a much higher tax situation than what you’ve had before. So just again, making sure that you take into account all of those different situations with for you do, it’s always good to preempt these kinds of conversations, not something you want to just sit there and say, Well, everyone else told me to do a Roth conversion, I should do one. I had a client last year that his financial planner did some recalculating.
Dr. Friday 28:22
And this gentleman is has been on a very high target of getting all of his IRAs converted into Roth, the goal of his and he’s been doing some fairly good conversions. And then the big picture when his financial planner did some cleaning up did some riba rebalancing of his portfolio, he ended up with a tax bill, which was supposed to be around 12-13,000 ended up being 60 some thousand dollars, way outside of what he had expected because of all these conversions. So when you’re doing these kind of planning, you need to make sure you’re talking to your financial planners and, and or your tax person, whoever’s helping you do those kinds of conversations, because if you’re just doing it on your own, it is a problem when it comes to you know, making those because like this, the financial planner was doing rebalancing and yet he was out there doing conversions, and both of them may have been doing what was good, but still cost a lot more money in that conversion that he expected to do.
Dr. Friday 29:26
So. Just want to make sure that you have the right situation and where you’re going to go. Purchase and placing assets and service this year. If you want the full tax break, bonus depreciation isn’t as valuable as isn’t as valuable after 2022 Because it unless Congress does something, our bonus depreciation is going to drop down so 2022 If you’ve got big equipment, and obviously we can take bonus depreciation and take almost all of it at that time, but in 2023, it’s 80% of 100% didn’t ride off. So it’s 20% each year after 2020. So basically it’d be 80, and then in 2024 60, and etc, etc, bringing it down. So again, now Congress may act and they may extend this. I’m hoping they do.
Dr. Friday 30:15
But, you know, the way spending has been at some point, they’re going to have to stop putting their mind to how are they going to generate more money, about how they’re going to do things in there. So alright, so I have a question. Can students in college and after graduates, can they put some information? I’m reading too fast so keep going. Put our student loans on? Yes, yes. Okay. So the question that came in, sorry, I should have let him finish it before I did it. The question was, can students in college and after grad school, can they put their loans on their tax return? And yes, there is a place up to $2,500 in student loan interest can go onto your tax return. So now it does have limitations on how much money you can earn.
Dr. Friday 31:09
So I think it’s a single people like 70,000, and a million people like 140 or 50,000. If you make more than that, you won’t be able to deduct the student loan interest. But if you’re making less than that student loan interest, again, up to $2,500 is a tax deduction for for anyone that wants to, you know, put that in, I always make sure that usually that is in there. So hopefully, they turn it into us and make sure they do what they need to do on that situation. Here’s a big thing. Shareholders in C corporations should weigh taking dividends in lieu of salary if you’re an owner in a high tax bracket, the owners preference tax rates on dividends plus corporate payroll tax savings, pay for dividends instead of salaries can exceed the firm foregone tax benefit to being one.
Dr. Friday 32:00
So if you work for a company, and this is a this is someone asked me this question, if you’re working for a Sub S Corporation, and maybe you’re the owner of a sub S or C corporation, remember, anyone that is working for those companies cannot just take dividends, you have to pay yourself a fair wage. That is very important, because I will tell you how many 1090 I mean, how many K1s I see with pass through income coming through as dividends, because you don’t have to pay self employment tax on income from an S corp. Now, C corp is double taxation. But on an S corp.
Dr. Friday 32:40
A lot of times owners will not put themselves on payroll, but they will just take and put the profit on them through a k one which does not account for Social Security or Medicare tax, the IRS has come down and said In fact, there was a many tax firms that were doing that, and they got audited and they had to go back and they converted all of it all of their distributions to taxable wages because they were earning this money. It wasn’t from an investment. It was earnings that you’re now invested in a k one or Sub S Corporation. That’s a whole different thing. But if you are working it and you’re doing it, you need to put yourself on payroll. No corporation can operate without at least one person on payroll. Is that simple. All right. I don’t know if I’ve got the right name delirious. Maybe. Is that right? Let’s see. It’s a Nashville Dolores, I’m sorry. Dolores. All right. How you doing, sweetheart?
Caller 33:48
I’m doing fine. But I have some questions on our rental properties. And I have replaced a vanity and a bathroom and a floor in that bathroom. And I’m wondering if these have to be depreciated or can they be expensed? They do.
Dr. Friday 34:10
Yeah because those would have added value to the the easiest way to remember is they would have added value to that property with a new floor, new toilets or whatever tiles any of that would have added a value was better than probably the old ones which may have been aged or older or whatever. Right. So you know, they’re in mind. So yes, so according to the IRS that would have to be depreciated.
Caller 34:34
Now, what’s the timeframe for that for vanities? Is that five years depreciation or seven or?
Dr. Friday 34:42
Well, yeah, the toilets and vanities those would be seven, flooring would be lifetime of the house.
Caller 34:52
Wow. Yeah that’d be 27 or whatever it is.
Dr. Friday 34:55
Yeah, most 28 Yeah. 27.5 right.
Caller 34:58
Seven for vanity. Wow. Then another question. I had a house that was destroyed during the tornado, it was a rental house. So I put a lot of money back into it and fixed it up Sure, better than it was. And it is rented, but I’m thinking of selling it, what was mine? How am I going to figure out my cost basis for that, if I sell it, because I have the original. Pardon me.
Dr. Friday 35:30
So you have to go back to your original basis from the original house. Because the and then, and then back out the insurance, right, because you got insurance, I’m assuming, and then you also put more of your own personal money, I’m guessing, but most of the time into the other. So you’re gonna need to have a mean this is a calculation would have to come out to original bases, replacement value that you get paid, and then additional money that you might have put back in and come up to the dollar amount, because the insurance money was not taxable to you.
Dr. Friday 36:08
So that’s going to add back in as a basis to us as far as what you actually have in value, but you need to, you know, basically figured out what the total cost of the new houses are, guess what it comes down to, and then back out what your original basis was. And that’s going to be I mean, when it comes down to, let’s just say it was originally $80,000. Now it’s 150. Because insurance pays you actual value, but then you decided to add another 50 and more bedrooms, or whatever you might have done to make it bigger and better.
Dr. Friday 36:37
So now, you know, whatever the insurance plus whatever you put into, it’s pretty much going to be your basis. But we’ll have to go back and see if there was any recapture of depreciation because theoretically, the house was gone when you mean, total? I don’t know if he had tear it down. Or if it was structural, you know, we don’t? Yeah, so totally gone. Well, you know, because then then you would have summary. I mean, theoretically, you sold the house and you rebuilt it. I mean, in essence, so whatever the insurance paid for is going to be your new basis.
Caller 37:06
Oh, what the insurance pays. What about what I added into it?
Dr. Friday 37:12
Yeah. Then what you added on top. Yes.
Caller 37:15
Okay. Yeah. Okay. All right. Well, that’s what I needed to know. And I thank you very much.
Dr. Friday 37:21
No problem. Thanks for calling. I appreciate it. All right. So we’ll take our last break for the show. If you’ve got any questions, you certainly can give us a call here at 615-737-9986. The number here in the studio. We’ll be right back with the Dr. Friday show.
Dr. Friday 37:49
All righty, we are back. We are back live on the Dr. Friday show. And you can join us again at 615-737-9986. And we’ve got Samuel in Mount Juliet. Hey, Samuel,
Caller 38:10
Hello, Dr. Friday, thank you for taking my call. I am calling to ask about my giving $50,000 to one of grown children during the year of 2022. Just as guilt, and I read in the RA is that my limit is $16,000. But I have to file a form 709 to submit it with my taxes, you know, when I file for when I put that on the form 1040 wants to 709 is filled out. And also what kind of tax, you know, might have to pay on the part above and beyond the 16,000 versus 50,000.
Dr. Friday 39:00
So yeah, so I’ve got some great, great answers on both of those. So the first thing is the 709 is just our gift tax returns or generation skipping depending on whatever you give it to and there is not going to be any tax unless you give more than $12 million. So I don’t think at this point for most of us that will not and that’s a lifetime credit. So most of us will never have to worry about that. The reason for filing the 709 it’s really just going to be there’s a place in there where you’re going to put his name, the basis, the date and the value of it.
Dr. Friday 39:34
Remember to back out the 16,000 when you’re filing the form because you know the 16 is free right? So the difference between the whatever you gave him in the 16 would be what goes on the 709 and it’s really just subtract it from the $12 million that you’re allowed over your lifetime. There will be no taxes due unless you take the money out of something that there is a taxable situation you know like if you can Take it from an IRA, then you’d have to pay tax on the money coming out of the IRA.
Dr. Friday 40:04
But that would fall on your personal tax return the 709 would never cross over onto your personal or your son or child’s personal, the gifting is free to the child or to the individual, and you have to pay tax on any money that you’re taking it out of it. If it’s just sitting in the bank, for example, there’s no tax because you’ve already paid tax on the money in the bank. Most likely, okay. Okay, that makes sense.
Caller 40:31
It does. Absolutely. And the one other thing, we’re would find it on form 1040? Or does it go home from there?
Dr. Friday 40:41
It does not go anywhere on the 1040. The 709, it’s just a separate tracking form, the 1040 would have nothing to do with giving the money to your child. Like I said, the only thing that would go on your 1040 would be is if you have taxes coming out for some reason on the money you’re giving them. But that would be through a form like a 1099 R or interest statement, whatever. But no, that would not go on to your 1040 at all.
Caller 41:08
Okay, thank you very much. I understand it completely.
Dr. Friday 41:12
Perfect. Thank you for calling. Great question. All righty. And so, again, if you have questions, and I know we’re winding down on the show, you can reach us at the office Monday. But meanwhile, we’ll take a few more of your phone calls here in the studio. See if we can get you through. It’s gonna be only a couple more minutes. And we’ll probably be our last caller coming in here right now, Gary, from downtown Nashville be here in a second. Oh, okay. Gary is online. Hey, Gary,
Caller 41:48
Hey there, how are you today?
Dr. Friday 41:50
I am good.
Caller 41:52
I’m a retired national policeman. And I work security now to supplement my pension and my Social Security. And I bought a vehicle just for the security stuff I got because it’s got lights and all that stuff on it to blocked intersections and all that kind of thing that I do. Sure. I was trying to figure out a way that I could deduct that off my income tax.
Dr. Friday 42:17
Are you a W2 at your security job? Or is this your own business?
Caller 42:21
No it’s a W2.
Dr. Friday 42:23
Yeah. And I have some bad news for you, Gary, first of all, thank you. Before I give you the bad news, the bad news is right now under the current tax law, there is no place for for employees to write off non reimbursed expenses, which would be exactly what you have is you created a vehicle that you can use to do your job correctly. But unfortunately, the only person that can write that off is the owner of the business. And in this case, that’s not you.
Caller 42:51
Well, I inquired to my employer about me incorporating myself and them just paying my company. And they said, “No, we don’t do that.” So you know, I’m stuck one way or the other.
Dr. Friday 43:06
Right. And I mean, you know, at some point, if you decide to start your own small security business, even though you bought the car two years ago, you could then depreciate that vehicle, because it would be part of your new business, but it’s not going to help you while you’re an employee of someone else.
Caller 43:22
Okay, thank you so much. That’s what I’ve been told us, hoping you might have a miracle in your pocket.
Dr. Friday 43:27
No, I wish I did. I wish I could give you better on that one. But that’s one we’ve got our hands tied on right now. All right, thanks. Thank you. All righty. We are winding down the show here. So we’re going to have just a few more minutes, let’s get out the details that you need to have. Which is first if you’ve never heard Amir, you have no idea who I am the best way to probably figure out that would be going to drfriday.com. That is drfriday.com. That’s my website. You can find out more about who I am. Also, we’ll be opening up the calendar for outside individuals, probably next week. Hopefully all my clients have already booked their appointments.
Dr. Friday 44:10
So we’ll start opening up the time. So if you’re not already an existing client, you want to have someone help you with your taxes. We’ll have an open calendar there. That’s where you’ll want to go and and get that information in there. And then if you have tax questions, maybe you’ve been receiving love letters, or maybe you know someone that hasn’t filed taxes for a number of years has received probably some level of if nothing else, the Levellers just said simply you haven’t filed your taxes and we need you to file them. It may be that simple.
Dr. Friday 44:37
They may not be under any kind of major collections. But anyway you look at it if you’ve got someone you know, that has those kinds of issues that they basically just need to maybe you know what, you’ve got a kid that’s gonna get ready to go to college soon and you’ve got the FASFA or you you want to buy a house all of these things come into play. And the first thing that anyone ever asked you in most of those cases is where’s your tax return? So if you haven’t filed taxes or you know, someone, let’s get a pace before they have 85,000 additional collection agents out there to try to get it.
Dr. Friday 45:07
Let’s try to get into play your offer and compromise or your payment plan, get you in compliance, because once you’re in compliance, then it’s just a matter of making the deal, or whatever that deal may be, and how it’s gonna work for you. But if you don’t have everything filed, if you’re behind a number of years, you haven’t filed your business tax returns or anything else. The first thing we have to do before anything else happened is getting your taxes filed, then we can figure out how much money you may or may not owe. Have you left money on the table I have people we fall 567 years, and they get refunds almost out of most of them.
Dr. Friday 45:42
And the sad part is they get refunds on some of the earlier years and they owe for some of the later we can only go back three years to collect on your taxes. So if you’ve got a refund, you’ve only got three years you can get it so going back 10 isn’t going to help you if you get a refund every year. All right, you can reach me at the office at 615-367-0819. You can also email me at friday@drfriday.com Friday is my first name friday@drfriday.com. Hope you guys have an awesome Saturday. Stay warm. Make sure you make it good. Call you later.