Welcome to the Dr. Friday Radio Show, where Dr. Friday takes on the latest tax updates, answers callers questions, and talks over the following topics:
- Dr. Friday’s Tax Tips For the End of the Year
- What You Need To Know About Cryptocurrency and Taxes
- What Is the Build Back Better Act
- Why You Should Contact Dr. Friday Before Selling
- Apply for PPP Forgiveness
- How You Could Qualify for College Credits
- RMD’s Are Back on the Table for 2021
- How Much Money Can I Gift My Child?
- Should I File Married or Jointly?
- How To Know If You Are Paying Penalties and Interests
- The Capital Gaines Tax Changes
- How to Get Back on Track With the IRS
and much more!
No, no, no, she’s not a medical doctor, but she can share a cure for 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
Good day, I’m Dr. Friday and the doctor is in the house. So if you have questions concerning taxes or money issues, mainly taxes, I do love my taxes. And there are so many things going on. We keep hearing about some of them are just the Build Back Better plan, which we haven’t really had passed yet. But many things in that plan are going to have some major tax changes for us. So we will stay on top of that.
Dr. Friday 0:53
Talking a lot more about the cryptocurrency and the tax policy that’s going to follow along with that. So for all of us that might own cryptocurrency, how we’re going to make the bookkeeping practice, you know, education, how are we going to take certain credits on that, making sure we understand and know what’s going on is very, very important. So we just want to follow through with all of that.
Dr. Friday 1:16
And if you have any questions at all you can during the show. We are here live on this wonderful Saturday. 615-737-9986, we are taking your calls, talking about again, my favorite subject and soon to be your favorite subject because tax season is going to be here before you know it.
Dr. Friday 1:40
And so let’s talk a little bit about cryptocurrency. I have a large number of clients now more than I used to have. Well, I think there are a lot more people that are into cryptocurrency than used to be into the cryptocurrency and I have a whole number of you that are listening right this second saying, “Hey, I don’t want to tell anyone I have cryptocurrency it’s top-secret.”
Dr. Friday 2:00
It’s like when I was younger people would buy gold or silver. And they caught up, hid that away because that was going to be their emergency stash in case something happened in the world. And we were going to have to go back or lose our currency and what was going to happen. So it’s somewhat the same kind of thing because there wasn’t as much tracking done, especially in the beginning, right?
Dr. Friday 2:22
I mean, let’s be honest, if you lost your account number and cryptocurrency, you lost your entire fortune, it was not something that was going to be able to stay with us or do with us. But that is not necessarily the case any longer. Many of us have Bitcoin wallets, many of us have some other software that we can actually convert crypto into other types of currency or convert US dollars into crypto. So we have software.
Dr. Friday 2:47
And to be quite honest, I don’t think it’s as hidden or as unknown as it was at least 10 years ago. So if you’re a person that is big into cryptocurrency, keep in mind, it is being treated just like stock. So if you are buying and selling and every time you buy and sell. So let’s say you take us dollars to buy cryptocurrency, let’s say Bitcoin for because everything’s crypto, Bitcoin, and then you turn and change and you buy some other type of coin and then get another type of coin. Every time you do those types of transactions, those are taxable. Gain or loss, they are taxable.
Dr. Friday 3:23
And then in many cases, you’re playing a video game and you’re earning crypto, some sort of a currency in cryptocurrency, and they’re giving it to you as reward points. Keep in mind, there’s no basis to that, then you take those points and you convert them into something else, or you move them into some other type of currency, or start mining or any of those things.
Dr. Friday 3:44
Every time those movements happen, you are now creating a taxable situation. That means you have to be more on top of it than you were in the past. In the past, a lot of times, let’s be honest, guys, you were just buying it, you would go buy a game, you’d win it, you mind it, and you didn’t really track how much it costs for you to get in the first place how much it costs for you to move in some other direction, you are just basically building up a nest egg within the cryptocurrency world, but not so much on how it’s going to work.
Dr. Friday 4:11
Now we need to know because the IRS knows this. It’s been out there, it’s been put out there. And you need to be able to make sure you have that information and have it going in the right way. Otherwise, trust me, that information is turning up and the next thing that you’ll start seeing as part of the Build Better Plan is hiring, I don’t know $63 billion worth of people to work for the IRS. So that sounds like quite a few people that could actually be working.
Dr. Friday 4:36
So those people are not going to be there to answer the phone and the questions which is what we really want. They’re going to be there to start generating income. The only way the IRS generates income is through collections. So they’re going to be looking at more and more audits they’re gonna be looking at more and more things that are going to come along with that situation.
Dr. Friday 4:53
So we need to be better prepared than we were before. Another thing I had was a client walking in the door the other day and I was looking at his taxes. And I realized that his wife had gone to school and he had done his own taxes. And he had taken off a tax credit of like $200, but they were entitled to $1,200. So keep in mind, your wife may go part-time to school, you may have children that are in college or taking secondary courses, you may go back and get more education.
Dr. Friday 5:22
A lot of times you could qualify for college credits in doing that. So keep that in mind, when it comes back to doing your own taxes. Nothing wrong with doing your own taxes, just make sure that you’re paying attention and making sure all the boxes are checked properly. And you understand the question because sometimes, when you do your own taxes, you’re not too sure what that means.
Dr. Friday 5:42
Another big thing we need to remind everybody that is over the age of 72, and or individuals that have started taking the requirement on distribution at 70 and a half, depending on your age right now. RMDs is we all like to refer required minimum distributions are back on the table for 2021. You do not want to miss that because the penalty is 50% of what you were supposed to take out.
Dr. Friday 6:04
So if we’re supposed to take out $10,000, guess what you now owe a $5,000 penalty, that’s a lot of penalty for doing something that you didn’t know you did wrong. So let’s make sure to get it back on the table, make sure you’re taking out your RMDs if you have an older parent, and you help them out, make sure they’re being reminded, normally, I will be quite honest with you.
Dr. Friday 6:23
Normally, you actually have a situation where they basically the people that you’re looking at normally do things, like the financial planner, or the bank, or one of those things. But that is not happening at this time. They are not sometimes doing their job. And so I want to make sure that their job is being done properly.
Dr. Friday 6:42
So you know, penalties hurt, and we don’t this is a stupid penalty, let’s not let it happen to our parents or anyone you know, that might be on a required minimum distribution. And those same people keep in mind, if they give to charity, that money can be converted dollar for dollar in taxes.
Dr. Friday 6:59
So let’s say again, they have a requirement of distribution of $10,000. They give the church every week or every month a total of you know, for the whole year, let’s say they give $3,000 to the church. Instead of paying it out of their wallet or their purse every single week, have it come out of their RMD because then it’s $1 for dollar deduction, no itemizing, no requirements on there. And it makes it work wonderfully.
Dr. Friday 7:23
So just saying, if you have something that’s called a qualified charitable deduction, if you are a person that is taking RMDs, and you do give to a charity, do it once a year in a big check, and you can even give them a little bit more if you wanted to, because you’re going to save 100% on taxes on that money. So that’s going to completely reduce.
Dr. Friday 7:41
So if you’ve got a question, if you’ve done this, or if you’re working on some tax things, I know we’re outside of the October 15 deadline. But now we have the time to start planning for 2021. We only have like a month or so left, right? It’s the 15th almost of November. So was it that, 45 days, and we got Christmas and Thanksgiving in there, which means we’re not going to have as many days to actually do things as we might want.
Dr. Friday 8:04
So if you have something that you want, a question or some situation, now’s the time to reach us, 615-737-9986 is the number here in the studio 615-737-9986. Fall planning is always very important. I know taxes, people like to think, “Well, I’ve already got my taxes, I’m gonna do this.”
Dr. Friday 8:24
But if you want to do a conversion, if you’ve sold a rental or some sort of investment property, if you’re thinking about cleaning out your stock accounts, as far as maybe you’ve got some winners, you’ve got some losers and you’re thinking, “Hey, this is what I need to do, right? I need to go ahead and start doing something with some of those things.”
Dr. Friday 8:42
Now’s the time to think, how will it benefit you? Is it a good time to do it? It’s not always just because you have a loss doesn’t mean you need a loss or maybe because you have gains that you could offset, maybe your income as a married couple is less than $100,000.
Dr. Friday 8:56
And so you’re thinking, “Hey, you know what, we could sell some stock and we could make it around $8,000. And we’ll pay 0% capital gains tax if we’ve held them for over a year.” Because a married couple making less than $180,000 with their capital gains or whatever could be at 0%. Single person about $55,000, 53 to be probably closer, but either way you look at it. That’s the kind of thing we want to be able to take over and do.
Dr. Friday 9:21
Okay, let’s hit the phones because Kelly got on the line for me. Hey, Kelly.
Hi. Okay, are you still there?
Dr. Friday 9:35
Yeah, turn your radio down. So that way you can hear me cuz it’s a delay. Yeah.
Okay. So my employer has a pension that is fully vested. They also offer a 401k with no match, which I’m doing and it comes out of my paycheck every week. Which am I better off doing though? Am I better off giving to my employer through 401k, no match that comes out of my paycheck every week, or giving to my financial advisor, like Edward Jones, etc? That doesn’t come out of my paycheck tax-wise.
Dr. Friday 10:14
Can you give me a ballpark Kelly of what your income bracket is?
It’s gonna be over 100,000.
Dr. Friday 10:20
Okay, are you married? Do you support somebody on that 100,000? Or are you single,
I’m married, both my wife and I will be together for over 100,000.
Dr. Friday 10:28
Okay, so the reason I’m saying if your income combined is 100,000 or less, combine both of your incomes, if it is, I would say, give it to your financial advisor, because you might as well be doing something like a Roth, right? Because it’s a 12% tax bracket, then you’re never gonna be that low again anyways.
Dr. Friday 10:45
So why not let it grow tax-free and not get the tax advantage today. If you guys are closer to $150,000, combined income, then I would say, let’s go ahead and give it to your 401k. Because you can’t easily you could do an IRA with your financial planner, but a Roth will allow you to put a lot more money into it than an IRA.
With my employer, I have a Roth 401k. And they tax it when it comes out of my paycheck. But I’m just wondering, do I get more advantages giving it to my financial advisor, like once monthly? Or am I better off getting it taxed through my employer?
Dr. Friday 11:25
Well, I mean, theoretically, either way, you would either take the money and you put it in your bank, let’s say you don’t do the employee, you take more money, put it in your bank, and then you write a check to your financial advisor, theoretically, you just reduced your check, just like it was done with your employer. Right? Taxes have already come out.
Dr. Friday 11:41
So the question is, does your 401k at work provide you enough diversity to grow it the way you need it to grow? Or is it limited and your financial advisor could actually spread it over 1000 investments like mine always says, “Well, you know, we don’t get the losses,” maybe I don’t make as much all the time. But I don’t hit the ups and downs as much because I’m so diversified. You can do it better with a financial planner than with a 401k. No question.
Okay. Yeah, I was just curious about tax implications on how that works.
Dr. Friday 12:15
It really isn’t gonna change anything. Because again, your employer is basically taking the money out after they’ve already taxed you want it, you know. So it’s same thing as if they give you the paycheck and you put in the bank, and then you write a check to your financial planner, either way, you’ve already paid tax on the money, which is what you want to do.
With the financial planner, if I give them like a lump sum monthly or anything, do they give you, are they supposed to give you like a W 2 yearly to turn that in? Or how does that work?
Dr. Friday 12:42
No, it’s not a W2, but there is a form that will show how much your total contribution into a Roth which is what you would be hopefully diversified into would be a Roth and it would give you the value at the end every year, and your contribution.
Okay, thank you.
Dr. Friday 12:58
Okay. No problem. Love the question. Thanks. All righty. Let’s go ahead and hit Ray real quick. Hey, Ray.
Hey, how’s it going Dr. Friday?
Dr. Friday 13:07
It’s going awesome. What can I do for you boss?
My girlfriend and I owned an LLC together. And after 14 years, we had a fall-out, and so she wants to buy my portion of the LLC, which is basically a house and some land. And so I’ll be getting $195,000 check there about this Wednesday as a matter of fact. So what are my tax implications?
Dr. Friday 13:45
Well, you have a couple options on that. Is this the primary home that the two of you guys lived in while you were together?
No, no, ma’am. I think I should be. It’s a vacation home in Texas.
Dr. Friday 13:58
Okay. Do you plan or do you want to buy another investment property?
No, ma’am. Okay,
Dr. Friday 14:06
Alright, so the only option left is to pay taxes. Trying I’m really trying. Since it wasn’t a primary home, we don’t have any exclusion. The only other one is called 1031. Which mean you’d have to go buy another investment put this money in escrow and buy another investment otherwise, at 195. Are you single, kids? What do you claim?
Yeah, no, I’m single.
Dr. Friday 14:27
Single? Okay, do you have any other income besides this 195?
You know, I mean, I’ve got rental property.
Dr. Friday 14:41
What do you say about your income besides this? Give me a ballpark of what you think your other income would be?
Dr. Friday 14:50
250,000 above the 195? So your total income that year or do you think that’s going to include it.
Dr. Friday 14:56
Okay, all right, well, then you might as well set aside, you’re gonna be over 400. So you might still look at 20%, almost 23%, probably on some of it, I would say it’s going to average.
Your advice is take that complete amount and invest in another property.
Dr. Friday 15:18
Well, obviously, that would be the way because if you did if you, if you don’t take the money, and at the time of this closing, when she gives it to you, you do 1031, which means you have to go to an attorney really quick. Do 1031 The money will go into escrow, you buy another investment property, and you’ll save almost 23% in taxes right now. But you’d have to do it before she hands that check to you.
I thought you said 20%.
Dr. Friday 15:43
Well, I was I mean. Once you hit 200,000, you went to 18.8 and then up to 400,000. Which you’re going to be over 400. Because you’re going to be well, yeah, 440. So the first for up to 400 will be 20. And then that last 40 will be 23.3. It’s progressive.
Dr. Friday 16:05
So I’m saying if you set aside like 21% on the whole thing, I think you’ll have enough in your pocket to pay your taxes. But I’d rather you have too much set aside than not enough. But that’s a lot of taxes if you if you’re really thinking about possibly later thinking about an investment, but you don’t have a lot of time to preserve that 1031.
Okay. When we sign all this, there’s gonna be like four attorneys in the room. But I see what you’re saying about have a financial attorneys set that up before,
Dr. Friday 16:39
Right? I mean, I can give you a couple of names or you can even find out if there’s a couple of attorneys, a lot of attorneys do 1031 exchanges. So basically all they will do at that time as they’ll switch it over, and instead of the cheque going to you, it will go to an escrow account. And that preserves it. And that means we don’t have to pay tax as long as you can meet the needs of 1031 which is to find another property to buy.
Dr. Friday 17:04
Okay. All right.
Dr. Friday 17:06
All right boss. All right. Thank you. Bye. All right, we’re gonna have to take a quick break. When we get back. We’re going to come to the phone. We’ve got Joe. And we’ve got a couple of other people I think coming on. So if you want to call, 615-737-9986. We’ll be right back with the Dr. Friday show.
Dr. Friday 17:34
All righty, we are back here live in the studio, we’ve got a caller on hold. His name is Joe. So we’re gonna go right to the phone line since he waited through the break. And we’ll see we can help him out. Hey, Joe.
Hey. So I got tired of this RMD stuff. And so I said, I’m just gonna pay you down, take some money out of my IRA and just convert it to a Roth. So I converted $90,000 to a Roth. So that’s about the same thing as doing an RMD when I do that?
Dr. Friday 18:15
Well, RMD actually takes it out. And you can’t, I mean, normally, you don’t reinvest it. You did, and you can’t contribute any longer unless you’re working. But what you did was a conversion, which there’s nothing wrong with that I have a lot of people that are doing that.
Dr. Friday 18:28
So that way, they don’t have to take out as much or any depending on your situation, as far as the required minimum distribution, you did get hit with the tax bill this year, whatever that’s going to be for you. But you know, some would be paying now pay later concept. So this way, the money will grow tax-free, you’re not required to have to take any required minimum distributions. Life has become simpler. And, you know, from your standpoint might have been an easier way to deal with it.
So, I just did this on my own. Nobody told me what to do or how to do it. I mean, I don’t know what I’ve done. But I mean, it’s like.
Dr. Friday 19:05
You’ve created a tax situation. But again, hopefully, it’s not a big one,
But I can convert from an IRA to a Roth. Right? That’s not illegal?
Dr. Friday 19:17
No, no, and you can do it once a year. So you’ve done one conversion, you’ve done it. And so at the end of the year, you’re going to get a form called a 1099 R, and you’re going to do an 8606. If you do your own taxes, or if you have a tax person, whatever. It is basically just going to show that the money went from a standard IRA, you’re going to pay the taxes on this year’s tax bill and the money is now sitting in a Roth IRA. And now you don’t have any more required minimum distributions from that $90,000
So did that take care of the RMD on that?
Dr. Friday 19:47
On that money. Yes. If you have other ones then you still have them.
I still got some money in that IRA.
Dr. Friday 19:54
So that won’t count as your RMD sorry. So you have to do the RMD based on December 31, the prior year balance. So whatever you had in that total IRA at that time, you still are required to take the RMD. That conversion did not count at it. I see what you’re saying. No, it did not.
So am I supposed to pay any taxes? Seemed like somebody said I had to pay taxes because it’s a taxable, I owe the money as soon as I’ve converted, I owe the money.
Dr. Friday 20:31
Right, the $90,000 You’re gonna owe taxes on let’s just throw a number out there. Let’s say it’s $15,000. So you’re going to owe 15 and you still need to take your RMD.
But was I supposed to do that pay that? It was at the beginning of the year? Should I have to tell you that taxes then because you know, it’s increasing my tax?
Dr. Friday 20:54
Right. Theoretically, we only have to pay 100% of what you owe the year before. So as long as you paid in as much as you did the year before, you shouldn’t hit a penalty.
So that’s right. I forgot about that. I increased my income by $90,000. Basically, what happened.
Dr. Friday 21:11
That is 100% correct. Yes. That is the simplest, yes.
What about Social Security.
Dr. Friday 21:19
You’re over the age of 65? Obviously, so nothing, it might make your Medicare go up. If it’s not already up or at the higher numbers, but it may make your Medicare go up.
How much would that be?
Dr. Friday 21:31
Well, I mean, they love to charge you guys. I mean, I’ve got people I mean, it could be I’ve got people mean, you know, paying five $600 a month. So I mean, I’m just saying they make really good money. I don’t know your situation. But on that 90,000 could easily change.
I’ve got about $70,000 coming in, you know, plus, so about $150,000 this year.
Dr. Friday 21:55
Okay. Is that including the 90?
Dr. Friday 21:59
Okay. So I would say you probably and this is a guess I’m not a Medicare expert. Let me throw that out there. But I’m going to say I would not be surprised to see your Medicare go up by a couple $100, possibly even a month. Because they’re basically saying even though you didn’t put that 90 in your pocket, they’re saying that you can afford this. And again, I’m not a fan on taxing Social Security or means-testing Medicare.
Dr. Friday 22:21
How long does it stay up like that?
Dr. Friday 22:24
Okay. All right. Thanks.
Dr. Friday 22:29
No problem. Thanks for calling. I really appreciate it. Alright, so if you want to join the show, you can 615-737-9986.
Dr. Friday 22:42
And that’s the kind of thing like what Joe was talking about reason I always pushed tried to have this show and thank goodness you guys have been listening here for over 10 years is that we have the ability to think this kind of stuff out. So if you’re thinking about doing a conversion, and doing the tax, it might not be.
Dr. Friday 22:59
I mean, that may have been a great plan as far as getting the money out of a regular IRA moving it to a Roth again, I’m not a financial planner. But when you do those things, sometimes that can create a taxable situation on other things like Medicare, right? His social security Joe is already paying tax on 85% of his social security because it was other income from what he was saying.
Dr. Friday 23:20
So I don’t think it will change anything on that side. But you know, I mean, you do have to think is there a way we could have done it in maybe smaller bites? Keeping them under a certain dollar amount? Again, if anyone knows the cut-offs or deals on Medicare that might be helpful but I don’t know the income bracket or cut-offs for Medicare as far as if you do this or if you do that.
Dr. Friday 23:39
So I do know that more than one of my clients when they sell a piece of real estate or something like this happens they turn around the next thing you know, they have the Medicare coming in and it says it’s only for one year but it always feels like it’s longer so just putting that out there.
Dr. Friday 23:56
Alright, well looks like we’ve got Donna coming on the line but we’re gonna go ahead and take another break. And then we’ll hit Donna. If you want to join the show you can at 615-737-9986. We’re gonna take a quick break when we get back we’ll hit Donna and anyone else that wants to join the show. Be right back
Dr. Friday 24:23
All righty we are back here live in-studio and as promised Donna held through the break which I totally appreciate. Alright, let’s see if we can help Donna Hey, Donna.
Hey Dr. Friday. How are you?
Dr. Friday 24:36
I am good.
Fantastic. Let me start off I forgot to tell your screener, this is my year to itemize. I’m paying double taxes, etc, etc. Are there any benefit in giving a sizable charitable donation to a 501 C3 university that I can take advantage of?
Dr. Friday 25:05
Well, no more great benefits than giving period as far as obviously you’re going to be itemizing this year or is if there’s a time for you to itemize, it will be on our even-odd year. She’s talking about where she does every other year itemizing for many of us have perfected, there’s no extra benefit.
Dr. Friday 25:24
I mean, depending on what it is you’re contributing. I mean, if you have something with an appreciated asset, obviously, there’s an advantage because you can take the value of that asset, but not necessarily pay the capital gains on it. But if we’re talking cash for cash, then the answer is no. And since we’re using it every other year, this will be the year you want to do it. So you can maximize as much up to 60% of your income, right can go towards charity, and then the rest of it will roll over to the next year, which may or may not itemize depending on your situation, and how much we’re talking.
Alright, I was thinking something like 5000 if I chose or gave our text person a check that shows UT or Vanderbilt or whoever this charity may be. $5,000 to the educational fund, would that be within the guidelines for itemizing?
Dr. Friday 26:22
Universities, they took a lot of that out there. As far as now you’re saying as long as I mean, let me put it this way, as long as it is a 501 C3 or a version of there’s a lot of different Cybele 1C’s. As long as it’s for the fun, the nonprofit of the college not giving something that you’re you know, and I know that’s what you’re saying.
Dr. Friday 26:43
But just to clarify, sometimes a lot of us would buy season tickets at a university, part of it was used for charity, but part of it wasn’t and therefore they disallowed us to be doing that as alumni or whatever. In your case, it sounds like you’re just giving it to a college under the education fund as a true 501 C3 or a true nonprofit. In that case, you are 100% deductible.
Okay, great. That’s what I needed to know.
Dr. Friday 27:09
Thank you so much for the call. I appreciate it. Thank you.
I appreciate you. Thank you.
Dr. Friday 27:14
No problem. All right, let’s go to Dennis in Nashville. Hi, Dennis.
Hey, Dr. Friday, thank you for taking my call. My question is, I just heard you talking about the guy that did you tell him to do a 1031 Exchange? Well, I sold my house. And then I had bought another house. But I’m not going to be able to close on it until probably January. So when I file my taxes, how’s that gonna reflect?
Dr. Friday 27:47
I have some great news for you, Dennis. That’s the reason I asked him but for my call. My gentlemen, that takes the information. It looks like this was the primary home that you sold, Correct?
Right, my primary residence.
Dr. Friday 28:00
Okay, and how long did you live in that home?
Like 22 years.
Dr. Friday 28:04
Okay, well, you were there for quite a while I only really needed two to five. So anyways, Dennis, so anything you took from that house there? Are you married or single?
Dr. Friday 28:16
Okay, so we get to say, and this is just an example. But let’s say you paid 100,000 for that home, but you sold it for 300,000 Just as this example, as long as there is like $250,000 exclusion. So whatever you sold it plus 250, as long as that is less than you sold it for, then you have no taxes due and you do not have to buy a new house.
Dr. Friday 28:40
This is your choice, you can certainly reinvest into a home, but it doesn’t make a difference, this will be a zero tax to you on your taxes. Unlike this other gentleman, he had it as an investment property, and he doesn’t get that exclusion.
Okay, but anything over 250 I’m gonna have to pay capital gains?
Dr. Friday 28:59
Right. So, again, whatever you paid for it, add 250 and then if it adds up to more like you sold it for 700 and you only paid 200 And you know, that’s 450 and you got $250,000 capital gains. Yes. And there’s no way of excluding that.
One time I heard you say you could take a one-time exclusion.
Dr. Friday 29:21
Right of $250,000. It’s not one time it’s every two out of five years but that’s the exclusion you have.
Only the 250, anything else I’m gonna have to pay?
Dr. Friday 29:34
Right. So whatever you paid for it, and if there were some improvements like sometimes someone might have bought a house but they redid the kitchen, you know, added value to the home. Those changes can be put in add all that plus 250 and that’s what you have for an exclusion anything above that you will pay capital gains no matter if you buy another house or not.
Okay, and do you know the percentage rate?
Dr. Friday 30:00
So give me a ballpark of how much you think it’s going to be above just a rough number.
100 above 250. So about 100,000.
Dr. Friday 30:10
Okay, so can you tell me what your earned income is just again ballpark it.
This year, probably just maybe 40.
Dr. Friday 30:19
Okay. All right. So, you’re basically looking at 15%. That’s an easy one. So you’re looking at $15,000 tax on that 100?
Yeah. Okay, well, thank you, Dr. Friday. I appreciate it.
Dr. Friday 30:33
No problem. All right, buddy. Thanks.
Dr. Friday 30:38
That’s always a hard one, guys. Because when we sell our primary homes, and I mean, nowadays, especially, he’s in the same situation, I have many, many tax clients in. Because most of the time, especially single people, I mean, you bought a house for 100, you did a lot of work, this gentleman’s lived in this house for 20 years. And then it turned around, and he sold it, let’s say sold it for 500,000, which sounds like you know, so he’s only got 350, get into paying tax on 150,000. And that kind of thing.
Dr. Friday 31:06
And, you know, even though he’s really just buying another house, it doesn’t work real well for us. But that is, many people are in that I had another person come in last week, and theirs was about $250,000, married couple of $250,000 taxable situation, and they were going to be at the 23% because their other income is higher. And there’s kind of a marriage penalty, again, on capital gains.
Dr. Friday 31:31
So, you know, think about that marriage thing. I’m just telling you guys, I’m not saying to get married, but I am saying when you do, you know, get some tax benefits that you’re losing. That’s all I can tell you. Do you know? So we’ll move on past that one, because, you know, I don’t want to get in trouble by some of you guys. I’ve had people call and say, “Should I get divorced?” And the answer is never get divorced, just for money, people, it’s not a good thing. But of course, people do divorce because of money. But not because Dr. Friday said to do that.
Dr. Friday 31:57
Alright, so if you’ve got questions, you can certainly join the show at 615-737-9986. We are taking your calls, talking about some of my favorite subjects’ taxes. And guys, this last year is probably been more crazy. I mean, 2020 was bad, because there were a lot of people that were out of work, a lot of unemployment, we had a lot of PPPs, and all this other stuff going for small businesses.
Dr. Friday 32:25
But then we thought, “Oh, it’s over, you know where to start 2021” and not as much stuff moved as fast as we thought it was going to move. We ended up with still more PPP, we ended up with another stimulus. And then on the ropes, we keep hearing, I’ve heard people call me several times, is there going to be a fourth stimulus check? I don’t know. I never thought there would be a third stimulus check.
Dr. Friday 32:44
You guys heard me? I’m like, there’s no reason for a third one. And look at it came out almost higher than the first two. So I am probably not the person you want to be calling asking that particular question, because I obviously don’t. Yeah, I’m not very good at predicting those things. But what we do know is the Build Back Better plan does have about is Obama so $3 trillion bill, depending on where you’re looking and reading, and some of the things in there, we’ll be dealing with taxes.
Dr. Friday 33:12
So some of its gonna be great stuff, energy credits, some solar and car buying electric cars, putting electric plugs and solar panels and things, some of that may be useful, because a lot of that stuff kind of fell off, we don’t have a lot of energy credits out there. So it might be some way to help build up and give things to individuals to be able to get more credits, and to maybe become greener, if that is something that you want to do and look at. It’s nice to be able to make money and or save money in at the same time.
Dr. Friday 33:44
So we’ll keep you informed on any of those things that are happening, what we have out there. And what we’re looking at. Right now, probably one of the big things we want to talk about is, of course, the charitable contributions for 2021. We have the $600 for a married couple, $300 for a single, no marriage penalty on that one.
Dr. Friday 34:05
And for all my entrepreneurs keep in mind, taking people out to meals right now is 100% deductible. We’ve always had a 50% deductible unless it was true, legitimate. There wasn’t 100 but very rare situation to qualify for it. But in 2021, they do allow all small business or medium or large businesses, whatever, businesses that are truly taking people out for meals, we will get a 100% tax deduction.
Dr. Friday 34:31
So really important to be able to look at that information and say, “Okay, here we go. We, you know, we’re going to use this.” And you might think, you know, I mean, I think they’re really trying to build up for small business, especially restaurants, right? They’re still having a very, very hard time. Make sure that they have what they need and going,
Dr. Friday 34:48
You know, let’s go ahead and hit Don. I think we’ve got enough time to probably take his call before the break. Hey, Don.
Hi Dr. Friday. I bought a piece of property about 12 years ago, it was not good shape. And I remodeled it, it was in a CF zoning, commercial. I was buying the property and remodeling, and I have 150, roughly $152,000 in it. It is commercial, it is a business property. I have basically rented it out, and I’ve paid taxes or whatever on the rent. Now, I’ve depreciated it over off my taxes. Well, what’s my tax liability when I sell it?
Dr. Friday 35:29
Well, you have two sides? And that’s a great question. So you’re gonna have capital gains. So that would just be the difference between whatever you sell it for, and what your original basis or original investment so the 152, right? So you’ve got 152 into it. Let’s say you sell it for 300. In for simple math, let’s just say it’s 150. That means you have a profit of 150 capital gains.
Okay, well let me explain. I’m not going to sell it for a profit, because I’m going to somehow give it to my daughter.
Dr. Friday 36:00
Yeah, I’m going to give it to my daughter.
Dr. Friday 36:05
Oh, daughter. Let’s say get a 501 C3, that’s great. We could depreciate. Um, so if you’re going to give it to your daughter, you have to have two options. One, you die, and you give it to her because that would chase gets a step-up in basis, and there’s no capital gains, not always the best plan. That means requires you to die and therefore not a good plan.
Dr. Friday 36:22
Plan two would be you have to sell it to her or gift it to her over the next number of years, you can theoretically gift it all to her today and then file a 706 form, which is a gift tax return showing that you gifted her at fair market value what it was, and there’s no taxes to her in your case, you will still pay tax. You can’t give it to her at what you paid for it, you will have to pay theoretically, needs to be gifted to her. I shouldn’t say that. You could gift it to her at your market basis. You can quickly claim it to her at 152. And then when she sells it, she will actually pay the capital gains.
Okay. Do I have to pay any taxes on it because I depreciated it?
Dr. Friday 37:07
You will have the recapture. And that’s ordinary income no matter what you will have the recapture.
So if I have $152,000 as the basis what I sell it to her for, I’m gonna have to pay taxes on that?
Dr. Friday 37:21
No, the 152 is a wash, right? 150 to 450 to no capital gains, but whatever. Let’s say you’ve depreciated it for 100 I mean, it’s only been 12 years and we have to depreciate almost over 30. Oh, 40 commercials. You’re right. 40. So let’s just say it’s $40,000 that you’ve taken in depreciation, just the ballpark, I have no idea what you’ve taken. That’s taxed.
Okay. Now, one other question. I know you’re not the state attorney. But if I give it to her, I can give it up to what $15,000 a year without taxes now?
Dr. Friday 37:56
Yep. But really won’t change anything, you still are gonna have the recapture depreciation because the property has to come off. It’s a rental real estate.
No way around it, I’m gonna have to get that recaptured. Thank you, dear.
Dr. Friday 38:14
Basically. Alrighty, let’s go ahead and take our last break here. And we’ll get back we’ll take some more of your call 615-737-9986, the phone number here in studio 615-737-9986. I’ll take your call when we get right back with the Dr. Friday show.
Dr. Friday 38:34
All right, we are back here live in studio. We’ve got about seven, eight minutes left to the show. So if you want to jump on the lines, you can 615-737-9986 taking your calls, talking about my favorite subject, which is taxes, trying to keep you guys informed, making sure that you’re making decisions that you know aren’t going to cost you more money down the line or create other tax problems for you.
Dr. Friday 39:06
Because let’s be honest, that’s not a win-win situation. And sometimes there’s a lot of moving parts when it comes to taxes. So you just want to make sure that you are focusing on what’s important for your situation. I know I get a little bit sometimes on the radio, I can’t really get one on one perfectly.
Dr. Friday 39:23
Some of the advice I give is more generic because let’s are honest, somebody makes 100,000 versus a person making 50,000. Someone with capital gains, you know, 25 or 30,000 or 200 or 300,000 big differences when it comes to taxes.
Dr. Friday 39:37
One of the biggest things you want to remember though is if you have a situation and you’re able to be a single person and you make less than $55,000, let’s say 53,000 to keep it on the safe side $53,000 And in that number includes your capital gains, there is a 0% Capital Gains. It’s not going to happen for very many people. Married couples sometimes, same thing 108 or less, if it includes your capital gains would be zero after that up until a single person making about 200,000, including the capital gains, then you’re at 15%. Soon as you hit that 200,000 mark, you immediately jump up to 18.8.
Dr. Friday 40:18
Married couples, this is where the penalty comes in, up until you make 250,000, you’re gonna be at 15%. And then you’re going to go to 18.8. And then for the single person about 440, a married couple, I think it’s 470. So again, kind of get a marriage and then anything above that it all incomes, if they are over those numbers, then your capital gains is going to be 23, or 23.8. But they’ll you know, they always talk about the 20% tax bracket, but there really isn’t a direct 20% tax bracket. Because you pretty much always had that Medicare tax on top of it in there.
Dr. Friday 40:54
So if you’ve got a question, or if you’re selling or thinking about selling, obviously, it’s always great if you can contact me prior to selling something, because then sometimes we can actually bring to the table what options you have, or preparing what you need to know. So you can set aside that money, especially if your plan is many times people have sold their real estate, their fine investment, real estate, their rentals, their second homes, and they’ve sold those.
Dr. Friday 41:18
And they’ve turned around and basically said, “Hey, I want to pay off my main home, I don’t want a mortgage anymore.” Which I’ll be quite honest with you guys. Maybe at a certain point in my life, I would say that, but when interest rates are like three and a half, four and a half percent, it seems silly for me to be paying off my home when I can be earning six or seven in my 401k. And I’m only spending three and a half to four and a half, I’m actually making money on my mortgage money, it doesn’t really make sense.
Dr. Friday 41:46
But I’m not a financial planner. And I know there’s going to be a time in my life were like anyone else when you stop working, and you’re like, “Okay, as long as I don’t have a mortgage, in a perfect world, I don’t have a car payment.” I mean, let’s be honest, without those two things, your cost of living has jumped down a lot. You don’t need as much money to live, it’s a lot easier.
Dr. Friday 42:04
So I’m just saying at certain points in our life, I’m not disagreeing, it might be nice to have a mortgage-free house. But in my opinion, I wouldn’t rush to pay it off, especially with the money that could be invested and grow for a period of time. So that would be a more important time. Because if you take that same money that you would have paid the mortgage off and invested it, of course, there’s always a chance of losing that money. That is something that’s always on the table.
Dr. Friday 42:28
But if it’s invested well, with a good investment advisor, I don’t really think you’re gonna see huge losses at any good time. But I think it is something that you want to make sure you understand and that you have a way of following through with that and making sure that it’s going to make sense to you and I and you know, to your financial and always check all this with a good financial advisor, make sure that your tax person and your financial advisor and your attorneys, obviously it’d be great if they were friends.
Dr. Friday 42:54
All right, let’s hit Pam really quick because we’re running about three minutes. Hey, Pam. What can I do for you girl?
Hi. I’ve just been, you’re just talking about paying off your mortgage. I own my house free and clear. But basically my retirement is my house. And so after considering the mortgage rates and everything, I have decided to go with a reverse mortgage. And I’m wondering if there’s any kind of tax implication when I take that money out?
Dr. Friday 43:31
There isn’t. I’m not going to tell you, Pam, then I’m a huge fan, I’m not gonna tell you I’m an expert either have reverse mortgages, I usually only get involved with reverse mortgages with the person that inherited the house, right? And that may or may not come into play in this conversation. So that’s, you know, I’m just saying.
Dr. Friday 43:48
But the answer to your question is when they give you either a lump sum or a monthly payment, guess there are a couple of different ways you can get money from the house. But anyway they do it, none of that is taxable income to you. That’s the important part.
Because I’ve already paid taxes on it.
Dr. Friday 44:04
You got it. And then when they sell the house, obviously, it’s like a mortgage. You know, I mean, if I take money from one of my houses, I don’t pay tax on that mortgage, because I’m going to have to pay it back. Well, that’s the same thing with this. When that house gets sold, once you pass away, or, you know, move or whatever, then they’ll take their money from the sale of the home.
Okay. And then if I use some of that money to invest in another real estate property, is that?
Dr. Friday 44:35
Nothing wrong with that, as far as I know, unless there’s something in the contract you sign as far as I know, you can take that money and invest it or spend it on anything you want. Again, I’m not you know, but unless there’s something some sort of clause that says you can’t go buy another house because they’re basically securing this loan against the home you’re living in so it should not tie any other assets.
Okay. Then basically the other thing is I’m possibly eligible to take my Social Security as well. Do you have somebody that specializes in Social Security? I can’t decide what to do.
Dr. Friday 45:13
I wish I could I could send you to Hank Perret, and if you want to call me Monday if you haven’t, he’s a financial advisor.
I listen to Hank, too.
Dr. Friday 45:23
Okay, there you go. He would be a person to you know, I can give you a call or he can call you whatever, that would be a director because he does a worksheet I know when I send my clients part of it is when should you take so security. But I mean, if you don’t have a lot of other income, I would say taking it earlier versus later.
Okay, sounds great. Thank you.
Dr. Friday 45:42
Thank you so much, Pam. I appreciate you. Alrighty, we are at the end of my show. Awesome, we did it! Sorry. You guys can’t see but I don’t normally get to see my engineer because we’re usually not in studios together and I’m so happy because I get to see him today.
Dr. Friday 45:58
Anyways guys, you can reach me at 615-367-0819 is the direct number to my office. Email is firstname.lastname@example.org again or check me out on the web. You never know, I might surprise you out there. drfriday.com.
Dr. Friday 46:24
I hope you guys are having a wonderful Saturday. Hope you guys enjoy this holiday season. The weather is awesome outside and I think we’ll be in great shape. Call you later