Could a Roth conversion quietly raise your Medicare costs?
Welcome to the Dr. Friday Radio Show! In this episode, Dr. Friday provides valuable insights into the intricacies of tax preparation and compliance. Key topics include the delay in IRS e-file opening, the crucial Small Entity Compliance Guide, and the urgent need for business owners to understand the Beneficial Ownership Information requirements. Dr. Friday emphasizes the importance of accurate tax documentation and the potential implications on Medicare and Social Security. The episode also covers payroll tax issues, child support considerations in relation to Social Security, and questions about capital gains on real estate sales. Insightful call-ins add to the dynamic discussion, making this a must-listen for anyone seeking practical tax advice.
Key Highlights:
- IRS E-file Delay: The opening of IRS e-file is postponed to January 29th, impacting the filing process for basic tax returns.
- Beneficial Ownership Information Compliance: A critical alert for business owners about the substantial penalties for non-compliance by January 1, 2025.
- Medicare and Social Security Impacts: Discussions on how income changes, including Social Security benefits, can affect Medicare costs and child support calculations.
- Real Estate Sales and Taxes: Guidance on the tax implications and exclusions related to selling property, particularly for seniors in different living situations.
- Interactive Listener Queries: Dr. Friday addresses a variety of caller questions, from payroll tax concerns to retirement account rollovers.
Whether you’re a business owner, retiree, or individual taxpayer, this episode is packed with essential information to help you navigate the complexities of tax season.
In this episode
- Check IRS notices against your own tax returns and payment records before paying, because an alleged omission may already be reported.
- Consider spreading Roth conversions across multiple years, because the additional income can increase Medicare premiums as well as income taxes.
- Report retirement distributions shown on Form 1099-R even when taxes were withheld, because withholding only estimates your final tax liability.
- Keep receipts for items purchased for resale so you can document their cost and calculate taxable profit accurately.
- Report earned income even when the payer does not issue a Form 1099 documenting the payment.
Transcript
No, no, no, she’s not a medical doctor, but she can sure cure your tax problems or your
financial woes.
She’s the how-to girl.
It’s the Dr. Friday Show.
If you have a question for Dr. Friday, call her now.
737-WWTN.
That’s 737-9986.
So here’s your host, financial counselor and tax consultant, Dr. Friday.
Hey, this is Dr. Friday and the doctor is in the house.
We are here live in studio on this very cold Saturday, getting ready to start our tax season.
Well, actually, it’s already started, already completing returns.
I will let you know that the IRS is now saying January 29th for many of my very basic W-2
only tax returns, that e-file will not open until January 29th.
So in some cases, if you were thinking to rush to that line and get your money back
from the IRS, you may have to wait a little longer than you expected.
But if you’re working on your taxes this weekend or you’ve got some questions, a little call
out to all my prior or existing clients that we, you know, every year obviously handle
your taxes.
If you don’t see a time, our calendar, the calendar is open at drfriday.com.
If you don’t see an available time, just call the office.
We do have available time, so we just can’t open up on the calendar because, well, if
we do, then we’ll have no more time because it goes as quickly as we have.
So that being said, just keep us in the loop.
And then if you want to join the show, 615-737-9986, 615-737-9986.
I’m always in your calls talking about my favorite subjects.
Anytime you have something, you can just let me know.
Again, 615-737-9986 is what we’re talking about here in the studio.
So we’ll take it from there.
I’m trying to get my mic still to work through the system, but this is working fine.
All right.
And then we also today, we’re going to talk a couple different times just depending on
how fast the phone goes in and everything else.
We’re going to have the small entity compliance guide.
There is a situation that’s coming around where a lot of people are getting emails,
phone calls from either other business owners or individuals.
And part of that is going to be basically where they’re talking about the beneficial
ownership information.
And there is a serious penalty.
We have until January 1st of 2025.
Put that out there.
The deadline for filing this is January 1st, 2025.
If you do not file in this compliance, the penalty is $500 a day.
So this is something we do want to keep talking about.
If you’re not too sure, you can always just Google beneficial ownership information.
There’s a website set up by the Financial Crime Enforcement Network.
This is coming out through the U.S. Department of Treasury.
It’s basically asking for the names of the owners, the address of the owners, the dates
of birth for the owners, the Social Security numbers for the owners of all businesses.
There are a few that can get waivers or have something that is — something out there where
basically there are certain businesses, certain things that don’t have to comply, like if
you sell insurance, I guess because you already have certain amounts of compliance that’s
required, you’re not required to have to do anything on that.
It’s just a matter of figuring out which way you want to go and how you want to make it
work, et cetera, et cetera.
So if you have a question on taxes, you can reach us at 615-737-9986, 615-737-9986, taking
your calls live here in studio.
Really not a whole bunch as far as taxes getting started.
There has been a lot of love letters, it seems like, coming out in this last week or two,
but having to do with prior years, ’18, ’19, ’20, ’21, ’22, and a lot of it has to do with
payroll taxes, like they’re just realizing now that some of these things were done and
they’re coming back and having us do things.
So it is one of those situations where you’re like, okay, do I actually really owe this
money?
Do I need to do something?
How can I make sure I’m not just paying a penalty because it’s showing up on here?
So we want to make sure all of that is in compliance.
So if you get one of those love letters and you’re not too sure what to do, first thing
I would do is go back and look at your own records.
Did you make all your payroll taxes on time?
Was there a problem?
Was there a delay?
And then that way you can double check to see if, you know, the situation is.
I mean, just like we all know payroll taxes were due on the 15th, the 15th falls on a
holiday.
Theoretically, they wanted all the payroll taxes done on the 12th.
You know, that’s what their prefer was.
So they would want to be on that and make sure that that was the situation.
So if that’s their case, then we have to make sure that that is filed on the right situation.
Otherwise, not going to be really a good situation.
All right.
Oh, sorry.
We have a question from Brentwood is on the line.
Let’s get Joe.
Hey, Joe, what can I do for you?
>> Joe Connor Hey, Friday, former client.
Question for you.
I am now eligible for Social Security benefits, but I have younger children under 16 on which
I’m paying child support.
So if I start drawing on Social Security, does my child support have to be recalculated
because that’s now counted as income?
>> Dr. Mary Jo Cagle That’s a great question.
That seems like probably more of a legal question.
And if you have children, if you’re on Social Security, and I don’t know all the rules,
but theoretically, your children under minor children can actually qualify for Social Security
benefits.
Again, not a total expert.
I have clients with young children that are on Social Security and their children qualify
as well.
But that may only qualify for certain types or income brackets, et cetera.
But that is a good question on how and since it’s not earnings, is it actually even a part
of the calculation for the child support since child support is not a tax deduction for you?
I’m not sure if they would actually consider it.
>> Joe Connor Yeah, it’s been sort of a murky thing that
I’ve not gotten a great answer on.
So I thought I would ask somebody that I trusted.
>> Dr. Mary Jo Cagle Well, I appreciate the question, Joe.
I just don’t feel like I’m going to be able – I mean, it really comes down to – because
child support, the way they calculate it, it doesn’t make sense for most of us to be
quite honest because many times they’re calculating things either prior to taxes being paid in
the right way and different things.
So I don’t find that there’s the same mathematics used when they calculate that than they do
with like us for taxes, right?
And since it’s not a tax deduction, it becomes even worse.
So in answer to that basic question, I guess I’m going to have to say I don’t know the
exact answer.
And I don’t even know how your Social Security would have even come into play as far as would
they care if you’re having to pay tax on it or not.
You know what I mean?
Would it make any difference that 85% of it could be taxed potentially?
>> Joe Connor Yeah, and my question is really because Social
Security is taking out pre-tax and child support payments are made based on gross earnings,
am I not already paying maximum child support because it’s based on my gross earnings?
>> Dr. Debra Hixxon Exactly.
Like I just said, that doesn’t make any sense to most of us.
If you’re sitting down and doing the math, why would you have to pay child support based
on gross earnings?
You don’t put gross earnings in your pocket.
And then when you take out Social Security, in many cases, even though you already pay
tax, you’re very likely going to have to pay tax again on up to 85% of what you get in
Social Security unless you can live off Social Security by itself, which most of us can’t.
So it just honestly doesn’t make sense to me the way they calculate.
So I’m going to say that they probably aren’t going to recalculate it.
They’re probably going to make you pay more because it just seems like they never see
unless something changes and you’ve reduced your income.
That’s about the only thing that would change.
That’s my guess.
>> Joe Connor Well, I appreciate your time.
>> Dr. Debra Hixson No problem, Joe.
Thanks.
>> Joe Connor I’m going to go to Joyce real quick before the break.
Hey Joyce, what can I do for you, sweetie?
>> Joyce Rose We are thinking about rolling over a 401(k)
to a Roth.
But now my question is, a couple or three weeks ago, you were talking about somebody
having income and it would affect their Social Security and Medicare.
We’re 73 years old and we’re on both.
So if we roll that over, I know we have to pay taxes on it, but does it count as income
and does it affect our Social Security and Medicare?
>> Joyce Rose My understanding is, and what I have seen
actually, it will affect if you guys go over, I think it’s like 92, don’t have the exact
dollar, 92 for single, so it’s like 180 for a married couple.
If you exceed that 180 for all of your income, including the conversion, you could end up
increasing, your Medicare could go up for another year because they base it on the year
that, you know, whenever that happens.
So you could end up paying higher in Medicare fees or the regular withdrawal than you do
now.
So I don’t know your income and I don’t know if you’re usually over or under that dollar
amount, but it is a key number to keep in mind when we’re doing things because we always
think about the taxes, but we don’t think about how Medicare does mean testing based
on our tax returns.
And the next thing you know, I’ve got people that were having a 160 or $130 normally coming
out and now they’re having a 180 or $200 a month.
And that, you know, fixed income, just because you have the money in your case, you didn’t
touch any of that money, you’re just paying the taxes.
So your fixed income is still the same and now you’ve lost money for your lifestyle.
Not to say it’s going to make it hardship, but who wants to pay more money to Medicare?
So 180, now that’s, is that net after you take off all your expenses?
Yeah, that would be your adjusted gross income.
Okay.
That’s 180,000.
Okay.
Thank you very much.
No problem.
Thanks, Joy.
Appreciate you.
All righty.
So that was a great question.
And a lot of times, I mean, I’ll be honest, doing this for 25, 28 years now, and one of
the things that we figured out probably five or six years ago, which makes us a little
slow, is that we’re always concentrating on the IRS or the state if they’re state income
and some of my clients, that’s what I’ve always looked at.
And then we started getting people, you know, coming in and afterwards saying, hey, wait
a sec, you know, now my Medicare changed because I sold a piece of real estate and my capital
gains went up, you know, whatever, and now we have this.
And then, you know, there is some sort of waiver that you can get once or something,
but I’ll be honest, guys, I’ve never successfully done it.
I’ve had clients successfully contact Medicare and get it done, but I’ve not yet had any
real success in filing that document.
So it’s really important if you can control it, like in Joyce’s situation, maybe they
do a little bit in 24 and a little bit in 25 and keep them under that number if that’s
a possibility, that would be something.
Because a lot of times your financial planner will be sitting there saying, wait, as long
as it’s under 250, you’re maximizing the 22 percent, let’s maximize as much as we can,
but when you go from that 180 to 250, you’ve just affected your Medicare rates.
So again, talk to your financial people, make sure you got it covered.
All right, we’re going to take a quick break.
When we get back, we’ll take more of your phone calls.
615-737-9986.
We’ll be right back with the Dr. Friday Show.
All right, we are back live here in studio.
And if you have anything you want to join the show, 615-737-9986, 615-737-9986, taking
your calls.
We’ll go right to Robert from Nashville and see what he has.
Hello, Dr. Friday.
My mother-in-law, I’m 90 years old now.
She has been in a nursing home the last couple of years.
We sold her home.
She lost her husband about 40 years ago.
She never remarried.
What is the exclusion on the capital gains?
Does she get 250 or does she get 500?
She only gets 250.
You only have a window of two years after the passing of a spouse.
But she did get a — well, 40 years ago.
I have no idea.
Theoretically, if they owned the home jointly that they had owned — I don’t know if she’d
sell the same house or not that you sold — but at the time of his passing, there would have
been a 50% step-up in basis.
But 40 years ago, I can’t imagine what the property would have had today, you know?
Oh, yeah.
It would be locked into most of the growth she’s probably seen.
I mean, I don’t know where it’s at or anything, but I’m going to guess in the last 10 years,
the house would probably increase quite a bit more than it had in the 30 years.
Oh, yeah.
Absolutely.
With all the growth we’ve had here.
So, yeah.
So she’s looking at a $250,000 exclusion.
But keep in mind, if she’s living in a nursing home, unless it’s a Medicare situation, any
money that she’s paying out is medical, and therefore can’t be used for itemizing.
Okay.
Very good.
Thank you.
All right.
I appreciate the phone call.
Thanks, Robert.
All righty.
So, again, if you have questions, you can join us here, 615-737-9986, 615-737-9986,
taking your calls.
If you’ve got questions, again, I do want to keep — Daryl will probably get tired of
it, but this is a huge penalty to all small business owners.
That means if you are a partnership, a corporation, it doesn’t apply to single member.
It does only, in most cases, if you’re a single member corporation, it would, or single sole
holder.
But you need to look.
You need to go online.
You may have already gotten something from compliance, but you need to be looking at
the beneficial ownership informational from the Financial Crime Enforcement Network.
This is a legitimate situation.
You have time.
It’s not something you have to draw up the phone and get done today, but it is something
that you need to make sure that yourself or your accountant or whoever is handling these
kind of situations.
It’s not part of a tax situation.
It’s not something that we normally would do, but it is something that you do need to
have someone help you do or get done yourself, so that way you’re able to not have this penalty,
because this penalty is, as far as I’m concerned, massive when it’s $500 a day when you’re late.
And that could add up really, really quickly.
So these questions, and keep in mind, right now, one of the best things you need to be
doing, you can start working on your taxes, but like I said, IRS has already sent notifications
out to us that they will not be opening e-file.
It was going to be the 22nd.
We got notification today that it was going to be the 29th.
It may not be for every single type of tax return, just some of the returns we’re working
on.
And then also you have the situation where you need to make sure you have all your documentation.
Make sure you have your portfolio.
So if you have stock, dividends, interest, a lot of that’s not coming out.
Mortgage statements, I know a lot of times nowadays we don’t use those as often, but
getting that information together.
If you have any kind of distribution, 1099s, none of that has to be out to the last day
of January.
And in some cases, again, my mortgage company said they weren’t going to have them out until
February 15th.
So again, one of those situations where you just want to make sure you have all the information
so you’re not amending things later.
All right, let’s take Gary.
I think it’s in Dixon.
Let’s see what he has a question on.
Hey, Gar.
Hey.
Yeah, we’re just on straight Social Security.
We don’t have any other income.
I think H&R Block told us last year we wouldn’t have to file no more.
Is that correct?
Correct.
If you only have Social Security and you don’t have any other source of income, Social Security
in itself is a zero tax.
It’s only when you make money that Social Security can become taxable.
So yeah, you have one of the few times, few advantages, Gary, at this point in life to
just be able to ignore all the hoopla when it comes to taxes.
Well, I think, yeah, I was sort of leery of that.
So I wanted to ask somebody, you know, about it.
And they said, no, if you don’t work any more or have any income coming in, up to a certain
amount, I think is what they told me, but I can’t remember.
Yeah, it’s up to the standard deduction, but half of that would be possibly, it’s called
the provisional tax code, so you take half of your Social Security plus whatever you
might have earned.
And if it does exceed your, pretty much your standard deduction, which as a married couple
is almost $30,000 if you’re over the age of 65, you would have some wiggle room.
So if you made a W-2 for $10,000, you’d still not, as long as there was no withholding,
you know, you’d still not have to file taxes.
Right.
Well, I’m 74, so we’re sort of home.
You know, we’ll just stay at home and stay out of trouble.
There you go.
It’s about time.
You get to enjoy a little bit.
Well, enjoy it.
Hey, man.
Stay inside, though.
It’s too cold.
All right.
You have a good day.
Thank you, sir.
All right.
And that was a good question, because I have a number of people every year, and I think
it’s good to check, because sometimes things change.
Maybe you sell some stocks or even selling your home, even if it’s a zero tax situation,
a lot of times we like to report it so that the IRS knows it was your primary home.
But most of the time, it’s just a matter of, you know, just making sure everything is reported
so you don’t have to look over your shoulder later and you say, “Oh, man, one of my clients,
he’s an older gentleman, and he just got a love letter from 2022, and we found that maybe
it looks like it may have been one of his portfolios, information did not come through
to him.”
So that’s why I’m using that example, and if you’re not the first, you certainly won’t
be the last.
But make sure, do your best to make sure that you have all of your information, because
the IRS is going to come back, and there is nothing worse than getting a letter from the
Internal Revenue Service saying you forgot or they’ve changed your tax return, because
it’s never for the good.
They never usually send those letters out that I can find that usually says, “Oh, we’ve
changed your tax return, and you now have a refund.”
Not really something that’s happening too often, you know, but what we do want to make
sure is that you are able to get your information and then be able to look.
And when you do get those letters, this gentleman, he was smart enough to review his taxes and
see that the way I labeled something and the way the IRS labeled it, it was the same thing.
So they were saying that one of the things was not on the tax return, but it was.
And it was on the same section, it’s just different labeling.
So just because the IRS says they’ve changed your tax return, don’t take that as that you
have to pay that money, okay?
That’s not always the case.
And there, in the letter, it basically says, “If you have any information to help us change
this, blah, blah, blah, if you ignore us, we’re going to change it anyway.”
And then you’d have to go back and try to amend, and just so you know, amended tax returns
are not necessarily having to be accepted.
So it’s one of those deals where you need to make sure you have everything.
Also, I wanted to put a reminder out that anyone that may not have applied yet for the
employee retention tax credit, that will expire come April.
So if you haven’t applied for it, and not everybody gets it, I can tell you every day,
during the week especially, I at least get one phone call a day telling me how I can
qualify for $26,000 per an employee.
I personally think they should be put under arrest or something, because it’s a fraud.
I mean, very few people actually truly qualify for $26,000 per an employee, because they
actually back out PPPs and different things, if you were truly affected.
Many of us stayed open, so my people were working, therefore they didn’t apply to them.
It only applies to people that maybe had, I don’t know, I’m thinking like a bar or something
that was totally shut down in Nashville for periods of time, and then they’d open and
then they re-shut them down.
Those companies were totally affected, and maybe in those situations, some of them would
have qualified, but if they got the PPP, which most of them would have gotten first, they
still won’t qualify for all of it.
So it’s very misleading.
So just be very careful when you get those calls, because I have several clients that
call me once they get those phone calls, and like I said, I’m getting those phone calls,
and they’re very misleading.
A lot of times they’re recordings, and they’re just someone saying something, so it’s not
like you can say, “Hey, you really can’t — I don’t qualify, so stop calling me.”
They’re phishing, and they’re trying to get this information.
So it’s really important that you know and understand how that works.
But if you have a business that was in business in ’21 and ’22, and you were affected by COVID,
and you didn’t maybe get all the PPP, or especially the second PPP, because many of them didn’t
qualify because they didn’t have the hardship, then you might want to make sure that you’re
not leaving.
But also I want to say ERTC, Employee Retention Tax Credit, is taxable income.
That is not like PPP that was free money or turned out to be free money.
This is a taxable situation.
So if you get $20,000 back, that’s $20,000 of income that in theory, if it was for ’21,
you need to go back, amend ’21, and then pay the taxes.
And the IRS is reviewing and auditing those.
I have already seen several cases and conversations that I’ve heard on some of these phone calls.
So just, you know, be prepared.
Make sure you have your documentation.
Just because you got the money from the IRS does not mean that they can’t come back and
audit that and reconfirm that you did or did not qualify for it.
So again, making sure that all that information was correct and you’re doing it.
All right, we’re going to get ready here to take our second break.
If you want, you’ve got a question concerning your 2024s, or maybe something has happened
in 2023 filings, or I should say 2022, or preparing your 2023, then you can give us
a call here at 615-737-9986.
615-737-9986.
We’ll be right back with the Dr. Friday Show.
All righty, we are back here live in studio.
You can join the show if you want at 615-737-9986.
615-737-9986.
And we’re going to hit Joe in Manchester.
Hey Joe, what’s happening?
Hey, Dr. Friday.
The house beside me recently sold during the summer, and the guy that bought it is a home
remodeler.
And he asked if I would keep his grass mowed for him, which I did, and he paid me $500.
And I’m not self-employed or a business owner, I’m just a neighbor.
So how do I need to claim that on my taxes?
Well, it would either be considered other income, because it wasn’t an attempt to make
earnings.
You could put it on your Schedule 1 under other income if you want to be.
I doubt he’s going to 1099 you, and in theory it was more like a gift that he paid you for
doing a nice thing.
But to be legitimate, you file it on your Schedule 1 under other income.
Okay.
All right, that sounds good.
Okay, good question.
Okay, thank you, Dr. Friday.
Most people would probably just ignore it, Joe.
Say what now?
Okay.
I said most people probably would not be reporting it, to be quite honest.
Well, he wrote me a check and everything.
He’s a home developer, so I didn’t know.
No.
I mean, what you’re doing is correct, but theoretically, as long as it’s $500 or more,
in theory, we’re supposed to report it on our tax return.
If he had paid you $450, you wouldn’t have had to report it.
So that might be something if he does for this year, you might just want to cut it off.
Say, “I’m going to do it for $450, so I don’t have to worry about taxes.”
Okay, sounds good.
Thank you.
Thanks, buddy.
Bye-bye.
All right.
But yes, he probably won’t, because it’s under $600.
He doesn’t have to legally 1099 you.
But what Joe brought up is actually a great point, which means that even though somebody
doesn’t 1099 you, in theory, the IRS says any income earned should be reported on your
tax return.
And if you have a, you know, I mean, Joe then, I would have said he could have wrote it off
as a small business, but the IRS would have classified it as a hobby.
He wasn’t out to make a lawn service.
He was doing it as a favor.
It was someplace that he would just come over and do.
So he wasn’t really in the lawn business.
So in his case, he doesn’t, he cannot write off his expenses against that money because
he wasn’t in business and he wasn’t trying to be in business.
Now, if you are in the lawn service business, then obviously you could have wrote off your
petrol and different things, your miles and the gas and things it takes to go into your
lawnmower, but that’s not one of those situations.
But anytime, and this is going to be coming back in 20, I know we keep saying this every
year guys, but in 2023, theoretically, some companies like Square and PayPal and Venmo
were getting geared up to start issuing anyone that made more than $600 on in using their
sites, right?
I mean, that was, and then it got extended and then it’s now $5,000.
So right now the law is $5,000 or more than 20 transactions.
And that’s what you’re going to be dealing with.
So if you’re doing a, I don’t know, like a garage sale kind of thing on, people are coming
in and paying you through one of them, PayPal or Venmo or any of those, or you’re using
those apps thinking that that isn’t going to really show up as income because it’s a
cash app and so far there hadn’t been a lot unless you were using merchant statements.
So I’m preparing you guys.
If you decide that you’re going to continue doing your webpage where you’re selling different
things and you’re maybe even taking furniture and fixing it up and then resubmitting or
reselling that or going around to garage sales and putting stuff out there and selling it,
that is a legitimate business.
Even though you might think it’s just a little side thing that you’re doing, the IRS is going
to say that is a business.
You are taking one thing and you’re creating it or you’re even just shopping around and
then you’re putting that same thing out for the market to buy.
You are now creating a product and a sale.
So you need to start thinking about, because most of the time what we ran into in a couple
cases, no one tracked their little garage sale pickup.
So people drive around and they find these really cool things that are at garage sales
and they negotiate prices and then they turn around and put them back out in the marketplace.
But they’re not carrying a receipt book.
They paid cash for it.
They don’t even know where they purchased it.
So there is no basis.
So when they sell it, since they did not track where, how, when, how much money that was
spent on it, then when they sell it and if the IRS audits those individuals, we have
no trail.
There’s nothing come back at us and says, “Oh, wait.
We can actually deduct this because this is who we paid $45 for this item that we sold
for 80.
So we have a basis and then we can only have to pay tax on the difference.”
No.
So if you’re one of those individuals that has just accumulated that you have a lot of
stuff and you’re selling it, theoretically if it’s your own personal thing and you put
them out there, but now if you sell more than $5,000 a year, the IRS is saying that’s a
lot of money in one year.
That’s a lot to be generating.
Therefore you’re going to have to question is it truly a business that you’re in or not.
You know, maybe you sold one thing for $5,000 because you had a piano or something, but
if you’re using any kind of cash app, it’s going to start coming.
So you need to start really thinking about where, how you’re doing things because if
you’re doing some of this on the side thinking, “Hey, you know what?
It’s been a great way.
I find these things.
I have a sister-in-law that used to go and go to some of the outlets, buy clothes,” and
then she would list them on the internet and she had a little store there and then she
would sell the stuff and make it, which was great.
But obviously if you’re not reporting at all, that becomes a problem.
So you need to make sure that if you’re doing something like that, you are now really tracking
your expenses because if you’re not, it could come back at you later where you don’t have
any expenses because you can’t justify any of them because you didn’t have a paper trail
to use.
And the IRS has the right to completely write off all of your expenses because you can’t
justify those expenses.
So, all right.
So we’ve got that.
Don’t forget we are in the middle of, well, we aren’t in the middle.
We just started I should say since e-file hasn’t even opened up until January 29th.
Does it mean you cannot complete your taxes?
Does it mean they can’t be ready and ready to go out?
We’ve already completed probably 20, 30 returns and we’re working this weekend.
Tax returns are going out and getting everything at least as far as we can go.
There’s going to be a couple that we may start and we’re waiting for a few documents, K-1s,
different things that’s going to come from other sources that we’re not able.
Don’t forget to track your stuff.
That’s all I’m going to say.
I know I say that a lot, but I can’t tell you how many times someone comes in because
they get a letter that the IRS has changed their returns because of something they didn’t
think about.
In some cases, it’s as simple as they had a 1099-R, which is a distribution.
And since the federal taxes came out of that distribution, some people think, “Oh, I don’t
have to put on my tax returns.
They already took the money out.
They already took the taxes out.”
That doesn’t quite work that way.
All they did was take an estimate.
They took a dollar amount that you told them, 10, 20, 30 percent, whatever it might have
been.
But based on your income, total overall is how that is taxed.
So in many cases, not enough money came out, and therefore, they end up having to pay more
money now with penalties because they didn’t report it, and then they get underreporting
of income and everything else.
Very important to track your information and make sure you know where it’s coming from.
That’s all I’m going to say.
Documentation.
Right now is the time to just go through, “Steve, did you work more than you said you
would?
Did you have more than one job?
Did you have any major medical situations that may or may not trigger anything?
Did you have a large charitable contribution?”
And that doesn’t always have to be cash.
But what we have also learned over all these years is what, guys?
If you have something over $250 or $500, depending if it’s cash or product, you need to have
documentation.
It’s always about the documentation.
And in most cases, if you have a family member that’s passed away and then you’ve donated
all of their things, and theoretically that could be a tax deduction to you, you better
have an appraisal.
We have a situation where we’ve been working with someone for a long time trying to get
them to come back and reopen and audit because they basically disallowed all of it because
he did not have, but he was under the understanding at the time that one item didn’t require it
unless one item was over the $500 or $5,000, depending on what you’re looking at.
Mark, and in his case, no, the IRS came back and they have ruled on this in court cases
that says if you have an estate, and let’s say the combination of everything in that
house is $5,000 or $6,000 and you’re going to give it all to a charity and you want to
deduct that from your taxes as a charitable deduction, you better have an appraisal that
shows that all of that was worth that.
And that’s the way it’s going to come down.
Otherwise, you’re not going to qualify for anything more than the $250 cash and $500
non-cash contributions.
That’s pretty much out there.
So just putting that on the table, you want to make sure that you’re documenting these
things.
Don’t forget, if you have some stock that is valued at a certain dollar amount and you
don’t want to have to pay capital gains, you can gift that to them at the value and you
get to take the value.
Let’s just say you have some IBM stock and it’s worth 50 grand, but your basis is only
10.
You can donate that to a charity for $50,000, deduct the $50,000 and never pay tax on that
capital gain.
That’s the way these kind of things work.
And if you have a situation where you want to do something like that, I’ve had people
in the past donate art or donate stocks or homes, then it’s something you want to really
consider or look into, right?
You don’t want to just — sometimes it always sounds good on paper.
Oh, I don’t want to lose that.
I’ll go ahead and do this and then I’ll give my 30%.
Well, maybe there’s another way of doing it.
Maybe there’s a way of giving something that you can then write off and do more with.
Well, that’s the kind of situation you can work with.
All right, we’re going to get ready to take our last break for the day.
That means if you are waiting and you’re sitting there going, oh, my gosh, I have something
I want to say and I don’t know, there’s really no silly questions.
There’s no dumb questions, really.
I mean, if you’re working on it, a lot of times it’s just what you’re asking.
A lot of other people sometimes are always curious about the same answer and it just
takes one person to call in.
So you can call the show at 615-737-9986.
615-737-9986 is the number here in the studio.
And we’re going to come back and take some of your calls.
You’re listening to the Dr. Friday Show and we’ll be right back.
(Music)
All righty, we are back here live in studio.
And it looks like we have a couple people on the line.
Let’s hit Bobby from Tennessee here and we’ll start there and see if we can get Bobby an answer.
Hey, Bobby.
Hey, I just recently got disability and I’ve got a little part-time job on the side and
they said I could work like part-time.
But the guy’s going to put that directly in the mutual fund, but it’s not much.
It’s like after taxes.
It’s $500 a month, but after taxes it’s only like $462.
Do I have to still file taxes for that part, that little bit?
Is this a W-2 or a 1099?
You said after taxes.
No.
I’m assuming it’s a W-2.
Yeah, he’s just going to put that little check in once a month straight into a mutual fund.
But I didn’t know if I still had to file taxes on that amount for $24.
Right.
Well, the answer would be, Bobby, if it comes on a W-2, then the answer would be no, you’re
under the minimum and nothing would be taxable.
If it comes on another form like a 1099, then the answer would be yes, because it’s basically
considered self-employment and you’ll still have to pay the taxes on it, even if he’s
withheld the taxes.
I’m not sure.
But it sounds like it’s a W-2, and if it is, then you should not have to pay any, I mean,
you wouldn’t need to file.
Well, he subtracted Medicare and-
Social Security.
All that out of it, yeah, and then he’s going to put the rest on in my mutual thing.
But I was just wondering.
Yeah, yeah.
So just, you’ll know in another few weeks, but my answer would be, if you see a W-2 from
this gentleman, then you know you don’t have to do anything, because he’s not withholding
any federal withholding, so there’d be no need to.
But if he gives you a form called a 1099, then you do need to still do it.
It doesn’t sound like he’s going to, but I’m just preparing you just in case, okay?
Well, all righty.
I appreciate it.
Thanks, Bobby.
I appreciate it.
All right, let’s head over to Darrell in Hendersonville.
Let’s see if I can help him.
Hey, Darrell.
Good afternoon, Dr. Friday.
I’ve got about $5,000 that I’m going to take as a long-term capital loss on a crypto coin
that tanked on me, and I wanted to find out what type of documentation would I need to
substantiate that capital loss?
Basically, you need the same as you would in any other stock.
So you needed to have the date that you purchased the stock and then the date that you sold
it and the type, the dollar, the cryptocurrency that it was.
You need to make sure that it is documented because that’s one of those areas that the
IRS is definitely coming back to.
A lot of people are claiming large losses, but unfortunately, in many cases, they purchased
one type of currency and then they sold that for another, and then they sold that, and
then now they finally converted or lost it all, and then they’re trying to claim it.
But each time you switch currency, it should have been a sale on the Schedule D for me.
So just tracking that information, no different than if you had brought normal stock, but
you do want to make sure it’s totally documented.
Otherwise, they may turn around and disallow your loss.
So just a regular statement from the wallet company?
So if you use one of the wallets, that’s the best way.
Different wallets.
I use a wallet.
And as long as you’ve used the wallet to put the money in to buy the crypto and then either
convert it back or if you lost it because it became zero worthless, then that would
be when it is.
As long as it’s been qualified as worthless or you sold it at a very big loss.
Yeah, I haven’t sold it yet, but I’m going to.
Okay.
Yeah.
All right.
The best bet is to sell it.
That way, at least you can prove your loss because otherwise, even though some of these
currencies are no longer really available, the IRS will say that they haven’t actually
closed out.
Yeah, I can.
In my opinion, it’s worthless.
But yeah.
The transaction has to occur first.
Exactly.
Exactly.
100%.
Good job, Joe.
Okay.
Thank you.
All right.
Appreciate it.
All right.
Really quick, let’s hit John.
John in Tullahoma.
Hey, John.
Hey, Dr. Roddy.
I’ve got a question regarding gift tax.
So if I wanted to gift some real estate property to my children, so son and daughter,
and would there be a gift tax required on that from either my side or their side?
So you want to gift them some real estate?
Is that what you said?
Yes.
Okay.
So the way it would work is whatever your basis is in that, let’s just say you pay $200,000
for this piece of real estate.
You could theoretically gift them that $200,000 on a gift tax return.
You would owe nothing because you didn’t have any gains.
And they would pay nothing because you’ve already paid tax on it when you purchased
that originally, right?
I mean, the money was tax-free.
So there would be nothing on those.
And then if they sell it, they then would have to pay the capital gains tax on that.
Now, just as a point of interest, I would probably not do that.
I would probably let them, you know, theoretically, if you die, they get a step-up in basis and
nobody pays the capital gains tax.
But if it’s a home that they’re living in or something like that, and you just want
to put in their name, then you need to give it to them at the cost basis, not at the current
market price.
Gotcha.
Okay.
So how would that apply for money if you were to gift them money?
Is there any–
Same thing.
I mean, exactly the same thing.
If you gift them money, the biggest thing is anything over the $17,000 that you and
then the theoretic if you’re married, your spouse can give to them, anything above that
needs to be on the gift tax return.
It doesn’t mean there’s any taxes, but we have a lifetime of $11 million that we can
gift.
And so they’re taking the difference.
So if you give someone $100,000, the difference between the $17,000 and the $100,000 is going
to come out of your lifetime gifting.
Okay.
Gotcha.
So you do have to file those?
Yes, you need to file that so that way they can track it.
Yep.
Gotcha.
Okay.
Good deal.
Thank you.
No problem.
Great call.
All righty.
So that was a good call.
And there’s many– and a lot of times people are like, well, how does anyone know?
But it does come down to sometimes.
I had one where they sold the house to their son and they did an actual closing, which
was proper, but then they gifted like $40,000 to their son.
But that became $40,000 in their pocket because they only paid– they sold it for like $200,000
and they only paid like $160,000.
So the difference or the gain, they gifted on the paperwork, but the paperwork was trackable.
So therefore, that $40,000 now became taxable income to them.
The person giving the gift always pays the tax.
The person receiving the gift does not.
So you just have to make sure however you want to give it to them, it’s going to work
one way or the other, and it could be that their tax bracket’s lower than yours.
So it’s better to gift the real estate and let them sell the real estate at a lower tax
bracket than if you were the higher tax bracket.
There are many things you can do that way, but there are paper trails and there’s a lot
of things that are turned in.
So you’re not really hiding anything, in my personal opinion.
So it’s better to have a paper trail.
And I mean, let’s be honest.
The gift limits have changed over my lifetime from as little as $500,000 over our lifetime
to now $11 million, and it could very likely reduce down again.
So the question would always be is what happens if you’ve already given several million dollars
and it goes down to a million?
I don’t know if I know the exact answer.
I’m assuming it gets grandfathered in.
But you know what?
IRS is always funny.
They may find a way to tax you again.
So we’ll have to figure that out when and if that ever happens in the rest of our lifetime.
But right now, we have a big window for gifting, and at least doing the things that you want
to do would be one way of doing it.
And not doing it without a paper trail, in my opinion, is not worth it.
It’s much better to have the tax returns filed for gifting, and then that way if the children
actually inherit or something changes, that was filed on the year it happened.
If you don’t file it, then that’s bound to cause some problems later in life.
All right.
So if you’re working on your taxes, again, people that are already my clients and you
get on my website, drfriday.com, and you click on calendar and you do not see a date open,
call me.
You know the number, 615-367-0819.
Again, 615-367-0819.
Call me Monday morning, and we will get you.
We have dating times open for our clients that are not on that calendar, and so there
is some opening for you.
If you want to send me or email me, you can always email Friday at drfriday.com.
Again, Friday, F-R-I-D-A-Y at drfriday.com.
And again, the website is drfriday.com.
If you’re looking to make an appointment, there’s also the tax organizers out there,
many different things.
Tell us a little bit about me if you don’t know who I am.
Then go on out there.
And then you could also send a message through that website directly to us if you’re still
looking for a date for existing clients.
So that way we make sure all of you are taken care of.
We get your tax appointment in.
Make sure you’re tracking all of your information so that you don’t have to worry about that
either.
And then that way you’re in good shape and you don’t have to worry about missing or having
a problem with your tax situation.
So if you have big changes, guys, this is the time to also look at your W-4s.
If you were married, divorced, had a child, you know, child turned over the age of 17,
you might want to revisit your withholdings on your paycheck because it’s January.
Now we have a whole year.
A lot of times people wait until they get their taxes done, which can be April all the
way down to October.
And then we’re making changes and that makes a big difference.
Alright, it’s Saturday, hope you guys had a great time.