The Hidden Tax Trap.
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- Опубликовано: 9 сен 2024
- There is a hidden tax trap ready to snap on the budgets of millions of unsuspecting Americans, perhaps even you. It is the limited capital gains tax exemption for the sale of a primary residence. That exemption amount has remained unchanged since 1997, but rising real estate policies are making it increasingly obsolete.
• So first, Let me give you an example, my neighbor Bob.
• Decades ago, Bob, a recent divorcee, bought a new two-story home in an attractive neighborhood for $30K. The last time Bob looked at the value of his house was before covid, when it was worth $250k.
• Age has been catching up with Bob, and he decided to sell his two-story home and move into a retirement community. Bob put his house up for sale and was surprised to receive a full-price cash offer in one day for $550k!
• Bob remembers that there is a tax exemption for home sales, so he puts the money in his pocket, but when he files his taxes, he gets a big surprise! Bob has a modest taxable retirement income of $50k a year, so he is subject to a 15% long-term capital gains tax rate, although people with higher income can pay 20%. And although he only makes 50K a year before taxes, when Bob prepares his tax, he finds he needs to reach in his pocket and cough-up an additional $40,500 federal tax payment, a $13,500 state tax payment and potentially higher Medicare rates, like -a $500+ monthly IRMAA surcharge! Poor Bob is going to pay more than his total annual income in capital gains taxes!
• The one thing you will likely conclude from this example is that you don’t want to be a Bob. I was going to use the name “dick” in this example, but when I wrote that last line, I figured I’d better change it. And there are some steps you might take to avoid this problem. But first some history:
• Adopted under President Clinton in 1997, the exclusion of 250K gain for a single or 500K for a couple who sold their primary residence of two years was then generous! The average sales price of a home was around $145K!
• But currently the average home in the US sells for almost three times more at $417K! Profit can easily exceed the $250k sales exemption for long-time owners.
• The tax exclusion is not indexed, it has stayed the same since 1997 and therefore acts as a stealth tax increase. If it had been indexed, in today’s dollars the exemption would have almost doubled and be adequate to protect many middle-class home sellers. It’s very much like the tax on social security which initially applied to 6% of beneficiaries, but because it is not indexed, now applies to more than 50% of beneficiaries.
• Now do you think Congress understood this issue when the adopted the law? Of course they did. But they are much more concerned about giving tax breaks to their big dollar donors. Numerous celebrity billionaires pay no or little tax a year. But middle-class voters keep electing and re-electing congressional clowns and get distracted by hot-button issues while bread and butter issues like rising middle-class taxation get ignored.
• So what can you do to avoid this tax trap?
• First, know your numbers. Review your records and be familiar with your tax basis in your home, usually what you paid for it, plus certain capital improvements like adding a sunroom or a garage.
• Second, keep your records. When you face substantial tax liability, you want to be able to prove your figures to the IRS.
• Third, move before you exceed the exemption figure. They say all politics is local, and I am going to borrow that and say all tax issues are personal. Values have risen so much in my area that today it is possible but not likely that I would exceed the exemption, but if prices keep going up at this rate, it is all but certain that in a few years I will. But the tax exemption is “reusable” every two years. So if I sell my two story home today, and buy a neighbor’s one story home at the same price, my tax basis in the next home will be the new purchase price, leaving me clear of the tax trap for quite a while.
• The fourth option is the opposite, never move. You are not subject to the tax trap unless you sell your home. Keep it. People talk about there being a “death tax,” but quite the opposite can be true. When you inherit a house you generally get a “stepped up basis” with a date of death value. If Bob kept the house until his death and left it to his kids, they would get the $550k basis and pay no capital gains tax if they sold it at that price.• And a final option, add a tax exemption to your family. If Bob married his longtime girlfriend, his tax exemption would double, giving him and Kathy a tax break that could fund a nice honeymoon!
• If you are facing this issue, please consult a qualified financial professional in your area for expert advice.
Hello “GCHiker”! Thank you for showing us such a wonderful video! I feel so happy! I look forward to your next work! Have a nice day!
Thank you, you are too kind.
An issue of growing importance to retirees. Thank you for raising this issue.
Thanks for watching!
Useful information well presented. Thank you GC hiker.
Glad it was helpful!
I have enjoyed this video very much. I am glad you took time to inform us about this hidden tax trap. Good job and thank you for sharing.
Thanks so much!
I thought we were going to be able to pay our taxes by filling out a postcard. There certainly are a lot of complex tax issues, and being wrong is very expensive. Thank you for raising this issue.
Ah, the promise of tax simplification. But it seems there are too many vested interests to make it happen, including, probably Realtors and this tax exemption. I agree, it is much too complex, but who will pay when it is simplified?
Remember the 9-9-9 tax proposal?
It is an interesting video and I think everyone should watch it and be aware of it.
@@Mr.DsBackyard Thank you.
22 - ❤👍Great video. Nice shots. The images are beautiful.
Thanks so much!
Very good information to have
Thank you!
Thank you for sharing this issue to help others. Liked how you gave an example and then covered this history of the issue too.
Thanks, I was unsure about giving the example first, so thanks for saying you like it. I always try to improve the quality of presentation, but sometimes it is slow going!
I never really thought about this, thank you for raising an interesting issue which may be important in upcoming years.
I think it is best to be aware of the potential issue, even if it is years down the line. Thanks for your comment.
Useful information well presented.
Thank you.
Yeah true.
Thank you.
The only things for certain are death and taxes. But you point out ironically that you can use death to avoid taxes! You learn something new everyday.
Clever observation. In many cases, it seems, death provides heirs with a tax advantage. Maybe seniors think selling a home will help their kids, but sometimes holding onto it is an alternative strategy.
Do you think real estate agents advise their clients of this when they list the house for sale? I doubt it. I guess it’s let the taxpayer beware!
That is a very fair question. I wonder if any Realtors viewing this can answer that question?