Paying Taxes When Selling an Inherited Vacation House — Lexington, KY

Paying Taxes When Selling an Inherited Vacation House — Lexington, KY

While it may seem great to inherit a vacation house, in actuality it may not be practical to keep the property, especially for tax reasons.  There are many factors to consider when inheriting property, including taxes, any mortgage, and other owners. But if you know you do not plan to keep the property, it is better to sell it sooner, rather than later.  Property like a house or stocks usually appreciates in value and is worth more than it was when the original owner purchased it. If you were to sell the property, there could be huge capital gains taxes. Fortunately, when you inherit property, the property’s tax basis is “stepped up,” which means the basis would be the property’s value on the date of death. For example, suppose you inherit a house that was purchased years ago for $150,000 and is now worth $350,000. You will receive a step up from the original cost basis from $150,000 to $350,000. If you sell the property right away, you will not owe any capital gains taxes. If you hold on to the property and sell it for, say, $400,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale price and the stepped-up basis). If the property is located in a different state from where you live, be warned that there may be a tax for selling real estate and moving to a new state. For example, New Jersey has an “exit tax” on the profits from any sale when you are moving out of state.  For inheritance questions or other estate planning or receiving concerns, call Gayheart Law at (859)...

read more

Special Tax Deduction for 2020 Allows Donations of $300 to Charity Without Itemizing — Lexington, KY

Special Tax Deduction for 2020 Allows Donations of $300 to Charity Without Itemizing — Lexington, KY

As we enter the giving season, there is an additional reason to be charitable. Congress enacted a special provision that allows more people to easily deduct up to $300 in donations to qualifying charities this year. Since the increase in the standard income tax deduction in 2018, only 11 percent of taxpayers itemize deductions, so fewer taxpayers take advantage of the charitable deduction. But to both encourage and reward giving in this difficult year, as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act Congress created a one-time $300 charitable deduction for people who do not itemize on their tax returns. To qualify, you must give cash (including paying by check or credit card) to a 501(c)(3) charity. Gifts of goods or stock do not qualify. While $300 may not seem like much, it can make a big difference to smaller charities. And a lot of $300 gifts can add up.  One thing that’s not clear is whether a married couple filing jointly can deduct $600. While it’s logical that they should be able to do so, the IRS has not clarified this yet. With just four weeks left in the year, time is a-wasting. Here are some places you might take a look at to determine which charity you would like to support before the end of the year: Give DirectlyGiving CompassCommunity Foundation LocatorPhilanthropy TogetherGrapevineCharity NavigatorCharity WatchKristof Impact For more information from the IRS about the tax deduction, click here.  If you would like additional information about tax planning, estate planning, or charitable contributions, give Gayheart Law a call to schedule your consultation, (859)...

read more

Ability to Withdraw Money Early from Retirement Plan, Without Penalty, Expires at the End of the Year – Lexington, KY

Ability to Withdraw Money Early from Retirement Plan, Without Penalty, Expires at the End of the Year – Lexington, KY

If you are experiencing financial hardship due to the coronavirus pandemic, you may want to consider withdrawing money from your retirement account while you still can. The special exemption allowing early withdrawals without a penalty ends soon.  Passed in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows individuals adversely affected by the pandemic to make hardship withdrawals of up to $100,000 from retirement plans this year without paying the 10 percent penalty that individuals under age 59 ½ are usually required to pay. This exemption is only for withdrawals made by December 30, 2020. If you decide to withdraw money from your retirement account, you will still have to pay income taxes on the withdrawals, although the tax burden can be spread out over three years. If you repay some or all of the funds within three years, you can file amended tax returns to get back the taxes that you paid.  To qualify for the exemption, you must meet one of the following criteria: You or a spouse or dependent have been diagnosed with COVID-19You or your spouse have suffered financial hardship due to the pandemic, such as a lost job, a job offer rescinded, reduced pay, business closed, or inability to work due to lack of childcare.  This step should not be taken lightly. Withdrawing money now means your retirement funds will be reduced and limits the retirement plan’s ability to grow. But for some people, it may be the best option to pay bills and avoid running up high-interest credit card debt.  For information from the Consumer Financial Protection Bureau on how the withdrawal exemption works, click here.  For more information about retirement plans or how to proceed during this difficult time, call Gayheart Law at (859)...

read more

Annuities and Medicaid Planning in Lexington, KY

Annuities and Medicaid Planning in Lexington, KY

In some circumstances, immediate annuities can be ideal Medicaid planning tools for spouses of nursing home residents. Careful planning is needed to make sure an annuity will work for you or your spouse.  An immediate annuity, in its simplest form, is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life. In most states the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the community spouse, it’s not a problem. In order for the annuity purchase not to be considered a transfer, it must meet the following basic requirements: It must be irrevocable–you cannot have the right to take the funds out of the annuity except through the monthly payments.You must receive back at least what you paid into the annuity during your actuarial life expectancy. For instance, if you have an actuarial life expectancy of 10 years, and you pay $60,000 for an annuity, you must receive annuity payments of at least $500 a month ($500 x 12 x 10 = $60,000).If you purchase an annuity with a term certain (see below), it must be shorter than your actuarial life expectancy.The state must be named the remainder beneficiary up to the amount of Medicaid paid on the annuitant’s behalf. Example: Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $128,640 (in 2020). However, Mrs. Jones has $238,640 in countable assets. She can take the difference of $110,000 and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life. In most instances, the purchase of an annuity should wait until the unhealthy spouse moves to a nursing home. In addition, if the annuity has a term certain — a guaranteed number of payments no matter the lifespan of the annuitant — the term must be shorter than the life expectancy of the healthy spouse. Further, if the community spouse does die with guaranteed payments remaining on the annuity, they must be payable to the state for reimbursement up to the amount of the Medicaid paid for either spouse. All annuities must be disclosed by an applicant for Medicaid regardless of whether the annuity is irrevocable or treated as a countable asset. If an individual, spouse, or representative refuses to disclose sufficient information related to any annuity, the state must either deny or terminate coverage for long-term care services or else deny or terminate Medicaid eligibility. Annuities are of less benefit for a single individual in a nursing home because he or she would have to pay the monthly income from the annuity to the nursing home. However, in some states immediate annuities may have a place for single individuals who are considering transferring assets. Income from an annuity can be...

read more

Make Sure Your Beneficiary Designations Match Your Estate Plan – Lexington, KY

Make Sure Your Beneficiary Designations Match Your Estate Plan – Lexington, KY

Many types of property and investments pass outside of probate and allow you to designate who will receive them after your death. It is important that these designations are kept up to date and are consistent with the rest of your estate plan.  When you open up an investment account or retirement plan or buy life insurance, the company encourages you to name beneficiaries who will inherit the property on your death. The choice you made at the time may not have taken your estate plan into consideration. To review your beneficiaries, get a copy of all of your beneficiary designation forms. Check to make sure that your beneficiaries are consistent with the rest of your estate plan or, if they are different, that the difference is intentional. If you made these designations online, print a copy of the page so that you also have a paper record. Once you have collected all of these forms, put them in a folder with your other estate-planning documents so that you and your heirs can quickly and easily find them in the future.  In determining how to make your beneficiary designations, the following are the considerations for each type of account: Bank and investment accounts. If you have a revocable trust as part of your estate plan, you can make the trust the owner of all of your bank and investment accounts. This way you avoid the need to name anyone as beneficiary and you still avoid probate. Then, all of the protections provided in the trust–for instance, that children do not receive their inheritance until a certain age or provisions for who receives the funds if a beneficiary predeceases you–will apply to the accounts. If you’re not using a revocable trust, simply name those who will receive your estate under the terms of your will. Or you have the option to name no one. If you do not designate a beneficiary, the account will pass according to the terms of your will and, while you won’t avoid probate, you’ll make sure that the people you want will receive the assets, that your personal representative will be in charge, and that any changes you make in the future–such as disinheriting your wayward nephew– will apply to the accounts. Life insurance. Unlike bank and investment accounts, the ownership of many life insurance policies–especially those that come as an employment benefit–cannot be transferred to your revocable trust. And there is really no benefit to doing so in any case (although there might be some tax and long-term care planning reasons to transfer property to irrevocable trusts). Instead, the beneficiary designation is the most important decision. If you have a revocable trust, you may name it as the beneficiary for the reasons mentioned above. Or you can name particular individuals. The beneficiary designation form will permit you to name alternates in the event that the first person or people you name predecease you. Retirement plans. First, don’t transfer your retirement plans to your revocable trust. The only way to do so is to liquidate the plan first, which would be a taxable event. Second, don’t name your revocable trust as a beneficiary of your retirement funds without consulting your lawyer. In most instances, if your spouse is not the beneficiary, the retirement plan will have to be...

read more

A Modest Social Security Increase for 2021

A Modest Social Security Increase for 2021

Tax Information and Answers in Lexington, KY The Social Security Administration has announced a 1.3 percent rise in benefits in 2021, an increase even smaller than last year’s.  Cost-of-living increases are tied to the consumer price index, and a modest upturn in inflation rates and gas prices means Social Security recipients will get only a slight boost in 2021. The 1.3 percent increase is similar to last year’s 1.6 percent increase, but much smaller than the 2.8 percent rise in 2019. The average monthly benefit of $1,523 in 2020 will go up by $20 a month to $1,543 a month for an individual beneficiary, or $240 yearly.  The cost-of-living change also affects the maximum amount of earnings subject to the Social Security tax, which will grow from $137,700 to $142,800. For 2021, the monthly federal Supplemental Security Income (SSI) payment standard will be $794 for an individual and $1,191 for a couple. Some years a small increase means that additional income will be entirely eaten up by higher Medicare Part B premiums. But this year, that shouldn’t be the case. The standard monthly premium for Medicare Part B enrollees is forecast to rise $8.70 a month to $153.30. However, due to the coronavirus pandemic, under the terms of the short-term spending bill the increase for 2021 will be limited to 25 percent of what it would otherwise have been. Most beneficiaries will be able to find out their specific cost-of-living adjustment online by logging on to my Social Security in December 2020. While you can still receive your increase notice by mail, you have the option to choose whether to receive your notice online instead of on paper. For more on the 2021 Social Security benefit levels, click here. To give local help and answers to your Social Security questions, call Gayheart Law at (859)...

read more