Money & Policy

More Answers to Your Tax Questions

Experts' tax advice on retirement accounts, inheritances and relocations

Next Avenue recently asked readers to send us their top questions about their 2018 tax returns and we would answer as many as we could. In the story published in late March, three tax experts sorted out confusion about: who needs to file; standard deduction vs. itemized deductions; whether certain expenses are tax-deductible and late filing, late payments and extensions.

In this article, four tax pros and an online tax research platform provide answers to your 2018 tax return questions about retirement accounts and investments; inheritances and death and the rules about relocation and state taxes.

Three of the experts work for Wolters Kluwer Tax & Accounting: Principal federal tax analyst Mark Luscombe, senior estate and gift tax analyst Bruno Graziano and senior state tax analyst Brian Plunkett. The fourth is Mark Steber, chief tax officer at the Jackson Hewitt tax preparation firm. The CCH AnswerConnect online tax research platform from Wolters Kluwer Tax & Accounting also helped provide answers.

Retirement Accounts, Investments and Taxes

If my adjusted gross income is over $31,000 (for a single filer), I can no longer deduct anything I put into a traditional Individual Retirement Account (IRA), correct?

“You can put up to $5,500 ($6,500 if you’re 50 or older) into a traditional IRA regardless of the income you earn. You can still deduct all or part of your contributions when you are covered by a company retirement plan if your income is less than $73,000,” said Steber. And, he noted,“you may be eligible for the Saver’s Credit if you are contributing to an IRA and/or a retirement plan through your employer if your income is below $31,500. This credit is in addition to the tax-deferred contributions you are making to either type of plan.”

Luscombe added: “For 2018, eligibility for a deduction for an IRA contribution phases out for single filers at an adjusted gross income of between $63,000 and $73,000.”

In order to reduce my tax burden, am I allowed to deposit funds into my retirement account? If so, what is the max limit and by what date must I make the deposit?

Luscombe noted the $5,500 limit mentioned above, adding that the figure is also the limit for a Roth IRA. But, he added, “the Roth contribution is subject to income limits — phasing out with modified adjusted gross income of between $120,000 and $135,000 for single filers and $189,000 and $199,000 for joint filers.

Contributions for 2018 tax returns can be made until April 15, 2019, said Luscombe. But “for a 401(k) contribution for 2018, those contributions would have have to have been made by December 31, 2018,” he reminded.

I received a 1099 form for a mutual fund investment which shows: ordinary dividends (box 1a), qualified dividends (box 1b), capital gain distribution (box 2a), foreign tax paid (box 7) and foreign source income. I only need to include these dividends and distributions if/when I cash out of the fund, correct?

Not correct.

“Your dividends must be included on your tax return the year you earn them, even if you are reinvesting the directly into the fund,” said Steber. “You will include the dividends you already paid taxes on with the funds you purchased when determining the basis [cost] of your mutual fund distributions when you take money out. So no, you don’t wait to include the money on your taxes; you must include the dividends this year.”

Luscombe said the answer also depends on whether the money was in a retirement account. The reader would only be correct, he said, “if the fund was held within a qualified retirement account. Since you received a 1099, the fund is likely a taxable account and you are subject to tax on these items for the current year even if you did not cash out of the fund.”

I’m retired and 71 years old, receiving 1099-R’s from IRAs going back 20 to 30 years. They were made with both deductible and non-deductible contributions. 8606 forms were submitted to the IRS for the latter, in years made. How do I not pay taxes on the previous taxed nondeductible portions on this year’s tax forms?

“First, total all the IRAs together. Then, total all your previous non-deductible contributions and use Form 8606 to determine the taxable amount of each year’s distributions,” said Steber. “The tax code only allows you to take a pro-rated amount of your non-deductible contributions to your traditional IRA each year.”

Luscombe said: “You should only need the Form 8606 from the most recent past year to determine your cost basis in IRAs, since the 8606 forms carry over the cost basis from year to year.”

How do I figure the cost of my retirement income? I have been receiving Survivor Plan Benefits for 18 years. It is for life. It cost about $95 a month for the three years until he died in 2001.

“A Survivor Benefit Plan appears to refer to a military retirement plan where the service member paid for the cost of a survivor benefit until death in 2001,” said Luscombe, with assistance from the CCH AnswerConnect online tax research platform. “The payments under the Survivor Benefit Plan are taxable to the recipient, with no deduction for the cost since that cost was deducted from the taxable portion of the service member’s retirement pay.”

Inheritances and Taxes

I received a lump-sum inheritance distribution. Is this counted as income or is there someplace else we claim this inheritance?

“Inheritances are excluded from taxable income and the federal government does not impose an inheritance tax,” said Graziano, citing information provided in the U.S. Master Estate and Gift Tax Guide. “There is, however, a federal estate tax that is imposed on the estates of decedents. The current exclusion amount for federal estate and gift taxes is $11.4 million or $22.8 million for a married couple. In addition, some states including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania impose an inheritance tax, which is a tax on the receipt of inherited property.”

Generally, Graziano noted, state inheritance tax rates and exemptions are more favorable to inheritances received by close relatives of the deceased person and to certain types of property, such as a family home or farm.

It’s a good idea to consult the law of the specific state or states you’re dealing with for more specific information, Graziano advised.

But “earnings on the money you inherited, or gain when you sell an item you inherited, are taxable,” said Steber.

My husband and sister-in-law inherited their mother’s house. The real estate agent valued the house at $250,000. It was sold for $195,000. Will they have to pay any income tax on the inheritance?

“Based on the information provided, there is a potential loss when the house was sold. The loss is considered a capital loss, and if neither your husband, sister-in-law or any of your relatives lived in the house after you inherited it and you sold it for the fair market value, you can claim up to a $3,000 loss on your tax return each year,” said Steber. “If the will did not state how to divide the property, it is assumed an equal division.”

Graziano explained, using information from the U.S. Master Estate and Gift Tax Guide, that heirs are entitled to receive what is called a “stepped-up basis” at death on inherited property. (That’s the value of the home at the time of death.)

Graziano recommended getting an appraisal by a qualified appraiser to establish exactly what the date-of-death value of the real estate is. “Just having a real estate agent say ‘the property is worth X dollars’ will probably not be sufficient to satisfy the IRS,” he said.

And, he added, if the home sold for more than the stepped-up basis amount, the heirs may be responsible for a capital gains tax. Its amount would be determined “based on the amount of the gain and the taxpayer’s overall tax situation for the year of the sale,’ said Graziano.

Relocation and Taxes

I moved from Washington state to Idaho in September. Do I have to pay Idaho state income taxes? I am not sure if this move will be permanent.

“State taxes can be tricky,” said Steber. “While Washington state doesn’t have an income tax, you will have to pay taxes on the income you earned while living in Idaho. How you pay your taxes — as a part-year resident or a nonresident — depends on your status, intention and the state laws.”

Plunkett said the answer will also depend on whether you earned income from a job in Idaho after the move. If so, you “will owe Idaho state income taxes on that income,” even if you didn’t officially become an Idaho resident, he noted.

When moving across state lines, it’s generally wise to speak to a tax adviser in your new state about the tax implications.

I moved out of my primary residence in March 2018 and have placed it for sale with a broker. I have also incurred expenses on that house (utilities, taxes, repairs, mortgage interest). The house has not yet sold. Can I deduct all of these expenses this year?

“You may continue to deduct real estate taxes and mortgage interest if you itemize deductions and comply with the new rules,” said Plunkett. (This presumes you still own the house and are paying the taxes and interest, noted Steber.) Among the new tax rules: a maximum deduction of $10,000 per year for state and local taxes, including real estate taxes.

But utilities wouldn’t be deductible, Plunkett added, unless you converted the residence into a rental property or operated a business out of the home. And repairs wouldn’t be deductible. But they could potentially be added to the home’s “cost basis” and then reduce any potential gain on the sale.

Up to $250,000 of gain from a principal residence’s sale ($500,000 for joint filers) can be excluded from taxes if the home was owned by the taxpayer and lived in for at least two of the last five years.

RIchard Eisenberg, editor at Next Avenue wearing a suit jacket in front of a teal background.
By Richard Eisenberg
Richard Eisenberg is the Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and Managing Editor for the site. He is the author of How to Avoid a Mid-Life Financial Crisis and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Follow him on Twitter.

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