Q: I traded in my old Explorer for a new Chevy Silverado 2500HD 4WD. This truck has a curb weight of over 6000 LBS. The salesman told me the new truck has a tax advantage due to its weight. Please explain.
A: Vehicles weighing more than 6,000 # (loaded gross weight) but less than 14,000 # (SUVs and Vans) depreciate as any other business asset. However, the Sec 179 deduction is limited to $25,000.
BUT – Vehicles weighing 6000 # or more may be treated as business property and not limited if:
- Name of company is on the vehicle AND
- There is seating for more than 9 persons behind the driver OR
- There is no seating behind the driver and the cargo area is at least 6 ft long AND
- Vehicle has been modified with one of the following,
- Hydraulic lift or side lift panels
- Tool Boxes, shelving or other mounted equipment
- Permanently mounted tanks or drums
- AND The primary use is to transport particular type of load – contractor, farming, drilling, refueling, etc
Q: Last year we paid our daughter’s house note for 8 months. We will be paying it this year as well. Can we claim the interest on that?
A: You must have an ownership interest in the property to claim the mortgage interest and property taxes. If you don’t, your daughter can quickclaim and add you to the deed..
Q: I owe federal and state taxes. Isn’t there some place on-line where I can use a credit card to pay the tax I owe?
A: Yes. You can go to www.1040paytax.com or www.officialpayments.com to pay both the state and the federal. Be aware of the fee for using their service! You can also go to www.IRS.gov and click on Make a Payment to make the federal payment. You will be asked to prove your identity and then make your payment with your credit card or debit your bank account. To make the state payment, Google your state income tax and look for a Make a payment. Not all states offer an on-line payment method.
Q. I have a question about donating a car. I was thinking about donating my existing car, a 2001 Volvo, what are pros/cons? Does the value of the donated car impact my tax returns, etc?
A: Go to www.kellybluebook.com or www.edmunds.com and find out the value of the Volvo. This is the maximum amount you can write off as a donation on your tax return, but it doesn’t stop there. You need a statement from the charity you are donating the car to that tells you whether they are using the car themselves or sending it to auction. If they are using it themselves, the letter should state a value (at or close to the bluebook amount) and you can deduct that amount as a charitable donation on your tax return. If it is going to auction, you can’t take a donation write-off until it is sold and only for the amount of the sale.
Q: I cut my hours at work so I can help my sister who is disabled and lives alone. She isn’t my dependent, so is there any tax relief I can get for the loss in pay?
A: Since she isn’t your dependent, there isn’t anything for you on the federal return (except your income is lower so your tax will be lower). You may have some relief on your state return. GA, for instance, has a Caregiver Credit. To qualify, the person receiving the care must be a family member but does not have to be living with you. She must be permanently disabled or age 62 or older. The credit is 10% of the money you spent for housekeeping, yard work, day care services, or medical equipment, supplies, etc. The maximum credit you can use to offset your GA state taxes is $150 (10% of a maximum allowance of $1500) or the amount of tax you owe, whichever is lower.
Q: My mom sold me a house which she inherited from my Grandfather. She intends to distribute the funds equally (approx $45,000 each) to my sister, brother, and me. Since this is originally an inheritance from our grandfather, will we have to pay gift tax? And if so, does it really apply to me since the money she is giving me is derived from the sale of the house to me? Seems to me I wouldn’t really owe taxes until I sell the house.
A: Your mother is the loser. Here is how it works:
The house was inherited by your mother from your grandfather. Since your mother is still living, it is not an inheritance to you and your siblings. If your mother passes it on, it is a gift from your mother. The ones who receive the gift are never taxed – it is your mother who will pay the gift tax (because she is moving an asset out of her “possibly taxable-in-the-future” estate).
Here is how the money works.
Capital Gain: The cost basis of the house in your mother’s hands is what its value was on the date of her father’s death (because she inherited it from him) plus any improvements she added while she owned it. She sold that house to you. The difference between what she sold the house for and her cost basis is a capital gain to her. If she lived in the house for two of the past five years, the capital gain (up to a maximum of $250,000) is forgiven. If she didn’t live there, she owes tax on the capital gain when she sells the house.
Gift Tax: Your mother is allowed to gift up to $16,000 per person per year tax-free. She will owe gift tax on the remainder when she distributes the money to each of you.
FYI: Your cost basis in the house is what you paid for it or its market value when you bought it from your mother, whichever is less.
Q: I just funded my and my wife’s Roth at $5,000 each. Then I remembered there was an income limit for Roths and my income is above the limit, but I’ve already sent the money. Who is going to know? What will happen if I let it ride?
A: Your income is too high to contribute to a Roth. You CAN contribute, though, to a non-deductible Traditional IRA. What you want to do is called a recharacterization. Contact the company and ask them to:
a) send the money back to you, or
b) recharacterize it to a traditional IRA.
Don’t mix the new contribution, which is after-tax money, with any 401k rollovers, which are pre-tax money and fully taxable when you make a withdrawal. Since this new IRA is after-tax money, you will pay no tax when you withdraw from it.
A word of caution: a reporting form goes to the IRS annually. If you leave it in the Roth, there is a 6% annual Excise Tax until you take it out.
Q: We are now 74 years old. My husband is employed and will make about $39,000, and I worked a few days and grossed around $1,600. We both draw Social Security. We also have $30,000 in Capital Gains this year and our mandatory withdrawal is around $8,000. How much could we contribute to IRA’s and what type would you suggest and is there any penalty for withdrawals since we are definitely over 59 1/2?
A: You have to pay tax on your RMD (Required Minimum Distribution) once you are over 72. You won’t get hit with the 10% early withdrawal since you are over 59 ½. If you are going to put money aside, you have a few options.
- You can contribute to a Traditional IRA up to $7,000 each. Part of your contribution is a Spousal IRA based on your husband’s earnings since your earnings were less than $7,000.
- Instead of receiving your RMD, either or both can opt to donate the amount to a charity. It is called a QCD (Qualified Charitable Contribution). If it goes directly from your fund to the charity, it doesn’t get reported on your tax return as taxable income. If you receive it and then donate it, you pay tax on the distribution and then write it off as an itemized deduction. The problem with this option is that a lot of couples in your position no longer have a mortgage and use a standard deduction instead of itemizing.
- Instead of putting the money into a traditional IRA, you could each put the same amount into a Roth IRA. Here’s the bad and good about that: Bad: You can always withdraw the amount you put in, but a Roth must be opened for 5 years before you can withdraw the interest. Bad: The amount you put into the Roth is not deductible on your tax return. Good: The amount you put into a Roth is not subject to the IRA withdrawal (RMD) rules. Because it is a Roth, it will grow tax-free and you don’t have to make any withdrawals. If you do withdraw the money, it is not taxable. Good: If you already have a Roth, the 5 year rule is already ticking. Adding more into the Roth this year will count as if it was in there from the beginning.
Q. My daughter will graduate this year and has about $30,000 in her 529 Plan. She owes approximately $25,000 in student loans. How does she go about paying them off? I’m told that once she graduates, she can’t touch the 529 and there will be penalties if she does.
A. There is a new rule for 529 plans that passed with the Retirement Act (SECURE Act) in 2020. You can use up to $10,000 (lifetime) to pay off student debt. Since your daughter owes $25,000, she can’t pay it all off with her 529 Plan but as long as she leaves it in the Plan, it is growing tax-free. I think she should go ahead and set up a repayment plan based on her total student loan owed. She gets to write the interest off each year as long as her earnings are less than $80K. Once her earnings top $85K, she can’t write off student loan interest. There isn’t a time deadline for using the $10,000 from her 529 to pay the student loan, so if she wants to make regular monthly payments up until her income tops $85K or until she only owes $10,000 more and then pay it off, that’s OK too.