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Taxpayer asks:

If the sole owner of a home passes – is there a capital gains write off or is it lost at death?  If not lost at death, is there a time limit?

Taxgirl says:

When an owner – sole or otherwise – of a home passes away, there’s a step-up in basis. What that means is that the fair market value of the home as of the date of death becomes the new basis (if there are multiple owners, the new basis is pro-rated). That’s true no matter what you paid for the house originally.

Here’s a quick example. Let’s say your mother bought her home for $100,000. And let’s also say that it was worth $250,000 at her death and you sold it a year later for $300,000. The capital gain on that sale is $50,000. That’s because the original purchase price ($100,000) is no longer applicable. The new basis is $250,000 – that date of death value. You calculate your capital gains based on the regular formula: selling price – basis = capital gains (or loss). In this case, that’s $300,000 – $250,000, for a capital gain of $50,000.

There’s no time limit on the sale for capital gains purposes. The basis doesn’t expire or fade away. However, the longer you hold onto the residence, the more likely it is to appreciate in value (thus increasing the capital gain). Remember this is a federal capital gains question: there may be applicable state and local probate and tax laws. 

Finally, there’s typically no write-off or loss for the sale of personal property: capital losses do not apply to a personal residence or other personal use property like your car. If you sold the home for $10,000, you can’t usually claim a loss on the difference between the basis and the selling price. Losses associated with property used in a trade or business and investment property, like stocks, may be deductible. However, that’s where an exception might apply for estate property: if you argue that the home is held by the estate for investment purposes, you may be able to treat it as a capital asset (and thus, realize a loss). This can be a tricky concept so it’s best to consult with a tax professional.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Hi! Thank you for your time.

My husband and I are volunteering at a charity event for a few days, and we have to have a babysitter. She’s babysitting at no cost to us (she’s family), but can she deduct any of her babysitting expenses? Would it be charitable giving on her part? Thank you!

Taxgirl says:

Unfortunately, no. You cannot claim the value of your time as a charitable deduction on your federal income tax return even if you’re volunteering directly for a charity. This is true even if you can value your time (for example, $10/hour for babysitting or $60/hour for house painting).

You can typically deduct associated expenses, like mileage, for volunteering with a qualified charitable organization; in this case, however, your babysitter is doing this as a favor for you (which is super nice) and not as a direct benefit to the charity. Those expenses would not be deductible.

(On the plus side, your babysitter is not missing out on much. Congress hasn’t changed the charitable mileage deduction since the Clinton era, and it remains just 14 cents per mile.)

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Reading about you connected me to this site. I had a small question.

That is can I double my deductions on my 2019 taxes being that last year I took the standard deduction. Such as House taxes, mortgage, charitable donations. 

Thank You

Taxgirl says:

I’m glad that you found the site!

Under the Taxpayer Cuts and Jobs Act (TCJA), more taxpayers are claiming the standard deduction. The changes typically benefit taxpayers who might have some itemized deductions (like home mortgage interest) but not so much that they exceed the new standard deduction amounts. The amounts are pretty generous with the standard deduction amount for married couples starting at $24,400 in 2019 (higher standard deductions may be available for those over age 65 and/or blind). You can find the numbers for 2019 here and for 2020 here.

If the numbers work out for you to claim the standard deduction in 2019, that doesn’t necessarily mean that it will work out the same for 2020. Circumstances change. And it’s absolutely the case that you can opt to claim the standard deduction in one year and itemized deductions in another. 

It sounds as though you are asking whether if you claim the standard deduction in one year – and therefore have unused itemized deductions in that year – you can simply roll those deductions into the next year. The answer is no. The rules regarding deductibility remain the same as always: you’re entitled to the deduction in the year the expense is paid. So, if you pay home mortgage interest in 2019, you can only claim that expense in 2019. If you claim the standard deduction for that year, then your deduction for home mortgage interest is “lost” (I used quotes here because you’re still benefiting from the higher standard deduction that year).

But this does lend itself to some planning ideas. If you expect that you might have higher expenses in one year – say, you have a significant medical procedure coming up in 2020 – you can adjust the timing of your other costs. So instead of writing that check to charity in 2019, consider doubling up in 2020. That’s called “bundling” – the idea that you can bundle expenses in one year to produce a higher itemized deduction total. It’s totally legitimate planning, but again, it only works if you pay the expenses in the year that you intend to claim the deduction.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

In September 2017 we refinanced our house to pay off crushing credit card debt we incurred during the recession and could not hope to get out from under. 

My question — Is the 2018 refinance law stating that we can only use home equity to pay for work on our dwelling/property retroactive or can we still claim that since it was before that took effect in December 2017? 

I appreciate your time and your blog with so much confusing tax information. 

Taxgirl says:

I agree that this is one of the more confusing pieces of the Tax Cuts and Jobs Act (TCJA) because there are so many working parts. On the one hand, the new law limits the deduction but also allows for some grandfathered bits and tweaks some definitions. With that, a quick recap is probably in order.

Under prior law, if you itemized your deductions, you could deduct qualifying mortgage interest for purchases of a home up to $1,000,000 ($500,000 for married couples filing separately) plus an additional $100,000 for home equity debt. The interest on the home equity debt was deductible no matter how you used the debt, so long as the total of the mortgage and the home equity debt didn’t exceed the fair market value of your home. With those rules, the loan you took out before the TCJA took effect would have been deductible.

The new law limits the amount of debt that qualifies for the home mortgage interest deduction. Beginning in 2018, taxpayers can only deduct interest on $750,000 of new qualified residence loans ($375,000 for a married taxpayer filing separately). The limits apply to the combined total of loans used to buy, build, or substantially improve your home (and a second home, if you have one). 

Congress recognized that some taxpayers bought homes in reliance on the old law, so they grandfathered some of those provisions. Specifically, if you took out a home mortgage before December 15, 2017, you can still deduct the interest payable of up to $1,000,000 of home acquisition debt.

That, of course, left a lot of taxpayers confused: What about home equity loans?

To help, the IRS issued guidance in 2018 which made clear that home equity loans may still be deductible – no matter what they are called – so long as they are used to buy, build or substantially improve your home. However, the TCJA otherwise suspends the deduction from 2018 through 2025. In other words, if the home equity loan is used for a purpose other than to buy, build, or improve your home, it is no longer deductible.

So, is that rule grandfathered, too? Unfortunately, no. Even if the home equity loan was taken out before the law was changed, if it was used for a purpose other than to buy, build or improve your home, it is not deductible. That would include using the loan to pay down other debt.

Here’s a quick example.

  • Let’s say that you bought a home in 2015 worth $900,000 and took out a mortgage worth $800,000. And let’s say that you took out a home equity loan in 2016 worth $75,000 that you wanted to use to pay off your credit card balances.
  • In 2015, you could deduct the interest on the mortgage. In 2016 and 2017, you could deduct the interest on the mortgage and the interest on the home equity debt. But beginning in 2018, you could only deduct the interest on the mortgage on the first home – even though it’s over the $750,000 limit. The rule which grandfathered up to $1 million of home acquisition debt would apply, but the home equity loan interest would not be deductible.
  • If, however, you had taken out a home equity loan in 2016 worth $75,000 to pay for a new kitchen and bath, the interest on the loan would still be deductible because it was used to improve your home.

It’s no wonder that you’re confused: the rules are anything but simple. I hope, however, that clears it up for you. For more info on home mortgage interest, check out IRS Pub 936 (downloads as a PDF).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

I paid short term and long term capital gains on my Bitcoin when I moved it from Coinbase into my hardwallet. Do you see any reason I should have to pay more taxes again when I spend some of these same Bitcoins from my hardwallet? Thanks.

Taxgirl says:

This is a great question. Guidance on the tax treatment of cryptocurrency has been limited (and late in coming), so there’s still a lot of confusion.

Some background might be helpful. In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. 

That means, generally:

  • For those taxpayers buying and selling cryptocurrency as an investment, calculating gains and losses are figured the same as buying and selling stock. That’s true, as well, when it comes to basis, holding period and a triggering (taxable) event.
  • For those treating cryptocurrency like cash – spending it directly for goods or services, or using it to buy other cryptocurrencies – the individual transactions may also result in a gain or a loss.

In your case, the trick is to figure the triggering (taxable) event. A taxable event is typically a sale or disposition of an asset. When it comes to cryptocurrency, a taxable event typically occurs whenever the crypto is traded for cash or other crypto or whenever the crypto is used to purchase goods or services.

It’s also true that cashing cryptocurrency out of an exchange or similar platform may be treated as a sale – even if you’re forced to withdraw it. It sounds like that’s what you did. You moved Bitcoin from one platform to another and paid the resulting tax on the gain. 

But you’re not done yet. When you spend your Bitcoin, you may be subject to tax again. That’s because you’ve experienced another triggering (taxable) event. The good news is that your basis will be adjusted accordingly.

Here’s an example.

Let’s say that you bought Bitcoin for $100, and when you moved it, it was worth $300. The gain was $200, and you paid tax on the gain.

Let’s assume that your Bitcoin are worth $350 when you’re ready to spend it. You will pay capital gains tax again – but using a new basis based on the value of the move from your last transaction.

So, in the first instance, it’s $300 (move price) – $100 (original cost) = $200 of gain. In the second instance, it’s $350 (value at the time you spent it) – $300 (new basis) = $50 of gain. All totaled, you have $250 in gain spread out over time. It’s the same result as though you held onto it for the entire time: $350 (value at the time you spent it) – $100 (original cost) = $250.

But what if it had gone south? Let’s say it was only worth $150 when you spent it. Then:

$150 (value at the time you spent it) – $300 (new basis) = -150 (you have loss).

You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses and the amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations and restrictions.

Capital gains tax rates are generally favorable.

Capital gains rates for long term gains (those held more than a year) range from 0% to 20% while short-term capital gains are taxed as ordinary income.

You’ll report all of your realized gains and losses on Schedule D. You don’t file a Schedule D if you don’t have any realized gains or losses: even if the value changes, if there’s no sale or disposition, there’s nothing to report.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

So I was trying to figure out how screwed we (my wife and I ) are because of the new 2018 “tax cuts” and it looks like we lost about 16k worth of deductions. we paid approx. 22k in state, local and property tax (Paul Ryan would call this the SALT tax) but the Treasury now limits this deduction to 10k. So we lost 12k in deductions there. Also because of the new tax law our charitable tax deductions are now worthless to us so a loss of about 4k there for a total loss of 16k in deductions, or in other words I now owe an additional 4k in taxes. SOME TAX CUT! So what is part of the solution? I am now going to stop making charitable contributions and just put the money in a savings account. After about 10 years I will have about 40k in this saving account and if I donate it then I will be able to deduct nearly all of it because I will be far in excess of the standard deduction and I will qualify to deduct it again! I only point this out here because I have not seen a single tax account recommend this but for many people this makes sense.

Taxgirl says:

This is a great strategy. I’ve been encouraging folks to do something similar: it’s called bundling gifts. The idea, as you noted, is to alter the timing of your charitable giving game plan to pack the biggest punch. The reason, of course, is that with the doubling of the standard deduction (you can see the 2018 tax rates and other tax changes here), there’s a reduced incentive to itemize. Since you must itemize to claim a charitable deduction, some taxpayers won’t benefit by giving to charity in one year.

So, for example, instead of donating $1,000 annually for each of five years, consider giving $5,000 all at once. It’s the same gift as before, but if you coordinate it with your other potential deductions, you can take advantage of the deduction in a year you itemize.

One thing to keep in mind: as the law currently stands, the standard deduction/Schedule A scheme will remain in place through 2025. I tell taxpayers to plan using today’s laws because what one administration puts in place, another can take away – speculation is hard at the best of times. We aren’t sure what’s going to happen in 2026, but we have some inkling about what should happen for the next seven years. Keep those dates in mind when planning.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

I am married and due to my husband’s tax debt, we file as married filing separately.  I bought a house recently in my name only that we live in together, and he pays 1/2 of all house expenses.  Is this considered income to me?  The state we live in is Illinois.

Taxgirl says:

If you file as married filing separately, that means that you are reporting only your income and claiming only your deductions; your spouse’s income and expenses are reported separately.

Splitting household expenses happens all of the time and for all kinds of reasons (we do it in my family, too). Typically, since household expenses are personal in nature and are not deductible, there’s no corresponding income. So, from a federal income tax perspective, your spouse’s payments to you to help cover household expenses are tax neutral – in other words, no harm, no foul.

One quick caveat: You didn’t specifically reference a mortgage but if you do have a mortgage, the ownership and payment rules still apply for purposes of any home mortgage interest deduction. Also, remember that when you file separate returns, you and your spouse must both claim the standard deduction or both of you must itemize your deductions (you can’t itemize while your spouse claims a standard deduction).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

Does H&R Block allow you to use a cosigner for Emerald Advance?

Taxgirl says:

Emerald Advance is a prepaid card for your tax refund.

I don’t work with this kind of product, so I don’t know the details. To get your answer, I went right to the source. According to an H&R Block spokesperson, applications for Emerald Advance are for individuals, and there is no co-signer or co-applicant. If married, both spouses can apply. Here are the full terms and conditions (downloads as a PDF).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

Hi! My husband and I had a whirlwind beginning to our relationship.  Long story short, we got married in secret and still haven’t told our families. I share an accountant with my entire family and my mother is involved with my taxes because of different financial situations we have in our family.  I don’t trust my accountant to not share this information with my mother, so can we both file as single without getting in trouble or anyone finding out?

My husband doesn’t have the same permanent address as me and he’s filling in a different state.

Thank you!

Taxgirl says:

It doesn’t matter what you put on your Christmas cards: when it comes to taxes, married is married. For federal income tax purposes, marital status is determined by state law as of the last day of the calendar year. If you are married on December 31, 2018, you are considered married for the 2018 tax year.

There are five filing statuses to choose from:

  • Single;
  • Married Filing Jointly (MFJ);
  • Married Filing Separately (MFS);
  • Head of Household; and
  • Qualifying Widow(er) With Dependent Child.

(You can find out more about filing status here.)

If you’re not married because you were never legally married or you were legally separated or divorced according to the laws of your state, you can file as single. You can’t file as single just because you feel single or want to file as single.

If you and your husband both file as single, you may be taking advantage of tax breaks that you’re not entitled to claim. For example, the student loan interest deduction is per tax return, not per taxpayer. So while a married couple would be limited to the $2,500 cap, two singles would be limited to a $5,000 cap. Choosing the wrong filing status can also skew phaseouts and limitations. The result is that your entire return could be flawed. The bigger problem is, of course, that by choosing the wrong filing status, you’re lying on the return.

If you’re found out, you’ll have to repay the tax that you should have paid if you had filed properly. You’ll also likely have to pony up penalty and interest.

Additionally, under Title 26 USC § 7206(1), a taxpayer who “[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter” is committing a crime.

Keep in mind that you’ll be asked your filing status for tax purposes more than once. In addition to your federal form 1040, you may have to fill out state and local tax forms. And, of course, many informational forms and schedules require you to provide your filing status. For example, remember form W-4? It helps your employer determine how much federal tax to withhold from your paycheck. To do that, you have to report your filing status, and as with the federal form 1040, you sign under penalty of perjury.

There are non-tax reasons why this isn’t a good idea, too. If you want to apply for a mortgage or other loan which requires copies of your tax returns, you’re going to have to keep perpetuating the lie. Ditto for health insurance and other work-related benefits like retirement accounts, as well as legal contracts like deeds and mortgages which may require you to offer proof of marital status. How you answer those questions could have both legal and tax consequences.

With so many moving parts, keeping up with the lie is going to catch up with you. As Mark Twain once said, “If you tell the truth, you don’t have to remember anything.”

The bottom line is that this definitely isn’t a good strategy on the tax side. Only you can figure out whether it’s a good strategy on the family/relationship side, but it might be worth considering whether you want to start your new life with a lie. Best of luck.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

An enrolled agent has had my tax papers for over a year and a half. She does not return my calls. California is now coming after me for 2015 and 2016 taxes. I would like to pay these back taxes but don’t know what to do since she has all of my paperwork. I left a message saying that the California franchise tax board has taken money from my account and that this needs to be taken care of and she still will not return my call. They have returned most of my money for the time being but said I only until the beginning of November to file. What can I do?

Taxgirl says:

You are entitled to a copy of your return, and to the return of your documents.

I would make one more effort to get your documents back by writing a letter. Send it by certified mail, so that you have proof of delivery. Give your preparer the opportunity to make it right in the event that there’s some kind of misunderstanding.

If you still don’t get results, you can report the preparer to the Internal Revenue Service (IRS). To make a report, fill out federal form 14157, Complaint: Tax Return Preparer (downloads as a PDF).

The form starts out at Section A by asking you some questions about your tax preparer. In your case, you’ll want to select Enrolled Agent (EA). As noted in the instructions, an Enrolled Agent status is granted solely by the IRS upon the individual’s demonstration of special competence in tax matters, by written examination, and passing suitability requirements.

Complete as much of the rest of Section A as you can, including contact information. You should be able to find the Preparer Tax Identification Number on a copy of your tax return.

You’ll explain the bad stuff at Section B. Based on what you’ve said so far, you’ll want to tick the “Preparer Misconduct” box.

On the next page, you’ll spell out as many details as you can provide. I suggest outlining your case in chronological order: be as specific as you can with respect to dates that you contacted the preparer. Use more paper if you need more space.

Fill out the rest of the form with your contact information and sign where indicated.

You’ll want to send the form together with all supporting documentation to the IRS by fax or mail:

  • If by fax, 855-889-7957
  • If by mail, Attn: Return Preparer Office, 401, W. Peachtree Street NW, Mail Stop 421-D, Atlanta, GA 30308

Depending on the tax preparer’s credentials, you may also want to report him or her to their professional licensing and/or disciplinary boards. Because EAs are federally-licensed, there is no mechanism (or need) to report them to a state accountancy board or state bar association. The form 14157 is sufficient.

One more quick note: I would let the tax authorities know that you’ve still been unable to get your documents back and that you have filed a complaint. They might grant you more time or reduce any related penalties.

I’d also consider getting a new preparer to help you file the returns. I know that you don’t have your original documents, but you may be able to retrieve documents you need by checking with your employer and financial institutions. You can also try retrieving them from the IRS via the online transcript service.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.