Property Tax Exemption for Senior Citizens

 Reader Question:  In a prior column, you mentioned an exemption from the State of Alabama property tax on your primary home if you are age sixty-five or older.  I’m sixty-five and my wife is sixty-one.  Since the deed is in both of our names, would we qualify for the exemption?  B.M.

Answer:  Yes.  Only one of you must be age sixty-five.

Reader Question:  My dad changed the deed on his beach house so that he has a life estate but at his death, the property goes to me.  He rarely uses the house anymore and he is planning to sell it.  He has told me he’d like for me to use the proceeds for a down payment on a home (I am currently renting).  I think it would be better for him to deed the home to me now so that he and I won’t have to pay so much tax on the sale.  What do you think is the best approach?  C.C.

Answer:  Because it’s not his primary residence, it likely will not matter, income tax wise, whether he sells it or he deeds it to you and you then sell it.  If either of you sell it for a profit, there will be a capital gains tax due.  If one of you is in a much lower income tax bracket than the other, it is possible the capital gains would be taxed at a lower rate.  Generally, the federal tax on capital gains is 15%.  However, for single filers, if your adjusted gross income (AGI) is less than $36,251 there is no capital gains tax.  If your AGI is $36,251 – $400,000, the capital gains rate is 15%.  If your AGI is $200,000 or more, there is an additional 3.8% Obamacare surtax.  Finally, if your AGI is $400,000 or more, the capital gains tax rate rises to 20% (plus the 3.8% Obamacare surtax).  Sound complicated?  Welcome to the new and improved tax code!

Reader Question:  I will need to begin drawing required minimum distributions (RMDs) from my IRA the same year my grandchild starts college.  It seems to me that college tuition for a grandchild is one of the uses that permit tax-free withdrawals from IRAs.  Can I use my RMD for her qualified tuition and thereby avoid taxes?  H.M.

Answer:  There are two separate tax rules that are going on here.  First, the law allows you to make non-taxable (and non-deductible) gifts for tuition for the benefit of someone else, in this case your grandchild, without owing a gift tax.  In order to qualify, you must pay the tuition directly to the college or university.  These tax free gifts are in addition to the $14,000 you are allowed to give to as many people as you wish each year.  Regarding your IRA, generally, you must begin withdrawing a required minimum distribution in the year you turn age 70½ and these distributions are treated as ordinary income for income tax purposes.  There is no way to ‘shift’ these distributions to a qualified education account, such as a college savings 529 plan or use them to pay college tuition and avoid income taxes. 

Reader Question:  I am married, in my fifties, and the heir to an estate worth about $800,000 of mostly cash and liquid securities.  I am a middle-class working person with some savings and some knowledge of investments and banking, but certainly not someone who runs with millionaires!  Should I create an off-shore account to move the funds as soon as the money becomes available to protect as much as I can from taxes and fees?  Alternatively, I have modest investment accounts of my own.  Can I roll any funds into IRAs that I already have?  Will that tie the money up and out of my use for a length of time? E.A.

Answer:  Congratulations on your good fortune!  You truly have an opportunity to improve your lifestyle if you manage this inheritance wisely.  Once the money is distributed to you from the estate, there should be no taxes or fees so there is no need for anything as complex as an off-shore trust.  Neither can this money be rolled into your IRA.  I would recommend that you put this money in a separate investment account at a discount broker such as Vanguard or Schwab.  By keeping this money separate, it may be shielded if, in the future, you were to get divorced.  Comingling it with personal money may taint the inheritance and allow it to be subject to a divorce proceeding.