Question: In 2012, I converted my IRA to a Roth and now realize that I owe approximately $16,000 in taxes on the conversion. This is in addition to the taxes on my wife’s regular earnings. Since I have not filed my 2012 tax return, can I convert back to a traditional IRA to avoid the $16,000 tax and in a few years again convert to a Roth when neither of us is working and we will be in a lower income tax bracket? P.C.
Answer: Yes. For a conversion done in 2012, you have until October 15, 2013 to reverse this transaction. Often the reason for ‘recharacterizing’ (reversing) a Roth conversion is that the investment account has dropped in value since the conversion date. For example, say you converted $50,000 to a Roth in February 2012 and then on March 1, 2013, it’s worth $30,000. Instead of owing taxes on the $50,000, you could reverse the transaction and avoid the taxes. After thirty-one days, you could again convert to a Roth IRA and now you’d owe taxes on the lower amount of $30,000. You’ll now have until October 15, 2014 to again ‘undo’ the conversion if it turns out to be a bad deal. If you convert to a Roth and reverse the transaction in the same calendar year, you must wait until January 1 of the following year to convert back to a Roth.
Question: I have a reverse mortgage and have been very happy with this decision. My two questions are:
1. I’d like to hold title to my home in a revocable trust but, as I understand the rules, this is not allowed.
2. If I don’t live in the home for one year, it’s my understanding that I must sell it even though I may return.
Answer: According to Jimbo King, a reverse mortgage specialist with McGowin & King Mortgage, LLC in Birmingham, Alabama, it is possible to hold your home in a revocable trust but you must first get approval from your lender. As to your second question, the reverse mortgage is due within six months of vacating it, but the lender is allowed by HUD to grant two three-month extensions, assuming that you are making a good faith effort to sell your home.
Question: Last week you discussed the $500,000 exclusion on profits for married couples ($250,000 for individuals) when selling their home. My partner and I jointly own our home. Would we each receive a $250,000 exclusion upon sale?
Answer: Yes. Unmarried couples who jointly own a home would each receive an exclusion for up to $250,000 of profits according to John West, CPA at Sellers, Richardson, Holman & West, LLP.
Correction: Last week, in answering a reader’s question, I stated that she would likely not receive any benefits from a long-term care insurance policy that she dropped because the insurance company kept raising her premiums. According to long-term care insurance specialist, Babs Hart, “Most states require long-term care insurance policies to have a contingent non-forfeiture provision which states that if the insurance company raises insurance premiums above a certain threshold and the policyholder terminates the policy, you’re eligible for a paid up policy equal to all or a portion of premiums paid.” As an example, if our reader had paid in $10,000 in premiums before she dropped the policy and the insurance company had raised premiums beyond the state mandated thresholds, she would be eligible for up to $10,000 in benefits if and when she received long-term care services. Note that not all states participate and each state sets its own thresholds so your best course of action is to call your agent or your insurance carrier and determine if you qualify. Mrs. Hart adds, “If you do qualify, be sure to tell someone! You may not need the benefits for years and it would be easy to forget that you still have benefits from a policy cancelled years ago.”