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Boomers, Taxes and the Housing Puzzle

As Baby Boomers approach retirement, many are considering downsizing their homes to simplify their lives and reduce expenses. However, what seems like a straightforward decision is often complicated by financial and tax implications, especially in today’s volatile housing market. This guide aims to shed light on the challenges and opportunities that come with downsizing, offering practical advice for those navigating this significant life transition.

Understanding Capital Gains Tax

One of the primary financial considerations when selling your home is the capital gains tax. This is a tax on the profit you make from selling your property. For many Boomers, the value of their homes has increased significantly over the years, potentially resulting in a sizable tax bill upon sale. Although there is a tax exemption—$250,000 for single filers and $500,000 for married couples—rising property values mean that profits can easily exceed these amounts.

The Current Housing Market and Legislative Landscape

The housing market’s dynamics, combined with stagnant legislative efforts to update relevant tax laws, have left many retirees in a difficult position. Proposals like the “More Homes on the Market Act” aim to alleviate some of these issues but have yet to be passed. Additionally, the lack of suitable downsizing options, such as affordable smaller homes, further complicates the decision to sell.

Strategies for a Smoother Downsizing Experience

Despite these challenges, there are several strategies you can employ to make the downsizing process as beneficial as possible:

Explore Creative Living Arrangements: Consider alternatives to traditional downsizing, such as building an accessory dwelling unit (ADU) on your property or modifying your home to suit a simpler lifestyle.

Maximize Tax Benefits: Familiarize yourself with the tax implications of selling your home. Ensure you qualify for the home-sale gain exclusion and seek ways to maximize this benefit. Timing your sale and staying informed about potential tax law changes can also be advantageous.

Consider Renting: If selling isn’t immediately appealing, renting out your property could be a viable option. This approach requires understanding the tax implications of rental income and how it affects your overall financial picture.

Keep Detailed Records: Maintain thorough records of your home’s purchase price, any improvements made, and depreciation if applicable. This documentation is crucial for accurately calculating potential capital gains.

Seek Professional Advice: The financial and tax aspects of downsizing can be complex. Consult with our office for personalized guidance tailored to your specific situation.

Downsizing in retirement is more than just a lifestyle change; it’s a financial decision that requires careful consideration and planning. By understanding the challenges and exploring your options, you can make informed choices that align with your retirement goals. Remember, you’re not alone in this journey—professional advisors can offer the support and expertise you need to navigate the downsizing process with confidence.

IRS Resuming Sending Collection Notices

Due to the COVID-19 pandemic, the IRS suspended the mailing of automated reminders to pay overdue tax bills starting in February 2022. These reminders would have normally been issued as a follow up after the initial notice. Although these reminder notices were suspended, the failure-to-pay penalty continues to accrue for taxpayers who did not fully pay their bills in response to the initial balance due notice.

IRS Disallowing 20,000 Employee Retention Credit (ERC) Claims

In its ongoing effort to combat questionable Employee Retention Credit (ERC) claims, the IRS has sent more than 20,000 letters advising taxpayers that the agency is disallowing their claims. This initial batch of letters is going to businesses that did not exist or did not have paid employees during the eligibility period (March 13, 2020, and December 31, 2021) to claim the claim the credit.

A Guide for Retirees Returning to Work

As you approach retirement age, the thought of returning to work might be on your mind. Whether you’re considering part-time roles or fully immersing yourself back into the workforce, this article is designed to provide insights into the financial aspects of such a decision. We understand that your return to work is a unique journey, and our aim is to help you navigate the tax implications, understand changes to retirement accounts, and make informed decisions about your social security income.

What You Need to Know About Gift & Estate Taxation

Gift and estate taxes are both part of the federal transfer tax system and are interconnected.

Gift tax applies to transfers of wealth during a person’s lifetime. If a person gives another person a gift that exceeds the annual gift tax exclusion ($17,000 in 2023), the giver (also referred to as the donor) may have to pay gift tax. However, there is also a lifetime gift tax exemption ($12.92 million in 2023), which means that a person can give away up to that amount over their lifetime without paying gift tax. When the amount given to another person during any year exceeds the annual exclusion for that year, the donor is required to file a Gift Tax Return (IRS Form 709), even if no gift tax is owed because the donor’s lifetime exemption hasn’t been exceeded. The IRS requires this filing so that they can keep track of how much of the donor’s lifetime exclusion has been used up.