Q: I am 72 years old and began taking required distributions from my IRA in 2011. Last year my distribution was $17,893 and I paid tax on the whole amount. This year my wife and I plan to do some remodel work for our house and we’ll need about $55,000 for the work. If I take enough out of the IRA to cover the remodel work and the tax I will have to pay is it possible to not have to take distributions in future years until I have “spent” the excess required distributions I took in 2014?
A: Required minimum distributions must be taken annually. It is not possible to use a distribution in one year to cover future year’s required distributions. Since the focus is on the minimum, there really isn’t a concept of an excess distribution.
Because the amount of the required distribution is based on the value of the account at the end of the preceding year, your plan will reduce the future required distributions, but it cannot eliminate that requirement.
I don’t know what other funds you may have access to, but it is generally best to leave funds in a tax-deferred account as long as possible. So you may want to evaluate other sources of funds beyond the 2014 minimum required distribution to fund your remodel plans.
You could even look into a home-equity loan. Rates are fairly low and you should be able to repay the loan relatively soon using “normal” required minimum distributions.
If you have access to tax-return software, or will ask someone to do your tax return this year, you should at least evaluate how much more tax you will owe by taking a large IRA distribution.
Since current law subjects more deductions to potential loss if income is too high, the IRA distribution plan may create a greater tax burden than you might think. Generally it is best to use software to do a “with-and-without” analysis to determine this cost.
Q: I am planning to spend a few years overseas and the original idea was to lease my house while I was gone, but some friends say they want to buy the house for their daughter. I really don’t know how long I will be gone and it is possible I may not return to Albuquerque, so I have decided to sell the home. I have no intention to spend the sale proceeds on a new home, at least for a while, and I want to know if this means I have to pay tax on any gain from sale. Also if I do have to pay is it at the special capital gains rate?
A: This is a surprisingly common question because although the law changed in 1997, there are many people who have not sold a home since then and had no reason to learn the new rules.
Under old law, you could avoid tax on gain from a sale of a home by buying another home that cost at least as much as the sales price of the old home. A special exclusion was also available for sellers who were age 55 or older.
But current law allows you to exclude as much as $250,000 of gain ($500,000 if married filing joint) if the home was owned and used as a principal residence for 2 of the 5 years before sale.
If you meet this 2-of-5 test, you should pay no tax on the sale. It makes no difference what you use the sale proceeds for. In most cases, the sale is not even reported to the IRS.
If you think you may be gone for, say, 2 years, you could also rent the house and then sell upon your return, and you should still qualify for the exclusion. You will have to recognize gain for any depreciation claimed during the rental period, but that’s just giving back the prior deductions.
So you have a few options that will avoid paying any tax on the gain from sale. You should pick the one that best fits your personal plans because the tax law makes it fairly easy to satisfy the exclusion requirements in your fact pattern.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.