#12 - How To Save $37,500
Reluctant Executor News
How do you explain a tedious process, or try to convince someone to study boring and dry rules? One way is through a relatable story.
If you haven't had to struggle through the challenges of estate administration, first consider yourself lucky. Second, it's hard to understand exactly what those challenges are. You may not understand why it's important to know the ins and outs of step-up basis, or the details of IRS filing statuses. But knowing those rules when you need to use them could save you immeasurable stress... and thousands of dollars.
Does the story below hit home with a situation you've been in? Is it something you could easily see happening to you?
LinkedIn post from May 31, 2024
Knowing the rules can get you in the game.
Knowing how different rules impact each other gives you power.
Take for instance step-up basis and capital gains exclusions.
Suppose your parents bought a home before you were born, for around $100k.
They stayed in that house through your childhood, college days, and were excited to show their grandkids where you used to play when you were their age.
Over those 40ish years, the value of that property grew to around $1.1M. Your parents talked about downsizing, but they never got around to it.
Then you get that fateful call, and the next thing you know you're planning your dad's funeral.
You try to convince your mom to move closer to you and her grandkids, but she wants to stay put.
Then, after Christmas, she realizes that she'll be happier being closer to family, so she decides to list her home after the holidays.
It sells in February for $1.1M. All good, right?
Well, she likely now has to pay over $37k in taxes. This tax bill wouldn't have happened if she has sold just a few months earlier.
Why?
Step-up basis and capital gains exclusions.
First, in non-community property states, the basis of the deceased's portion of an asset gets stepped up to the value as of their date of death. That means that the basis when your mom sells the property will be her portion at purchase ($50k) plus the stepped-up portion ($550k), for a total of $600k.
Second, filing your taxes as married filing jointly allows you to exclude $500k on the sale of your home, but only $250k if you file single. You can file jointly the year your spouse dies, but not the following year.
So your mom gained $500k in stepped-up basis, but she lost $250k in tax exclusions by waiting to sell until the following year.
The end result was over $37k in taxes owed.
Is $37k worth the hassle of trying to convince someone to move out of their lifelong home before they're ready? Maybe, or maybe not. But knowing how these different rules impact the situation gives you better insight to evaluate options.
Don't know how different rules impact each other? Don't have time to find out? That's a good opportunity to bring on professionals.
If you need help working through estate administration, or need referrals to other pros, I can help.
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Professional Referrals
Reluctant Executor is not a certified financial planner or an estate lawyer. But we do know a lot of them. We're happy to help connect you with the right professional that can help you through a difficult and confusing process.
If you or someone you know needs this type of support, contact me at Bill@ReluctantExecutor.com