Posted on July 24, 2016 by Jan Roberg

Easiest Tax Quiz Ever!

Here’s an easy Tax Quiz.

1. Are you married? What’s your spouse’s name?

2. Do you have children? What are their names?

I told you this was an easy quiz. Now here’s the next part: same questions, but what would the answers have been three years ago? Any changes? If your answers have changed over the past few years, here’s a tougher question for you; did you change your will? How about your 401(k)? Your insurance policy?

You see, it happens to everyone. Our families change, we have children, we get divorced, we get remarried, people die. If we don’t manually go in and adjust who the beneficiaries are on our bank accounts, retirement plans, and such, then the money that we’ve worked so hard to save and care for our families might go to the wrong people.

It happens all the time. A man dies, and accidentally leaves a million dollar life insurance policy to his ex-wife. Perhaps his IRA goes to his dead brother. Or maybe he’s left his entire estate to his three eldest children completely leaving the youngest out of the will because he forgot to change it when the baby was born.

I’m not just giving you “what ifs”. These are all real examples that happened to real people that I know. The ex-wife had been divorced for five years, the dead brother had been gone for ten years, and the baby was twenty years old when her father passed away.

We all like to think that if we died, our family members would do the honorable thing and share accordingly. Hopefully they will, but it’s still better to put your wishes in writing with the proper documents. Even if your family does have the best intentions, and the highest level of integrity, if you don’t take care of assigning your beneficiaries, your assets will be left for state law to divide.

Let’s say you have no problem with your state laws and you agree with how the state determines the way your assets will be split. Fine. Of course, it could take years for the state to decide how to split your assets once you’re dead and your family could starve to death waiting. Let’s say you die and there’s no determination as to who your beneficiaries are. Generally, it takes about a year to get your assets out of probate, but I once worked on a case that took three years. For those three years, you know who got paid? I got paid for doing the tax returns, the financial manager got paid for handling the money in the account and the lawyers got paid a bundle.

You know who else got paid? The IRS got paid because the income from the assets in the account got taxed at the highest rate because we couldn’t pass any money through to the family. The family got nothing until the estate was closed. All that money eaten away by lawyers, number crunchers, and the IRS– what a waste. Is that really the choice you’d make?

So here’s your little Roberg Tax to do list. Check your life insurance policy. Check your retirement plan. Check your investment and bank accounts. And, check your will. Make sure that the people you have listed as your beneficiaries are the people that you want to receive your money when you die. If you’ve got the wrong people listed, you need to make some changes.

Your family loves you. They’d much rather have you be alive than be your beneficiary. But, because you love them too, make sure you take care of that paperwork.

Posted on January 22, 2013May 31, 2016 by Jan Roberg

Inheriting a House and Converting to a Rental

Photo by Kevin Saff on Flickr.com

I’ve gotten this question a couple of time recently so I decided to post about it. Here’s the question:

“My Dad died and my sisters and I want to keep the house and rent it out instead of selling. How do we handle the taxes on this?”

First, you need to change over the house to your names. That’s important. Get the house out of the estate before your rent it. Also, some day you might sell or something; you want to fix that now.

Now—you and your siblings are going to become a partnership. I recommend becoming an LLC—that means Limited Liability Company. It gives you a little protection in case someone you rent to decides to sue you. Here in Missouri, it only costs $50 to file online. Do file in whatever state you actually live in though—don’t do one of those “file in Nevada” things you see online—big mistake, unless you actually live in Nevada. File your LLC in the state you live in (or the state the house is in if that‘s different.)

After you file for your LLC, you will want to get an EIN number. Here’s information on that: http://robergtaxsolutions.com/2010/11/how-to-get-an-ein-number-for-your-business-for-free/ . Because you have a partnership, you’ll need the EIN number to file a tax return.

You will also want to have a separate bank account for the partnership. You’ll use the EIN number to set up that bank account. It’s important to do that. If you use your personal bank account for the LLC then you have (legalese here) “pierced the veil” of the LLC. That means if there was an issue, then you could be sued personally—so the bank account is important.

Okay, so now you’ve got the LLC, the EIN, and the bank account. You rent out the house, the tenant writes checks to the partnership, and the partnership pays bills out of the bank account—all good. If you have a profit, the partnership can make distribution payments to you and your sisters (the partners.)

At tax time you will file a partnership return, Form 1065. They’re due to the IRS by April 15th, but really they need to be done before then because you need that information to file your personal return.

The partnership will issue a K-1, tax form to each of the partners. The K-1 form is how you report the partnership income on your personal return so that you can pay your share of the taxes. Let’s say the house had a profit of $5001. The three of you are equal partners, so you’d each get a K1 saying that you had a profit of $1,667 that you would report on your personal tax return. Or if there was a loss, you’d report the loss which would offset your other income.)

As long as you and your siblings all agree, you should be okay. You might want to sit down together and write out some stuff like, what happens if one of the partners wants out? Who’s going to run the rental (collecting rent, making sure house is okay and stuff). Does the person managing that get paid something extra?

You are not required to have an attorney write up a partnership agreement. (You might want one, but it’s not required.) But do think through potential problems and decide how to solve them before you start. Example: what happens if one of the siblings falls on difficult financial times and needs to sell her share of the house? How will you handle that? A partnership is kind of like a wedding. It’s easier to get into than to get out of. Planning ahead will make those transitions easier.

Posted on September 14, 2012May 31, 2016 by Jan Roberg

Is My Inheritance Taxable?

Photo by Matt Lowden on Flickr.com

Good question. I bet you’re looking for a yes or no answer though and it’s not quite that easy.

Everybody talks about the “death tax” but for most people, there’s no such thing. Generally, if you inherit money, you do not pay tax on it. There are a couple of states that tax inheritances, but the federal government does not.

But… (You were waiting for the ‘but’ weren’t you?) While you won’t be taxed on the inheritance itself, you can be taxed on the income of a deceased person’s estate. The easiest way to explain this is with an example.

Let’s say your Uncle Bob dies and leaves you $10,000 in his will. Cool. You get $10,000 cash, and that’s it. There’s no inheritance tax. He just left you a dollar amount; nothing to it but cash.

But what if instead of just leaving you cash, your Uncle Bob left you half of his estate? Suppose he leaves half of everything he owns to you and the other half to your sister. Let’s say he has $50,000 cash in the bank.

It might take some time for the estate to settle and for you and your sister to get what’s coming to you. During the time after your uncle’s death and before you settled the estate, the estate (that is, the stuff your uncle used to own) made some money. Interest was paid on the bank account. While you won’t pay tax on the $25,000 cash you get, you will pay tax on the interest that the cash earned while it was part of the estate. It will be “passed through” to you as the beneficiary.

That’s the part that’s really confusing to most people. You read the IRS books that say inherited money isn’t taxable—it isn’t. But the income that money earns while it’s sitting in the estate is.

The taxable income will be reported on a document called a K1. If you’ve never seen one before, it’s a little intimidating. But if you’re doing your own taxes, you just input the numbers from the K1 into the boxes in the software and you’re going to be okay.

So, if the $50,000 in the bank earned $1,000 in interest and you’re supposed to get half of the estate, then you’ll pay tax on $500 (your share of the interest earned) and you’ll get $25,500. (Half of the $50,000 plus half of the interest earned.)

Now, realize that I’ve really simplified this. Usually there’s more than just a bank account. There will be stocks, a house, maybe even a business. But the idea is basically the same: you pay tax on the income that the estate earns, but you don’t pay tax on the value of the actual stuff in the estate. (If we’re looking at estates that are worth over $5 million dollars, referred to as the $5 million estate-tax exemption—that’s another story, but that’s not what I’m talking about today.)