Capital gains on home sale after age 65

Dear Liz: We’re retired and living in California. We are planning on selling our home, which is paid for, and moving to Tennessee in a couple of years. I think we qualify for a “one time” capital gains exemption. Our home is worth over $1 million and we paid only $98,000 in 1978. We plan on buying a home in Tennessee for around $800,000. Will we have to pay capital gains tax?

Answer: Before 1997, a homeowner could defer paying taxes on home sale gains as long as they rolled the proceeds into the purchase of another home of equal or greater value. In addition, there was a one-time exclusion for homeowners over age 55, who could exclude up to $125,000 in home sale gains.

Those rules were replaced in 1997 with the current law. Now homeowners of any age can exclude up to $250,000 each in capital gains on the sale of their primary residence, as long as they’ve owned and lived in the house for at least two of the previous five years. As a married couple, you can exclude up to $500,000 of gain — but that still leaves you with more than $400,000 of potential capital gains.

The capital gains calculation doesn’t factor in the value of your replacement home or whether you have a mortgage. However, you can use the value of home improvements you’ve made over the years to reduce your taxable gain — assuming you kept those receipts. The IRS defines home improvements as expenses that add to the value of your home, prolong its useful life or adapt it to new uses. Examples would include additions (bedrooms, bathrooms, decks, garages, etc.), heating or air conditioning systems, plumbing upgrades, kitchen remodels and landscaping, among other costs.

Improvements don’t include maintenance required to keep your home in good condition, such as painting, fixing leaks or repairing broken hardware, or improvements that are later taken out. If you put wall-to-wall carpeting and then removed it to install hardwood floors, only the cost of the hardwood floors would count.

Many of the costs you incur to sell the home, such as real estate agent commissions and notary fees, also can be used to reduce the capital gain. You can find more details in IRS Publication 523, Selling Your Home. A big home sale gain can affect other areas of your finances, such as your Medicare premiums, and may require you to pay quarterly estimated taxes. Consider talking to a tax pro before the sale so you know what to expect.

Spousal benefits

Dear Liz: My wife and I have been married for 18 months. I am 67, she is 66. She is not eligible to receive Social Security due to her work history. Is she eligible to receive spousal benefits now, even though I plan to wait until age 70 to receive mine?

Answer: Your wife can’t start spousal benefits until you begin receiving your own benefit. In the past, someone in your position could file a Social Security application and then immediately suspend it. That triggered the spousal benefit while allowing the primary earner’s benefit to continue growing. Congress changed those rules in 2015, however.

Executor duties

Dear Liz: My best friend made me her executor. She has no relatives. She has listed people to receive money, possessions and her house. She has left me money as well. Once everything is disbursed and bills paid, there will be leftover money. If she wants me to have it, what needs to be written in the trust?

Answer: Her will should include a phrase that disposes of her residuary estate. After listing specific bequests, she would include a phrase such as “the rest and residue of my estate goes to” followed by the name of the person she wants to have the remaining estate. This clause isn’t without its problems, however, since receiving the residuary estate could tempt you to stint the other beneficiaries. Keep in mind that as executor, you have a fiduciary duty to all the beneficiaries, which means you cannot put your own interests first.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.

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This information is not current and is being provided for reference purposes only

TSSN-26

State Tax Tips for Senior Citizens

 This TSSN is superseded by IP 92(4)

STATE TAX TIPS FOR SENIOR CITIZENS

This brochure is designed to acquaint you with the most common tax advantages available to Connecticut residents age 55 or older.

CAPITAL GAINS TAX

There are two exemptions available to Connecticut residents selling their home:

• If a person, age 55 or older, elects the one-time federal exclusion on the sale of their residence, Connecticut will not tax the first $125,000 of the capital gain.
• If the seller is age 65 or older and has lived in his or her home at least five of the prior eight years, the capital gain is not taxed regardless of the amount.
• When a resident, age 65 or older, has any type of capital gain and his or her federal adjusted gross income is below $10,000, not including the gain, the gain is not taxable regardless of the treatment for federal income tax purposes.

  Example:

  Adjustable Gross Income	$159,000
  Less: Capital Gain	150,000
  Nontaxable Balance	$ 9,000

  There is no Connecticut tax on the $150,000 gain in the above example because the balance is less than $10,000.

INTEREST & DIVIDENDS

Residents whose Connecticut adjusted gross income is less than $54,000 do not pay a tax on their interest and dividend income.

To compute Connecticut adjusted gross income, subtract the Social Security or Tier I Railroad Retirement figure on your federal income tax return from your federal adjusted gross income figure.

SALES TAX

Although there are no direct exemptions from the sales tax for senior citizens, many items and services are not taxed.

Some examples are:

• Clothing, including shoes, overshoes, adult diapers, etc., when each item costs less than $75.
• Prescription drugs, eyeglasses, dentures, hearing aids, and batteries.
• Non-prescription (over-the-counter) drugs that are used internally. This includes: vitamins, minerals, food supplements, pain relievers, laxatives, cough syrups, lozenges, cold and allergy products, diabetic supplies, eye care products, nasal sprays, drops and inhalers, and antacids.
• Oxygen and oxygen equipment, customized trusses and braces, crutches and wheelchairs.
• Food purchases in super markets. Beer, wine and all alcoholic beverages are taxable. Candy, gum, soda, carbonated water and non-alcoholic beer and wine are taxable unless purchased with food stamps.
• Fuel for heating residences such as oil, kerosene, wood, electricity and coal.
• Animal grooming and boarding services, dry cleaning and laundromat, hair styling, towing, tax preparation, real estate and jewelry appraisal and fur storage are a few examples of nontaxable services.
• Labor for home repairs including plumbing, painting, electricity and carpentry. Private auto repair labor and refuse removal.
• Seeds, vegetable plants, food bearing bushes and trees, fertilizers, weed killers, plant insecticides and fungicides.
• Yarn, fabric, thread ,buttons, zippers, trim, etc., used to make clothing.
• Meals delivered to homes of elderly persons, such as, "Meals on Wheels".
• Funeral costs of $2,500 or less.
• Current United States and Connecticut flags.
• Newspapers and subscription magazines only.
• Doctor, dentist, medical laboratory, lawyer and travel agent fees.
• Instruction classes such as: knitting, sewing, dog obedience, tennis, golf, swimming, music, etc.

When a senior citizen discount is offered, the sales tax is applied to the discounted price.

If you must present a manufacturer's coupon to receive the discount, the coupon is considered to be money and you must pay tax on the original price. However, when a store coupon is presented to that store the tax is applied to the discounted price.

Examples:

The sale of "Dine Out" cards and "Entertainment" coupon books are not taxable. However, the free meals received by using such cards or coupons are subject to sales tax using the menu price that would have been paid if it had been purchased without the card or coupon.

INHERITANCE TAXES

Under these tax statutes different exemptions are given depending on relationship:

• Any transfers to a surviving spouse are exempt. Therefore, if all the estate passes to the spouse, there is no tax.
• The class composed of children, grandchildren and parents receive a $50,000 exemption.
• Brothers, sisters, their descendants, etc. receive a $6,000 exemption.
• All other persons not referred to above, or taxable organizations have a $1,000 exemption.
• There is only one exemption per class. In other words, if there is one child there is one $50,000 exemption. If there are five children there is still only one $50,000 exemption.
• Transfers to qualifying charitable, religious, educational, historical, scientific, etc. organizations are tax exempt.

REAL ESTATE CONVEYANCE TAX

A taxpayers who transfers property, for no consideration, to his or her spouse or children is exempt from this tax. A taxpayer receiving Elderly Property Tax benefits is also exempt.

LOCAL PROPERTY TAXES

• Homeowner/Renter Tax Credit: Annual property tax or rent credit is available to residents, age 65 or older, or to a surviving spouse of a previously approved applicant who is age 50 or older.
• Veteran Exemption: A varied, annual tax exemption on the assessed value of an owner-occupied dwelling or on a motor vehicle is available to any qualified veteran or surviving spouse.

Contact the local assessor in your town or city hall for details and forms for any of the above.

FREE ASSISTANCE WITH PERSONAL TAXES

The Connecticut Department of Revenue Services will help you fill out your Connecticut Capital Gains, Dividends and Interest Income Tax Return. Call the department's toll-free number 1-800-382-9463 or (860) 297-5962 or contact one of our regional offices.

Please call us for further information on any state tax.

For federal tax information, call the Internal Revenue Service toll-free at: 1-800-TAX-1040

TSSN-26 (Rev. 7/90)

Is long term capital gain taxable for senior citizens?

Who is exempt from capital gains tax?

Is there a once in a lifetime capital gains exemption?