Tax Considerations for Taxpayers 55 and Over

Under current federal and state income tax laws, tax planning is an essential part of retirement. How much of the equity in your home is yours tax free? Is it better to roll your retirement benefits into an IRA or keep them? How can you transfer homes and not increase you real estate taxes? What is your adjusted cost or basis in your personal assets, (home, stocks, etc.) once your spouse is deceased?

For taxpayers over 55, Internal Revenue Code Section 1034 still allows the opportunity to sell a principal residence and exclude up to $125,000 of the gain. This exclusion is widely known but the strategies that accompany it are not. For instance, if you are over 55 and your aged parent has been residing with you for at least the last 3 years; gifting 50% ownership can qualify you for an exclusion of $250,000. Each of you has 50% ownership of a home which is occupied as a principal residence. This tactic also works for unmarried couples each owning 50% of a principal residence.

Rolling over your retirement assets into an IRA may not be the best tax planning for you. The law still allows 10 years averaging on a lump sum distribution from a qualified retirement plan other than a 401(K) or IRA plan. The 10 year averaging is available for taxpayers who were at least 50 on January 1, 1986.

Proposition 90 allows you to sell and owner occupied residence and purchase a new home without an increase in real estate tax. There are qualifications that must be met, such as (1) you must be at least age 55 on the date of the sale (2) the price of the new home must be equal to or LESS than the sales price of the old home and (3) the new home must be located in the same county as the former home or located in a county within California which accepts the transfer.

Your cost or basis in your real estate and personal property is crucial for tax planning. Your basis in property determines the capital gains tax upon its disposition. Your cost is the amount pain for the property plus improvements as in the case of real estate. If the property is received by gift or inherited, your basis is determined differently. If you own property as a joint tenant with your spouse for instance, and your spouse dies, your basis in all jointly owned assets is increased by 50% of the asset's fair market value on the date of death. if the transactions are handled appropriately, your basis could increase by 100% of the fair market value at time of death.

Harriet Hunt is a certified public accountant who practices with CPA firm of Petsas and Hills, 4101 MacDonald Ave., Suit C, Richmond, California.