Deductions & credits

It depends.  Based on your statement the house was sold before your friend's death, and assuming it was 2024.  If this is the case, then the sale would be entered on her final tax return.  She could qualify for the home sale exclusion on her return, up to $250,000 or $500,000 for married taxpayers of the gain on the sale.  Since her husband died in 2022 she maybe eligible for the full $500,000. See information below about the sale of her home.

For your return, assuming the timing is accurate based on your comments, there is no sale for you which means there is nothing to report on your personal income tax.  You must determine if an inheritance tax return must be completed in your state. Also check to see if an estate return is required due to any earnings received after the death of your friend.

• The federal government doesn't have an inheritance tax. As of 2023, six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Generally, the value of the inherited assets has to exceed minimum amount before an inheritance tax is due.
  • What is inheritance tax?
  • Estate Tax Rules (In some cases this is the federal rules)

As a surviving spouse she may qualify for the maximum $500,000 exclusion based on the information in IRS Publication 523.

1. You sell your home within 2 years of the death of your spouse.
2. You haven't remarried at the time of the sale.
3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale.
4. You meet the 2-year ownership and residence requirements (including your late spouse's times of ownership and residence, if applicable).
   1. Use Worksheet 1 to find her exclusion limit.

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. 

1. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. 
2. You can meet the ownership and use tests during different 2-year periods. 

However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to IRS Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

The gain is actually determined by arriving at her actual original cost, capital improvements through the years and purchase expenses.  This final figure will be used as the cost basis and subtracted from the sales price less sales expenses.  Any loan and/or reverse mortgage is of no consequence on the sale other than finding the amount of any proceeds that were used for capital improvements spent on the home itself.   

Any gain that is not excluded due to the gain exceeding the maximum amount will be taxed at the capital gains rates shown below for your convenience to give you an idea of the tax that you might consider sending in as an estimated tax payment for her return assuming the sale was in 2024. This does not account for any other income which is probably quite minimal for 2024. Simply use the Schedule D Tax Worksheet (page D-16) to calculate the estimated tax and send to the IRS using Form 1040-ES.

A capital gains rate of 0% applies if your taxable income is less than or equal to:

• $44,625 for single and married filing separately;
• $89,250 for married filing jointly and qualifying surviving spouse; and
• $59,750 for head of household.

A capital gains rate of 15% applies if your taxable income is:

• more than $44,625 but less than or equal to $492,300 for single;
• more than $44,625 but less than or equal to $276,900 for married filing separately;
• more than $89,250 but less than or equal to $553,850 for married filing jointly and qualifying surviving spouse; and
• more than $59,750 but less than or equal to $523,050 for head of household.

However, a capital gains rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

Medical Expenses: Any amount of loan proceeds used for medical expenses can be deducted in the year paid if they are greater than 7.5% of the adjusted gross income (AGI) and itemized deductions are being used on the tax return.  Itemized deductions generally include mortgage interest, property taxes, state and local income tax or sales tax, charitable contributions and medical expenses that exceed 7.5% of AGI. The standard deductions for 2023 are shown below for your convenience.  This could be used for the 2023 tax return and may be too low for the 2024 tax return.  However, the full standard deduction is allowed in 2024.

For single taxpayers and married individuals filing separately, the Standard Deduction is $13,850 in 2023. 

For married couples filing jointly is $27,700, and  

For heads of households, the Standard Deduction is $20,800

If you're at least 65 years old or blind, you can claim an additional deduction in 2023 of:

• $1,850 for single or Head of Household
• $1,500 for married or Qualified Surviving Spouse.

If you're both 65 and blind, the additional deduction amount is doubled. 

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