adjusting agi strategies after selling inherited home

[STPETEJACK]

My sons inherited their mom's home after her death.  They sold it and will have a capital gain.  They are maxing out their 401k's and put 6k into an IRA to reduce their agi's.  They are also paying student loan interest.  We have the comps of her house for date of death value and are adding in improvement costs.  Looks like each son will have a 90,000 dollar capital gain. Are there any other strategies to reduce their cap gains tax bite?

Thanks for your time. 

[NCperson]

@STPETEJACK - don't forget to subtract the selling costs (the big one is normally the commission), from the capital gains. 

also, consider how much their other income is.  While many think the capital gains is 15%, it's not at the lower income levels (Subtract the standard or itemized deductions from the amounts in the table)

2022 capital gains tax rates

                                          0% tax rate               15% tax rate               20% tax rate

Single	$0 to $41,675.	$41,676 to $459,750.	$459,751 or more.
Married, filing jointly	$0 to $83,350.	$83,351 to $517,200.	$517,201 or more.

in the end, if it is any consolation, paying taxes in  situations like this is a "good problem"; it just means you have a partner (the IRS) sharing the benefit.....😊

[NCperson]

@STPETEJACK one other thing..,.. be careful that the capital gains income doesn't preclude other deductions.

depending on their salaries added to the capital gain, the student loan interest and the IRA contributions may NOT be deductible. 

[tagteam]

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@STPETEJACK wrote:

Are there any other strategies to reduce their cap gains tax bite?

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Although it does require extreme caution and careful consideration, there is always tax loss harvesting if they have investments in taxable accounts.

See https://seekingalpha.com/article/4505337-tax-loss-harvesting-definition-rules-examples?source=acquis...

[STPETEJACK]

thanks for weighing in on this issue.

[STPETEJACK]

Hi NC person,

Son #1 $55,000 salary before deductions, single, his portion of cap. gain on sale of house is 90k.

His AGI is lower due to putting max of 20,500 into 401k.  Also has student loan interest.

Son  #2 26,000 salary before deductions, single, his portion is the same, 90k.

He has a small amount of student loan interest,   a small amount of 401k, and a 6k contribution to trad. IRA.

It was over a year from date of death to sale of house, so it will be a long term cap gain.

Should son #1 also contribute 6k to trad. IRA to lessen his tax hit?

With this additional information do you think they will be able to deduct student loan interest and IRA contributions?

 Is there a way I can get a preliminary idea of how much tax they will have to pay?

Thanks.

[NCperson]

@STPETEJACK - as few things

1) since the asset (house) is inheriited, it is always a long term gain, even if you sold it the day after the death of their mom.

2) my personal opinion, it is best to make investment decisisons based on their merits and not with the primary objective to reduce taxes - otherwise, it's the "tail wagging the dog"

3) for son #1, the student loan interest is not deductible because his adjusted gross income exceeds the threshhold of $85.0000.  I can't tell you what the tax bill will be because I don't know how much is being withheld in his paycheck.   I can tell you, look at the table I posted above, some of the capital gains will fall into the 0% tax bracket, and I suspect the blend of the part that falls into the 0% tax bracket and the 15% tax bracket should be around 12% of the $90,000.  Contributing to an IRA will not impact his taxes because his employer offers a retirement plan (the 401k) and his income is otherwise too high with the capital gains included to deduct the IRA contribution on his tax return.  He can still make the contribution, but it would not reduce his taxes. 

4) for son #2, again, the student loan interest is not deductible because his adjusted gross income exceeds the threshhold of $85,000.  The IRA contribution will NOT be deductible because his employer offers a retirement plan (the 401K) and because of the capital gains, son #2 makes too much money to be able to deduct the IRA contribution.   He can still make the contribution to the IRA but it won't impact his taxes.  Similar to son #1, look at the table I posted above, some of the capital gains will fall into the 0% tax bracket, and I suspect the blend of the part that falls into the 0% tax bracket and the 15% tax bracket should be around 10% of the $90,000. It's a little less for son #2 because his income is slightly lower, so there is more of the capital gain that would end up on the 0% capital gains tax bracket. 

5) there will also be state income tax if you live in a state that has state income tax.  For most states that is "ordinary" income - there is no separate tax bracket for capital gains.  

does that help? 

[Bees]

Your cost basis is the fair market value of the home at the time of death. You cannot add your purchase basis and improvements to that number. 

[NCperson]

@Bees what does this mean: purchase basis? 

improvements (post the death date) can certainly be added to the cost basis to reduce the gain. 

[SweetieJean]

Also be aware of this:

Questions and Answers on the Net Investment Income Tax | Internal Revenue Service (irs.gov)

and consider State taxes.  Some states do not have a special capital gains tax rate.

[NCperson]

@SweetieJean - in this situation, NIIT won't be an issue - the AGIs presented by the OP are too low; NIIT kicks in at $200,000 for single filers. 

[STPETEJACK]

Great answer, very helpful, thanks!