Friday May 9, 2008 - Mother?s Day: Tax Planning

Yes there is still such a thing as tax planning.

There are tax breaks your parents can take advantage of. Take a look at their tax returns for the last three years and if this job is beyond you hire someone to do it for them.

Have they been filing their tax returns in a timely manner? Do they need to file returns? Did they file a return so they could take advantage of the Tax Stimulus Rebate this year?

Are they making estimated tax payments on time? Have they been filing the short form because it’s been easier? They may have been paying too much in taxes simply because it is easier! Or worse, they may not have filed a tax return because it was just too much work. And after the first year when the IRS didn't call them on it, they figured it was okay.

Have they been utilizing the tax credit for the elderly or disabled on their tax return? All questions you need to ask!

Some cities and towns have a real estate tax rebate program for their elderly citizens. Check with the tax collector where they live. Some towns have work programs where an older citizen can work off some of the real estate taxes they owe.

There is now an exclusion for capital gains tax when you sell your primary residence. For example, Mom and Dad bought their Victorian house in Dorchester for $50,000 and it is now worth $500,000. They have another $50,000 invested in the house for the paved driveway, the addition and storm windows. When they sell they house they will have capital gains of $400,000. Current tax laws allow them to exclude from capital gains up to $500,000. So they would owe no tax on the $400,000. The IRS rules for the sale of the home are as follows:

· Must have owned and occupied the house for 2 of the last 5 years
· Must be your primary residence
· $250,000 exclusion for individual
· $500,000 exclusion for married individuals filing a joint tax return, both names do not need to be on deed
· Can use once every 2 years

So if Mom and Dad’s largest asset is their home and moving into something smaller works for them there is tax break.

If mom and dad have reached the magical age of 70 beware that they must begin mandatory withdrawals from their retirement plans at age 70 ½. Don’t mess with this one, for the penalty is 50% of the missed distribution.

There is also help available with their tax returns, The Tax Counseling for the Elderly (TCE) Program offers free tax help to individuals who are aged 60 or older but only until April 15... Nonprofit groups such as AARP have volunteers who have been approved and trained by the IRS. They will offer technical assistance to elderly individuals in the preparation of their Federal Income Tax Returns.