Question: My wife and I are both 64. We recently sold our house at a substantial profit and brought a split-level house. We plan to take advantage of the $100,000 exclusion feature, establishing the cost of the new house as its tax basis. We don't know what may happen in the future that might later prevent us from using the $100,000 feature. Do you have any comment?
Answer: You don't give me any numbers to work with, so I can't comment on your specific situation, but I can give some general guidance. As you know, people over the age of 55 can get a tax exclusion of up to $100,000 in capital gains on the sale of their principal residence and pay no tax on this profit, but the exclusion is available only once in a lifetime for individuals and for married couples.
Therefore, if your new house costs as much as or more than the selling price of the town house, I would use the tax law provisions that allow you to simply defer paying capital gains taxes as long as you put the gains into buying a new home. This way, you can save the once-in-a-lifetime $100,000 exclusion.
It is true that by doing so your new home would have a much lower tax basis, on which profits are measured, so that the capital gains on it will be much higher later. And it is also true that circumstances later might deprive you of the opportunity to use the $100,000 tax break. (You mentioned a couple in your letter, which -- as most letter in this column -- was edited down for space.)
But those circumstances are only probabilities, not sure things -- and in my opinion not having a high order of probability, either.
I don't think the government is likely to eliminate the exclusion, and even if it did I suspect there would be some kind of grandfather clause protecting those who could have used the exclusion and chose not to.
If you use the $100,000 exclusion now, you foreclose your options. Once any part of the exclusion is used, neither you nor your wife can use any of it again. So you're choosing certain loss of a future option against a possible, but not likely, loss of that option. The odds favor waiting.
Q: I was married in February. Both my wife and I are employed, and naturally our combined family income for 1981 will be a lot more than either of us made before. Will we be able to income-average?
A: Unless you or your wife of both earn a lot more this year than in prior years, the answer is no.
If you want to income-average on a joint return and you both filed singled returns in prior years, you have to compare your joint income for 1981 with the combined total of both your incomes in the four preceding years.
And for the benefit of other readers, I'll go a little farther. If either of you had been married to someone else with whom you had filed a joint return in any of the preceding four years, there are rules for splitting that income to come up with comparable figures to use on Schedule G, for income-averaging. IRS Publication 506 has complete details.
Q: Each year we give our children a gift of money for Christmas (less than $3,000). Can we deduct this from our income tax? Do we have to report the gift? If so, what form do we use? Finally, do the children have to report these gifts as income?
A: You may not deduct gifts to your children from your income. They in turn have no income tax liability and no responsibility for reporting the gifts as income.
There is no requirement for reporting gifts amounting to $3,000 or less in any one year. And that's $3,000 per recipient, no matter how many different people you make the gifts to or what the total amount given is.
If the total of gifts to an individual during any one calendar year exceeds $3,000, then you should file Form 709 by Feb. 15 of the following year. There are special reporting requirements if the total exceeds $25,000.
There may not be any tax due. If both husband and wife concur in the gift, then up to $6,000 a year may be given to any one person without any gift tax liability. But the filing requirement kicks in at the $3,000 figure.