Question: I have been separated from my husband for three years and will shortly be filing for "no fault" divorce. He has been living in our house, which is jointly owned, for the past three years while I moved into an apartment. My questions: (1) If we sell the house this year, after divorce, does each of us file Form 2119 with our separate returns next year, dividing all the numbers in half? (2) My husband will be 55 in two years. If we wait until then to sell the house, will I get half the tax exclusion ($62,500) if we are divorced? (3) Assuming we sell now and both apply all our gain to the cost of new residences, is there a tax disadvantage compared to waiting until he's 55?
Answer: I just happen to have three responses in my answer file that fit your questions: (1) Yes. (2) No. (3) No.
For joint owners who sell a residence after divorce, each one reports his or her own half of the transaction on a separate 2119, as you said.
In the case of joint owners who are not married to each other--even if they once were--each must qualify independently for the over-55 exclusion of up to $125,000 of the gain on the sale.
There is a tax advantage, rather than a disadvantage, if you can defer the tax by the purchase of a new residence. You get essentially the same tax result--deferral instead of exclusion, but still no current tax liability.
And you still have the over-55 exclusion to use on some future sale. If you were to sell before the divorce and claim the exclusion on a joint return, you and your husband would both lose any further use of this once-in-a-lifetime tax break.
If you are divorced and file separate returns, your husband would be eligible to apply the $125,000 exclusion to his half of the transaction. But then he would forfeit any further use, and, as I said, you wouldn't qualify in any case (until you reach age 55).
If you buy a replacement residence which will permit you to defer tax on the present gain, that's the preferred way to go for both of you.
Q: You recently pointed out the availability of the 10-year-averaging method (Form 4972) for an individual taking his private pension in a lump sum. Would this apply if I decide to take my IRA money in a lump sum after age 59 1/2?
A: No, the special advantage of 10-year-averaging is not available for lump-sum distributions from an IRA. It only applies to what are called "qualified plans," a term that includes most employer plans and Keoghs for the self-employed, but not IRAs.
Of course if the IRA distribution--all of which normally is taxable--increases your income substantially over that of previous years, you may use normal income-averaging to reduce the tax bite. But the tax saving from Schedule G is not nearly as advantageous as Form 4972.
Q: In calculating estimated income tax for 1983, the IRS instructions state that you should not use the 1982 tax rate schedules. The new schedules included with the estimated tax forms are quite different, yet the amount being withheld from my husband's salary is the same now as in 1982. As a result, for the first time in many years we shall not need to make estimated tax payments. Why has there been no change in the rate of withholding?
A: Be patient. The annual tax reductions mandated by the Economic Recovery Tax Act of 1981 were scheduled to take effect on July 1 of each year. Your husband will see a change in the amount withheld from his pay for the first pay period after that date.
The tax rate schedules accompanying 1040-ES (the estimated tax form) take into account this split-year arrangement. Hang in there until you see what the change is after July 1, then decide if you need to file estimated tax for the year.