Tax

Have a Tax Question? Ask a Tax Expert

Ask an Expert,
Get an Answer ASAP!

Tax

I am retired with an IRA (over 60 years old). I want to buy

Customer Question
I am retired with an...
I am retired with an IRA (over 60 years old). I want to buy a house for $200K for my primary residence. I have a house to sell which will probably bring $150K It is currently my primary residence. How can I minimize my tax hit?

If I withdraw cash from IRA I will have steep taxes. Then when I sell my other home I will have steep taxes on the profit. How can I minimize my tax bill?
Submitted: 8 years ago.Category: Tax
Show More
Show Less
Ask Your Own Tax Question
Answered in 1 minute by:
6/26/2009
Tax Professional: Merlo, Accountant replied 8 years ago
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Verified
Hello Randy,

Can you please tell me how long you have owned your current primary residence and how long you have lived there?

Ask Your Own Tax Question
Customer reply replied 8 years ago
I have owned my current home for about 20 years. It is paid off.
Tax Professional: Merlo, Accountant replied 8 years ago
Hello again Randy,

Under current IRS regulations, when you sell your primary residence, you are allowed to exclude $250,000 from any gain you have (or $500,000 if you are married filing a joint return) before any excess gain is taxable.

In order to be considered your primary residence, you must have owned the home for at least 2 years and you must have lived in the home for at least 2 of the last 5 years preceeding the sale. You qualify on both points. So when you sell your current home, if the market value is $150,000, by the time you claim your allowed exclusion, you will have no taxable gain.

Regarding your IRA account, if you do decide to withdraw some funds from that account to help pay for your new home, any amount you withdraw will be subject to ordinary income tax. The actual amount of tax that you will end up owing will depend on your total income for the year, including the IRA withdrawals you made, as it is your overall income that determines the tax bracket you are in.

But you will not owe any tax on the sale of your current home.

If this was helpful please press the Accept button. Positive feedback is also greatly appreciated.

Thank you Randy, and let me know if you have additional questions.

Ask Your Own Tax Question
Customer reply replied 8 years ago

So what else can I do? Five year income average? Buy from inside the IRA? Buy the new home as an investment?

 

So far you have suggested nothing to reduce my tax bill, therefore I am not yet satisfied.

Tax Professional: Merlo, Accountant replied 8 years ago
Hello again Randy,

Before trying to answer your question, could you please provide a little additional information.

You said you are currently retired.

1. Are you married or single?

2. Do you and/or your spouse receive SS benefits? If so, how much do each of you receive each year?

3. Do you and/or your spouse have any other income for the year such as retirement plan income or income from investments? If so, how much total do you have each year from the other income sources?

Having this information will help me better understand your current tax situation.

Ask Your Own Tax Question
Customer reply replied 8 years ago
I am Married. I recieve about $35K in retirement income from my employer and Social Security. No other income.
Tax Professional: Merlo, Accountant replied 8 years ago
Hello again Randy,

Is the $35,000 that you receive strictly from your employer?

How much do you receive from SS?

The reason I ask this is so that I can determine how much, if any, of your SS benefits are taxable.

Ask Your Own Tax Question
Customer reply replied 8 years ago

I am not home right now so I can't tell you exactly but I think about $24K is social securtity, the rest is from my employer.

Tax Professional: Merlo, Accountant replied 8 years ago
Hello again Randy,

Thank you for the additional information.

I want to try and explain some things in my response, so allow me about 10 or 15 minutes to get this typed up and then I will post a reply back to you.

Ask Your Own Tax Question
Tax Professional: Merlo, Accountant replied 8 years ago
Hello again Randy,

First, I would like to address some of the things you brought up as possibilities:

1. 5 year income averaging - this was disallowed a number of years ago by the IRS and is no longer an option execpt for people in the farming and fishing trades.

2. Buying your home inside of the IRA - this is not an option for an IRA investment.

3. Buying the home as an investment - this still does not reduce or eliminate any tax that you owe on your IRA withdrawals.

We have already established the fact that you will owe no tax on the sale of your current residence. So all the sales proceeds that you receive from your current home can be used towards the new residence you wish to purchase. Since you would like to use the funds from your IRA account to do this, the question becomes how to minimize tax on those withdrawals.

The one basic thing that you must understand about IRA withdrawals, is that there really is no way to minimize tax on the withdrawals, other than to keep the withdrawals down to an amount each year where it keeps you in a lower income tax bracket. When you withdraw funds from your IRA account, those funds become taxable, regardless of what type of investment you use them for, so there is no other option for reducing your taxes on the withdrawals, other than to keep down the amount you withdraw each year, to a point where it keeps you in a low bracket.

In your current situation, you said you receive about $24,000 in SS benefits and another $11,000 from your employer's retirement plan. This would mean that none of your SS benefits are taxable at this point.

When you receive SS benefits, if that is your only source of income, then the benefits are not taxable. However, if you receive other income, including IRA withdrawals you make in a year, then part of your SS benefits may also be taxable, if your other income exceeds the allowed amount.

There is a formula which is used to determine if any of your SS benefits are subject to tax and here is how that works. As a married person, SS allows you a base amount of $32,000. You must then take half of what you receive in annual SS benefits and subtract that from the base amount. The result is what you are allowed to have in other income before any of your SS benefits are subject to tax. Since your SS benefits are currently around $24,000, then if we take half of that ($12,000) and subtract it from your base of $32,000, that means you could have an additional $20,000 in income each year without any of your SS benefits being taxable.

Right now you are receiving an extra $11,000 from your retirement plan. That means you could have another $9,000 in annual income without any of your SS benefits being subject to tax. That being the case, here is what I would suggest that you do.

If you sell your current home for $150,000 and purchase another home for $200,000, then take out a 5 year balloon note to finance the other $50,000 you will owe on the new home.

Each year, withdraw $9,000 from your IRA account. This is the amount you can still have in income without subjecting any of your SS benefits to tax. This would then give you total taxable income for the year of $11,000 from your retirement plan and $9,000 from your IRA, for a total of $20,000. Since you are married you are allowed a standard deduction of $11,900 plus exemptions for you and your wife of $3,6,50 each. That gives you total deductions of $19,200 against your $20,000 income. That would then only leave you with taxable income for the year of $800, and your tax on that amount would be $80.

If you take out the $9,000 each year for the next 5 years, then at the end of the 5 year period, you will only owe another $5,000 on the home, and can pay off the balance in the 6th year. Each year that you do this you will owe no more in tax than $80.

The interest rate that you would be paying on the 5 year balloon note should be no more than around 5.5% to 6%, and of course your principal amount will be reduced each year as you make annual payments of $9,000 on the note.

This is going to be the best way for you to minimize taxes on your IRA withdrawals.

There is one other thing that I would suggest. If you choose to go this route, then at the end of the 5 years, once your new home is paid for, I would continue to take yearly withdrawals from your IRA account of $9,000 each year, since it will only cost you tax of $80 to do this. Then take that $9,000 and roll it over in to a Roth IRA account instead of a traditional IRA.

Once you have the Roth IRA open, you never have to worry again about paying tax on that Roth IRA account. Any earnings that are made are totally tax free. So in future years when you make Roth IRA withdrawals, you owe no tax whatsoever. So your money still continues to grow tax free, and the money it earns is also free from tax. And you should definitely take advantage of making those $9,000 annual withdrawals since by doing so your tax bill is only $80 on the entire amount.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you again Randy, and let me know if you have more questions. I am happy to help you with whatever I can.

Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Verified
Merlo and 87 other Tax Specialists are ready to help you
Ask your own question now
Ask Merlo Your Own Question
Merlo
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
9,783 Satisfied Customers
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad

Merlo is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,300 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,338 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

Robin D.

Robin D.

Senior Tax Advisor 4

13,980 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,651 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

R. Klein, EA

R. Klein, EA

Enrolled Agent

1,839 satisfied customers

Over 20 Years experience

< Previous | Next >

Related Tax Questions
Does the new (in effect 01-01-2018) standard deduction for
Does the new (in effect 01-01-2018) standard deduction for couples of $24,000. apply to 2017 tax prep? … read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
Please let me know what is the standard deduction on the
Hi. Please let me know what is the standard deduction on the 1040 form for 2017 for a single person with no dependents. This is for a friend. This is in California. Thank you.… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
My wife is and OTR driver can we claim standard deduction
My wife is and OTR driver can we claim standard deduction and her per diem both? she is paid by 10-99 … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
Are adr fees in a roth ira or an ira deductible, as
are adr fees in a roth ira or an ira deductible, as investment expenses? … read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,083 satisfied customers
If I don't have any ordinary income, only social security
Second opinion] if I don't have any ordinary income, only social security and have a long term capital gain from the sale of a business, how would it be treated for tax purposes? … read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
If I don't have any ordinary income, only social security
if I don't have any ordinary income, only social security and have a long term capital gain from the sale of a business, how would it be treated for tax purposes? … read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,083 satisfied customers
I file a joint return with my husband. I have a rollover IRA
I file a joint return with my husband. I have a rollover IRA and want to do a contribution for 2017 to be able to use it as a tax deduction. 2 questions: What is the cap on individual contributions th… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
Can one take a distribution from a traditional IRA to pay
Can one take a distribution from a traditional IRA to pay for a dependents college tuition without incurring the 10% early withdrawal penalty?… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
I have about 42k in a traditional IRA, 23k from a before tax
I have about 42k in a traditional IRA, 23k from a before tax pension roll over, 5k in gains, ~8k in constructive, the remainder in dividends. If I want to withdraw 10k for a first time home purchase, … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
IfI cash in a traditional IRA and pay the taxes on it, can I
IfI cash in a traditional IRA and pay the taxes on it, can I spread the income amount out over 5 years ..... to show my income decreased annually? If I show the whole amount as income then my medicare… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
On Social Security, received dividend on traditional IRA
On Social Security, received dividend on traditional IRA want to withdrawn funds from Roth IRA … read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,083 satisfied customers
Suppose my taxable income in 220,000 this year and the tax
Suppose my taxable income in 220,000 this year and the tax rate is X up to 200K, but Y for 200and over, do I pay Y on the full 220K or just that above 200K? … read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
Traditional IRA contribution - *Married taxpayers file MFJ
Traditional IRA contribution -*Married taxpayers file MFJ *One spouse covered by retirement plan, one is not *AGI will be over $ 200K for 2017 *Taxpayer that is not covered by retirement plan, contrib… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,083 satisfied customers
What are tax rules for an inherited Roth IRA, GA, the
what are tax rules for an inherited Roth IRA JA: Since estate law varies from place to place, can you tell me what state this is in? Customer: GA JA: What documents or supporting evidence do you have?… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
I have a question regarding the ordinary income tax. If the
Hello, I have a question regarding the ordinary income tax. If the ordinary income tax due is negative does that apply anywhere? This pertains to the sale of an S corp .business. … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,980 satisfied customers
My wife has a traditional IRA, Roth IRA, 401K and a pension.
My wife has a traditional IRA, Roth IRA, 401K and a pension. I have a Rollover IRA, Roth IRA and two 401ks. We wish to divide all retirement funds 50/50 but I do not see a way to communicate that. Ide… read more
Chad EA, CFP ®
Chad EA, CFP ®
IRS Enrolled Agent, CFP(R),
Master\u0027s Degree
1,083 satisfied customers
I am thinking of converting my traditional IRA to a Roth IRA
I am thinking of converting my traditional IRA to a Roth IRA and I am trying to figure out what tax rate is used in the conversion. My ordinary inocme, excluding cap gains and dividends, with be negat… read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
I filed a joint return through TurboTax. My taxable income
I filed a joint return through TurboTax. My taxable income was $87,829. Using the IRS's published tax rate schedule, the tax I owe should be $13,499.25. TurboTax calculated I owe $17,787 (this compare… read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x