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What you should know if you inherit your parent’s home

By Hook Law Center

Many people will inherit the house in which their parents lived. Deciding what steps to take with respect to the house can cause you to confront some financial and emotional concerns, and matters can become even more complicated if you have siblings. You have the option to sell the house, move into the house or rent it out.

If you decide to sell the house, view listings of comparable homes that have sold in the neighborhood and adjacent towns, and decide upon a minimum price. Make certain that the homeowner’s insurance is paid and current, and that the estate or trust is designated as the insured in the event anything happens to the house after your parents’ death and prior to the sale. The same applies to mortgage payments, property taxes and utility bills. Upon the sale of the property, you will be required to pay the balance of the mortgage, real estate commissions, transfer taxes and other closing costs. If you move into the house, there may be a rise in property taxes for you, as the house may be worth more than before. However, any special property tax break for seniors may not apply to you.

Nevertheless, if you subsequently decide to sell the house, and the house has increased in value, you may be eligible for the capital gains exclusion. Thus, if you are single, you will not have to pay capital gains taxes on a maximum of $250,000 profit, and if you are married, you will not have to pay capital gains taxes on a maximum of $500,000 profit. In order to qualify for this exclusion, you must reside in the house for a minimum of two of the last five years prior to the sale.
You may, instead, wish to rent out the house to generate income while still using the property during certain times of the year. For instance, the house could be a vacation rental, and at other times, you and your family could use it for family get-togethers. If you live relatively close by, you could serve as property manager rather than hiring one, thereby realizing savings of 10 to 30 percent of the rent.

In addition, you will have to switch the insurance coverage to a landlord policy that covers the structure and personal property along with medical and legal liability in the event a tenant is injured and files a lawsuit against you. This type of insurance also covers loss of rent in case the property can no longer be inhabited because of a covered loss.

You will also realize a tax benefit by modifying the house into a rental. The depreciation expense will help to lower your taxable rental income. Regarding tax savings, the house is a depreciable asset, and a certain portion of its value can be subtracted each year. Furthermore, you can depreciate improvements, such as a new roof, if they add value and lengthen the life of the property. However, in the event you sell, you will have to repay the depreciation to the IRS, and you will not be eligible for the capital gains exclusion because the house is not your main residence.

Posted on Wednesday, March 30th, 2016. Filed under Estate Planning.

How working after retirement affects Social Security

By Hook Law Center

There are people who wish to work when they have reached their 60s, 70s and beyond, but are concerned that their income will adversely affect their Social Security benefits. However, there is no cause for concern because according to the Social Security Administration (SSA), you do not run the risk of losing any Social Security benefits if you work past full retirement age, regardless of the amount of your earnings.

The SSA considers earnings to consist of the income earned from your job or your net income from self-employment. Earnings also include bonuses, commissions and vacation pay because they are relevant to employment. But pensions, investments and other retirement income are excluded.

If you are employed after you have attained full retirement age, your Social Security benefits can increase. The calculation of your Social Security benefits is based on the 35 years in which you earned the greatest amount of income. If your earnings past full retirement age replaces one of those 35 years, then the SSA will recalculate your benefits, and you could receive increased monthly benefits.

However, if you collect Social Security benefits prior to reaching full retirement age, and you keep working, then your benefits could be lowered. If you are under full retirement age for the whole year, the SSA will reduce your benefit payments by $1 for every $2 you earn in excess of the annual limit. In 2014, that limit was $15,480, and in 2015, it was $15,720.

In the year in which you attain full retirement age, the SSA reduces your benefits by $1 for every $3 you earn in excess of a different limit. In 2014, your earnings were limited to $41,400, but only the earnings prior to the month in which you reached full retirement age were counted. In 2015, your earnings were limited to $41,880.

Posted on Thursday, March 24th, 2016. Filed under Estate Planning.

You can insulate your retirement plan from government policy changes through tax diversification

By Hook Law Center

While government policies can adversely affect your retirement, there are steps you can take to minimize the impact that they can have on your life savings. People are usually concerned about tax rates, which can directly affect your strategy for saving, and the amount of funds in your 401(k)s, IRAs and other accounts that are accessible.

One of the ways in which you can protect your retirement is to disperse your retirement savings so that you will have funds in various accounts that are treated differently with respect to taxes. Try not to keep all of your retirement savings in traditional 401(k)s and IRAs, both of which are taxed at ordinary income tax rates upon making withdrawals.

An increase in ordinary income tax rates could cause you to have considerably less cash, after taxes, in retirement. However, because qualified withdrawals from a Roth 401(k) or Roth IRA account are not subject to tax, any savings in those accounts would not be significantly affected by a rise in the ordinary income tax rate.

You can also engage in further diversification by investing in stock index funds and tax-managed funds that yield a great deal of their return in terms of unrealized long-term capital gains. These kinds of gains are beneficial in that they are not subject to tax until you sell, and they are taxed at the same rate at which long-term capital gains are taxed. This rate is usually lower than those at which ordinary income and short-term gains are taxed. And when making withdrawals, you may also fare better by first removing funds from taxable accounts, then tax-deferred 401(k)s and IRAs, and then Roth accounts.

Moreover, be cautious when selecting the types of investments for your retirement plan. If you are worried about a potential future increase in the rate of inflation because of government monetary policy or excessive government spending, you can supplement your investments with natural resources funds, Treasury Inflation Protected Securities (TIPS) or Real Estate Investment Trusts (REITs).

Posted on Thursday, March 10th, 2016. Filed under Estate Planning.
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