Day: September 5, 2024

When you sell a primary residence, the IRS allows you to exclude from your capital gains taxes the first $250,000 of profits if you file single or $500,000 of profits if you file jointly. You must include any surplus of those amounts in your taxable capital gains for the year, though. So, what if you sell your house for an $800,000 profit? You will probably owe taxes on a good portion of that sale, although you’ll get a significant tax break in the process.

Do you have questions about downsizing for retirement or retirement planning in general? Speak with a financial advisor today.

How Capital Gains Work on a Home Sale

When you sell any asset, including anything from real estate to investments to personal property, the profits are considered capital gains. The IRS calculates those profits as the following:

Sale Price – Tax Basis = Taxable Capital Gains

The sale price is whatever amount you received for selling the property, and the tax basis is the amount of capital you have invested in the underlying asset. For real estate, this generally includes:

• The price paid to buy it, including legal fees, title insurance and costs of setting up necessary services like utilities

• Costs of improvements and upgrades to the building or property (generally considered any costs that improve the property or extend its lifespan)

• Some costs involved with selling the property, including realtor’s fees, advertising and costs involved with showing the property

However, this generally does not include property taxes, financing or interest costs, costs of use and occupancy and necessary maintenance.

So, for example, say that you buy a house for $500,000. You then have the following hypothetical expenses:

• $40,000 of mortgage interest

• $25,000 to remodel the kitchen

• $10,000 to install a new boiler when the old one breaks

• $6,000 to repair a weak point in the roof

If you now sell the house, your cost basis would be $535,000, as the home cost you $500,000 and the kitchen and boiler both count as upgrades to the property ($25,000, plus $10,000). Even though the old boiler was broken, by installing a new one rather than repairing the old it counts as an update.

Your financing costs do not count, nor do the necessary repairs you made to the roof. Repairs are considered costs to maintain the property’s existing value rather than upgrades to improve the property’s value.

If, down the road, you then sell the house for $700,000, you would have $165,000 of potentially taxable capital gains ($700,000 – $535,000 = $165,000).

If you have questions about retirement planning, consider speaking with a financial advisor.

What Is the Home Sale Exclusion?

When you sell a primary residence, the IRS allows you to take a home sale exclusion, otherwise known as a Section 121 exclusion. Under this rule, you can exclude a certain amount of primary residence sale profits from your taxable capital gains. For single filers, this number is $250,000, and for joint filers, it’s $500,000.

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You must meet certain conditions in order to claim this exclusion. Most notably:

• You must have owned the home for 24 of the last 60 months (can be nonconsecutive)

• You must have used the home as your primary residence for 24 of the last 60 months (can be nonconsecutive)

• You must not have claimed the home ownership exclusion in the past two years

Individuals who meet these conditions can first eliminate the exclusion amount from their home sale profits, then include any remainder in their taxable capital gains for the year. Individuals who do not meet these conditions must include all of their profits from the sale of the property in their taxable capital gains for the year.

So, for example, say that you have sold your house and netted $800,000 after accounting for the property’s tax basis. Here’s how you’d break this down:

• If your home does not qualify for the Section 121 exclusion, you have taxable capital gains of $800,000.

• If your home does qualify for the Section 121 exclusion, you have taxable capital gains of either $550,000 as a single filer ($800,000 – $250,000 = $550,000) or $300,000 as a joint filer ($800,000 – $500,000 = $300,000)

The advantage of the home sale exclusion is that it’s simple and offers a considerable amount. Most households will be able to avoid taxes on much or all of the profits from the sale of their home under this law, and the rules are very straightforward. Consider consulting a financial advisor to plan a tax strategy for your home sale and beyond.

Bottom Line

When you sell your home, you can take a $250,000 (single) or $500,000 (joint) exclusion from your capital gains. After that, you must pay taxes on any remaining profit from the sale. This is a significant and straightforward tax break, but it will mean at least some taxes for especially high-profit sales.

Home Sale Tips

• A financial advisor can help you build a comprehensive retirement plan that could include downsizing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• For many households, their house is their single most valuable asset. That can be a very good thing, since you might literally be sitting on a strong retirement plan, but it also requires careful management. If you are thinking about selling your house, consider these steps to make sure you do it carefully.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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The post I’m Selling My House and Netting $800k. Can I Avoid Taxes While Downsizing for Retirement? appeared first on SmartReads by SmartAsset.

I want to do a Roth conversion from my traditional IRA in the amount of $250,000. It’s my understanding that I have to pay the income tax on the $250,000. Can that tax be paid from the funds in the IRA or do I have to pay the tax outside of the IRA?

– Kevin

This one is straightforward. The IRS doesn’t care where the money comes from. As long as you cut them a check they’ll be happy!

All kidding aside – yes, the $250,000 is included in your gross income. You can pay the tax bill using either the converted funds or money from other sources, but the difference is potentially substantial. You may want to consider using non-IRA funds to pay the tax bill if it’s an option for you.

A financial advisor can help you make important retirement planning decisions, like when to do a Roth conversion and in what amount. Connect with a financial advisor.

Roth Conversion Taxes

To understand the tax implications of a Roth conversion, it’s helpful to think about what this type of transfer does. A Roth conversion allows you to move money from a traditional, tax-deferred retirement account into a Roth IRA.

The main idea behind tax-deferred retirement accounts is in the name. When you contribute to a traditional IRA, 401(k) or similar account, you get to deduct that amount from your current gross income, thereby avoiding the tax liability for that year. Instead, that tax liability is deferred until you withdraw the money from the account. This deferral also applies to the growth, dividends and interest the money earns.

Typically, this tax bill comes due when you start making withdrawals in retirement. However, moving that money into a Roth IRA also removes it from the account, triggering income taxes. Assuming that you made deductible contributions (not non-deductible contributions) to your IRA, the converted funds are added to your gross income for the year and increase your tax liability. (A financial advisor with tax planning expertise can be a valuable resource as you make important financial decisions, especially around retirement.)

How to Pay Roth Conversion Taxes

You can pay the tax bill on a Roth conversion using a portion of the converted balance or money you have outside of your IRA. Here’s a closer look at the two options:

Using the Converted Funds

As a practical matter, many people rely on the converted funds to pay the income taxes on the conversion. If you don’t have money outside of the IRA to cover the taxes, this may simply be your only option. If that’s the case you can normally have the financial institution withhold the money when they do with conversion.

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Paying with Other Savings

If you have enough savings outside of your IRA to pay the tax bill, this is almost always going to be the better option from a retirement savings perspective. By taking this approach, you’ll not only avoid potential tax penalties associated with using the converted funds to pay your taxes, but you’ll also ensure that the entire converted balance grows tax-free in your Roth account. Of course, be mindful to not deplete your emergency savings.

Which Is better?

As an example, let’s assume someone in the 24% marginal tax bracket is converting $100,000 and they have $24,000 in cash, which they can use to pay the tax bill:

• If they pay the tax bill using the converted funds, they’ll only have $76,000 leftover in their Roth IRA after taxes, along with their $24,000 in a taxable savings or brokerage account.

• If they use the cash savings to pay the tax bill, the full $100,000 would go into the Roth IRA.

The big difference comes in the way the two accounts are taxed. Since Roth IRAs grow tax-free, it’s much more efficient to maximize the savings there, especially if you plan to invest that money for a while. (Consider matching with a financial advisor if you need help tackling retirement planning scenarios like this one.)

Special Consideration if Under 59 ½

If you haven’t yet reached age 59 ½, it’s important to consider the 10% early withdrawal penalty. The conversion itself is not subject to this penalty, but any amount you take out to pay taxes will be. This makes paying the conversion taxes with cash savings even more valuable if you’re under age 59 ½.

Furthermore, the penalty applies whether you have a portion of the money withheld for taxes at the time of the conversion or you withdraw the money from your Roth IRA when you file your taxes. Withdrawing these funds less than five years after a conversion violates the five-year rule on Roth conversions and triggers the 10% early withdrawal penalty if you haven’t reached age 59 ½. (This five-year rule can be confusing, but a financial advisor can help you navigate it and potentially avoid costly tax penalties.)

Bottom Line

You can pay the tax bill on a Roth conversion from any source. You can have a portion of the conversion withheld; you can wait until tax time and withdraw from the Roth balance; or you can use outside savings to cover the tax liability. Keep in mind that early withdrawal penalties may apply if you if you use IRA funds to pay the tax bill. If you are able, paying with outside dollars is typically the far better option.

Tips for Finding a Financial Advisor

• Hiring a financial advisor isn’t just about finding someone who can get the biggest return on your investment. That’s important, of course, but you should also look to work with an advisor whose services and areas of specialty align with your needs. For instance, if you need help organizing your estate and making a plan for how can pass your wealth on in a tax-efficient manner, you’ll want to find an advisor who offers estate and legacy planning services. After all, not all advisors specialize in these areas.

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

Photo credit: ©iStock.com/zimmytws, ©iStock.com/shapecharge

The post Ask an Advisor: I’m Going to Do a Roth Conversion on $250k. Can I Use the Converted Funds to Cover the Taxes? appeared first on SmartReads by SmartAsset.

Benzinga and Yahoo Finance LLC may earn commission or revenue on some items through the links below.

Not many people can claim to be a better investor than Warren Buffett. However, a little-known woman named Anne Scheiber beat the “Oracle of Omaha” at his own game. When Scheiber retired in 1944, she only had a $5,000 pension. She invested wisely enough to grow her nest egg into a $22 million fortune by the time she died at 101. Even Buffett couldn’t match her return on investment.

Check It Out:

Anne Scheiber worked as an auditor for the Internal Revenue Service for 23 years. During her entire employment with the agency, she was never promoted and never received more than $4,000 in annual salary. She didn’t attend the Wharton School of Business or any of the other Ivy League colleges that typically produce America’s premier bankers and investors.

Anne Scheiber’s $5,000 pension was not extravagant; she was 51 when she got it. That’s roughly the equivalent of $89,000 in today’s money. It wasn’t enough for her to retire comfortably in 1951. Facing several decades of life with relatively little money, Anne Scheiber had no choice but to invest wisely to build her wealth.

So, how did she do it? Scheiber and Buffett never met, but they shared a few things. Chief among them is a commitment to living frugally. Scheiber preferred walking to work over taking the bus to save money. Her attorney Ben Clark told Money Magazine, “She was saving 80% of her salary at least. In those days, you could get a hot dog lunch at Nedick’s for 15 cents, but I know she found an even cheaper place.”

The closest modern equivalent to a 15-cent hot dog would be Costco’s famous $1.50 hot dog and drink special. It would probably be impossible for Anne Scheiber to beat that price, but she would surely find other innovative ways to save if she were alive today. It’s not hard to imagine her scouring the internet for special deals on all her favorite products. But saving money is only half the battle.

Don’t Miss Out:

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Scheiber still had to grow her wealth. To do so, she adopted an investing strategy remarkably similar to Buffett’s. She believed in investing in industries that she had personal knowledge of and invested for the long term. Scheiber’s broker, William Fay, told the New York Times that “She was never looking for a quick buck. Her whole idea was to get performance on a long-term basis.”

Scheiber’s portfolio included blue-chip stocks like PepsiCo, Chrysler, Bristol-Myers, and Columbia Pictures. She also made it a point to stay very informed about her investments. Anne faithfully attended shareholder meetings for the companies in her portfolio. As the portfolio grew in value, her experience as an IRS auditor came in very handy.

Scheiber strategically held investments or liquidated them in such a way as to minimize her capital gains tax exposure. Eventually, Scheiber’s portfolio grew to an estimated $22 million – a 4,400% gain on her original $5,000 pension. After Scheiber died in 1995, her lawyer, Ben Clark, told the New York Times, “You think Warren Buffett, you know, that guy, was good at this sort of thing? She ran rings around Warren Buffett.”

Perhaps the most amazing thing about Scheiber is that she didn’t begin investing until she was in her early 50s. It’s also encouraging to middle-aged investors who are behind on their retirement planning. Living within your means and investing wisely for the long term can still serve you well. It worked for Anne Scheiber and Warren Buffett. It could certainly work for you too.

Are You Missing Out On Higher Yields?

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through dividend stocks… Certain private market real estate investments are giving retail investors the opportunity to capitalize on these high-yield opportunities and Benzinga has identified some of the most attractive options for you to consider.

For example, the Jeff Bezos-backed investment platform just launched its Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. The best part? Unlike other private credit funds, this one has a minimum investment of only $100. 

Don’t miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga’s favorite high-yield offerings.

This article The IRS Auditor Who Beat Warren Buffett At His Own Game originally appeared on Benzinga.com

(Reuters) — Intel’s (INTC) contract manufacturing business has suffered a setback after tests with chipmaker Broadcom (AVGO) failed, three sources familiar with the matter told Reuters, dealing a blow to the company’s turnaround efforts.

The tests conducted by Broadcom involved sending silicon wafers – the foot-wide discs on which chips are printed – through Intel’s most advanced manufacturing process known as 18A, the sources said. Broadcom received the wafers back from Intel last month.

After its engineers and executives studied the results, the company concluded the manufacturing process is not yet viable to move to high-volume production.

Reuters could not determine the current relationship between Broadcom and Intel or whether Broadcom had decided to walk away from a potential manufacturing deal.

“Intel 18A is powered on, healthy and yielding well, and we remain fully on track to begin high volume manufacturing next year,” an Intel spokesperson said in a statement. “There is a great deal of interest in Intel 18A across the industry but, as a matter of policy, we do not comment on specific customer conversations.”

A Broadcom spokesperson said the company is “evaluating the product and service offerings of Intel Foundry and have not concluded that evaluation.”

Intel’s contract manufacturing business was launched in 2021 as a key part of Chief Executive Pat Gelsinger’s turnaround strategy.

Broadcom is not a household name but makes crucial networking gear and radio chips that helped generate $28 billion in overall chip sales in its last fiscal year. It has benefited from the boom in spending on artificial intelligence hardware, and J.P. Morgan analyst Harlan Sur estimated it will bank $11 billion to $12 billion from AI this year, up from $4 billion last year.

Some of its chip sales are from agreements with companies such as Alphabet’s Google and Meta Platforms to help produce in-house AI processors, which can include arrangements with a manufacturer, such as Intel or Taiwan Semiconductor Manufacturing Co.

Crucial setback

As part of a disastrous second-quarter earnings report that shaved more than a quarter from the company’s market value, Intel announced a 15% job cut and a reduction in capital spending related to its factory construction. Gelsinger and other executives will present a plan to the board of directors in mid-September on possible cuts to business units and teams to reduce costs, Reuters reported on Sunday.

Intel has committed to about $100 billion of expansion and new factory construction at several sites in the U.S. A crucial part of the company’s expansion includes attracting big customers such as Nvidia or Apple to fill up capacity at all its new sites.

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Intel reported a $7 billion operating loss for the foundry business, wider than the $5.2 billion in losses the year earlier. Executives expect the contract chip business to achieve breakeven in 2027.

Typically fabricating an advanced chip requires more than 1,000 separate steps inside a chip factory, or fab, and takes roughly three months to complete. Production success is determined by the number of working chips on each silicon wafer. Achieving a substantial yield is crucial to move to producing the tens of thousands or hundreds of thousands of wafers demanded by big chip designers.

Broadcom’s engineers had concerns with the viability of the process, the sources said. Typically that refers to the number of defects on each wafer or the quality of the chips fabricated.

For an advanced manufacturing process used by TSMC (TSM), the Taiwanese giant charges roughly $23,000 per wafer at high volume, according to two sources familiar with wafer pricing. Reuters could not determine Intel’s wafer pricing.

TSMC declined to comment on its wafer pricing.

Moving a chip design from a manufacturing process used by a company such as TSMC to another vendor such as Samsung or Intel can take months and requires dozens of engineers, depending on the complexity of the chip and the differences in manufacturing technology.

Betting on a new manufacturing process such as Intel’s 18A is impossible for some smaller chip companies because doing so would require resources they do not have.

Intel released its manufacturing tool kit for its 18A process to other chipmakers over the summer, Gelsinger said on an earnings call last month.

The company plans to be “manufacturing-ready” by the end of this year for its own chips and begin high volume production for external customers in 2025, Gelsinger said. At an investor conference last week, he said there are a dozen customers “actively engaged” with the tool kit.

(Max A. Cherney in San Francisco; Editing by Kenneth Li and Matthew Lewis)