Home Ownership

Your home sale profits are fully tax-free up to 250,000 dollars for single filers or 500,000 dollars for married couples filing jointly. This applies to both federal and Massachusetts state taxes. To qualify for this tax break, you must meet specific ownership and residence requirements set by the IRS. First, you must pass the ownership and residence tests. You need to have owned the home for at least two years out of the five years before the sale date. You also must have lived in the home as your primary residence for at least two years out of those same five years. Additionally, you cannot have used this home sale tax exclusion on another property within the past two years. Federal tax rules state that if your profit falls below the exclusion limit, you owe nothing. If your profit exceeds 250,000 dollars as a single filer or 500,000 dollars as a married couple, you only pay capital gains tax on the amount above that limit. The federal capital gains tax rate will depend on your total income. High earners may also owe an additional net investment income tax. Massachusetts state tax rules match the federal exclusion limits exactly. Profits under the thresholds are completely exempt from state income tax. Any profit that goes over the limit is taxed at the flat Massachusetts long term capital gains rate of five percent. If the taxable profit pushes your total annual income over one million dollars, the portion over that million dollar mark will face an extra four percent state surcharge.To calculate your actual taxable gain, you must determine your adjusted basis and net proceeds. Your adjusted basis is the original purchase price plus the cost of major home improvements like a new roof or kitchen remodel. Your net proceeds are the final selling price minus selling expenses like real estate agent commissions and closing costs. Your capital gain is the net proceeds minus your adjusted basis. You then subtract your exclusion limit from this capital gain to find your taxable amount. Some special exceptions and rules may apply to your situation. You might qualify for a partial, prorated exclusion if you have to sell the home early due to a job relocation, health issue, or other unforeseen circumstance. If you ever used the home as a rental property or claimed a home office deduction, you may have to pay back depreciation taxes. You will likely sign a certification at closing to show your profit is exempt, or you will receive a form 1099-S to report the sale.

As a CPA, I came across this website and joined just last week, and I just came across your question.

First, assuming that you and your husband are each first-time homebuyers, you’re correct that you could use up to $10,000 from your traditional IRA penalty-free for a down payment.

Second, the mechanics of how to do it are a little more involved. If it were possible, I think the best course of action would be to have the bank transfer the money directly to the title company (or whoever is handling closing). This way, you never actually take possession of the money. If that were not possible, I’d have the bank make a check out to payee specified by the title company (or whoever is handling closing). A bank should be willing to at least do that much. If a bank was unwilling to do even that much, I suppose you could resort to taking out the money yourself, but then you leave yourself in a weaker position (from an audit perspective) if you were ever audited. Why put yourself in a position where you have to defend or explain or prove that you used the money correctly when you can avoid the problem altogether?

Third, come tax time next year, the bank should issue a Form 1099-R for the distribution. You’d have to prepare your tax return correctly, to report to the IRS that you qualify for the exception to the 10% early withdrawal penalty because you used the money for a first-time home purchase.

Finally, keep in mind that the $10,000 is a lifetime limit, to be used only one time.

Happy house hunting!

If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income.
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
This exclusion was scheduled to expire for debt discharged after December 31, 2012. ATRA, extends the exclusion to debt that is discharged before January 1, 2014.

When services are performed in the parents’ home according to instructions by the parents, you are considered an employee of the parents and do not have self-employment earnings

Household employees include baby sitters, nannies, housekeepers, drivers, caretakers, health aids, private nurses, maids, gardeners, and others who work in or around your private residence as your employees. Household workers who are under age 18 during any part of the calendar year are exempt from the FICA tax for the entire year even if the wages exceed $1,800 if the household employment is not their principal occupation. A full time student is considered a full time occupation. Workers you get from an agency are not your employees if the agency is responsible for who does the work and how it is done. Self-employed workers are not considered your employees. In the current year, if you paid a household employee cash wages of $1,800 or more in a calendar year, you generally must withhold social security and Medicare taxes from all cash wages you pay to that employee. Household employers must file IRS Schedule H to pay the social security and federal unemployment tax and any withheld federal income taxes. A household employer is not required to withhold federal income tax from a household employee's wages. Federal income tax withholding occurs if the employee requests and the employer agrees.

The Federal Reserve System is the monetary authority of the United States. It was established in 1913, and governed by the Federal Reserve Board which is located in Washington, D.C. The system includes twelve Federal Reserve Banks and is authorized to regulate monetary policy in the United States as well as to supervise Federal Reserve member banks, bank holding companies, international operations of United States banks, and United States operations of foreign banks.

A "After acquired clause" is a contractual clause in a mortgage agreement stating that any additional mortgage able property attained by the borrower after the mortgage is signed will be regarded as additional security for the obligation addressed in the mortgage.

Bank collection float is the time that passes between when a check is deposited into a bank account and when the funds are available to the depositor, during which period the bank is collecting payment from the payer's bank.

If you pay a household worker such as a housekeeper, babysitter, nanny, maid, gardener or other household helper less than $1,800 in the current year, you will not have to pay Social Security or Medicare taxes on behalf of the worker. The $1,800 threshold has been raised to $1,800 in the year 2013. Payments made to students under the age of 18 for domestic services are exempt from employment taxes. You do you have to pay employment taxes on behalf of a worker who is considered a self-employed "independent contractor". Also exempt are payments to workers who are employees of the agency you contract with.