Monday, October 04, 2004

Questions and Answers QuestionAre awards received in a wrongful death case taxable? AnswerMy condolences for your loss. I will only discuss the federal tax rules for your issue. You should be working with an attorney and a tax return preparer in settling your father-in-law's estate. Amounts received for physical personal injuries (including wrongful death) are excludable from taxable income. Punitive damages are taxable income. (Internal Revenue Code Section 104(a)(2).) However, if only punitive damages may be awarded under a state's wrongful death statutes, which were in effect on or before September 13, 1995, the damages are excludable (§ 104(c)). The CCH Federal Tax Service cites the Conference Committee Report to P.L, 104-188 (1996) H,R. Rep. No. 104-737 in concluding that nonpunitive damages received for wrongful death are excluded from income under Internal Revenue Code Section 104. The clarifying language under § 104(c) and Letter Ruling 200029020 also support this conclusion. Damages received under a wrongful death statute are excludable from the taxable estate of the deceased person, but amounts that person would have been entitled to during his or her lifetime for pain and suffering or as reimbursement for medical expenses, etc. are includable in the taxable estate. (Revenue Rulings 69-8, 54-19, 75-127, 75-126, 83-44.) QuestionI want to buy the home next door to mine, fix it up and sell it 2 or 3 months later. What kind of taxes and fees will I have to pay? What are the negatives in selling so fast? AnswerI don't know what fees you will have to pay. There will probably permits for the repair work. There may be commissions to real estate brokers. If this is an isolated transaction, any gain will be a short-term capital gain, subject to regular income tax rates (maximum 35%). If you held the house for more than one year, you could qualify for long-term capital gains rates (maximum 15%). Holding the house for a longer period of time exposes you to more market risk. If mortgage interest increase dramatically, the value of the house could go down or it could be harder to sell. If you do a lot of "rehabs", you will probably have a trade or business, not qualifying for capital gains treatment and subject to self-employment taxes in addition to regular income taxes. Good luck! QuestionCan I file Chapter 7 for an S corporation that has no assets and no money, but owes 2004 (California) minimum tax of $800 plus penalties? AnswerI'm not a bankruptcy attorney. It seems to me it would cost less to pay the tax and terminate the corporation before the end of this year to stop the expense. QuestionWe lost $2 million in the stock market over the last two years. I need money to pay bills. I have money in my wife's Roth IRA, my Roth IRA, or my SEP IRA. Can I take the money from the IRAs tax-free? Would it be better to get a home equity line of credit? Would it be better to get a home equity loan? AnswerI don't have enough details to answer your questions. I am assuming you are under age 59 1/2. The SEP-IRA is the worst candidate for funds, because withdrawals will be subject to income taxes plus penalties. There is an exception when the withdrawals are made as a series of substantially-equal payments over your life expectancy. (§ 72(t)(2)(A)(iv).) The amounts contributed to the Roth accounts can be distributed tax-free. Amounts in excess of the contribution amounts are subject to regular tax plus the 10% early-distribution penalty. The equity line of credit has the advantage of being able to take funds as you need them, but will probably have a higher interest rate and annual fees as compared to the equity loan. I know you are short on funds, but you should seek more detailed help to solve your problem. Good luck! QuestionMy husband and I bought a home in Palmdale, CA on June, 2003. We want to sell the house now and buy a new home. We were told we could avoid the tax if we bought the replacement residence within a certain time frame. Is that right? AnswerYour friend is thinking about an old tax law that has been repealed and replaced with the new "more than two years holding period" rule. If you sell your home with the facts you gave me, any gain will be taxed as a long-term capital gain. Remember California taxes long-term capital gains at the same rates as other income and will require income tax withholding for the sale of 3 1/3% of the sales price. 3:01:53 PM

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