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A Gift to Spouse Is Not Tax-Free but Tax-Deferred

QUESTION: Your recent discussion of $10,000 tax-free gifts got me thinking. Does a spouse qualify for such a gift? Would whether they have a joint checking or savings account make a difference? What if they are separated or divorced?--X. Q.

ANSWER: As of 1981, one spouse is allowed to give another any amount of money or other property without either party paying federal taxes. Said in another--and technically more precise--way, there is a 100% deduction for gift and estate tax purposes on spousal gifts. The law applies regardless of the type of savings and checking accounts the couple has and even in the event the couple has separated. However, the marital deduction does not apply once the marriage is dissolved by divorce.

However, you should not think the marital deduction is a permanent escape from taxation. When the recipient dies or gives the property to another, the gift is subject to applicable estate and gift tax regulations. At best, a gift to a spouse enjoys only a tax deferral.

Q: My wife and I are both retired school teachers receiving pensions from the state Teachers Retirement System. This year, my wife will earn about $5,000 as a self-employed consultant. Our total adjusted gross income for the year will be in excess of $55,000.

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May my wife make a $2,000 deductable contribution to an individual retirement account for 1988? May she make a contribution to a Keogh account? We are not sure if the tax law changes in 1986 changed our eligibility for these tax-deferred accounts.--J. K. M.

A: Yes, because your wife is no longer covered by a pension plan--drawing a pension doesn’t count in this case--she may make a $2,000 deductible IRA contribution. In fact, if you are not employed, your wife can make an IRA contribution of as much as $2,250, the full amount allowed an individual with a non-working spouse.

Alternatively, your wife could choose to contribute to her Keogh plan. But the maximum deductible contribution would be 25% of her annual earnings for the year, or $1,250.

Q: We are confused about the state proposition governing homeowners over age 55 who buy a new house. The original price of our present home was $50,000 and we pay about $500 per year in taxes.

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If we sell the house for $300,000 and purchase a new home for between $275,000 and $325,000, will the taxes remain at $500 per year? For how long do the taxes remain low? What if we can’t find another property in the qualifying price range? Can we prorate the tax break and receive a partial benefit? Please explain this proposition.--N. M.

A: Proposition 60, approved by California voters in 1986, offers an attractive property tax break to homeowners 55 years or older who move to a new home. Basically, the law allows these homeowners to transfer the current assessed value of their old home to the new one--but only if the new home has a fair market value equal to or less than the fair market value of their old home. The law’s provisions are particularly attractive to older homeowners who are enjoying the low property taxes allowed under Proposition 13, the Jarvis Amendment, approved in 1978.

As a result of Proposition 13, the assessed value of a home purchased after 1978 is about 1% of the purchase price. For homes purchased before the passage of Proposition 13, it is the property’s assessed value in 1975-76. (In both cases, the assessed value can increase as much as 2% every year without voter approval.)

We’ll assume that you are selling a house with an assessed value of $50,000. And we’ll assume that the fair market value of this house--which can be far different from the sales price--is $300,000.

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In order to transfer your assessed value of $50,000 to the new house, it must have a fair market value of $300,000 or less. However, you have two years in which to purchase the replacement house, and in the first year after your sale, you are allowed to purchase a home worth 105% of the market value of the original house, or $315,000. If you wait until the second year, you’re allowed to spend as much as 110% of the original home’s fair market value, or $330,000.

Be aware that the sale and purchase prices of the two dwellings are not always the same as fair market value. The county assessor must determine the market value for each property. The appraisal will be made when you apply for the tax base transfer from your local county assessor. The assessed value of your new home can increase by 2% a year, so your property tax will rise accordingly.

If the fair market value of the replacement house exceeds the allowable limit--even by a small amount--the transfer of the old assessed value cannot take place. There is no partial benefit. Further, you should know that this tax break can be used only once by a taxpayer and is available only if the home being sold is the taxpayer’s principal residence.

Finally, the law applies only to homes bought and sold within the same county. However, a pending legislation would allow the special tax treatment for sales and purchases that cross county lines.

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For more information on Proposition 60, write to the state Board of Equalization’s Property Taxes Department, Real Property Technical Services Unit, 1020 N St., Sacramento, Calif. 94279. This department has prepared a simple but comprehensive question-and-answer pamphlet on the proposition.

Q: In 1982, I opened an individual retirement account with a $2,000 contribution that was deductible from my federal income taxes. However, California state law at the time did not permit the deduction, so I paid taxes on that $2,000 of income. The IRA account is now worth $4,147.98 and I have started to make mandatory annual withdrawals of $191.15. I know that this amount is fully taxable by the Internal Revenue Service. But what do I owe the state? I have already paid taxes on the $2,000 principal.--C. S.

A: According to the state Franchise Tax Board, only the interest portion of your $191.15 withdrawal is taxable by the state. Without knowing what sort of account you have established or the withdrawal arrangement governing it, we can’t give you a precise amount that you should declare as taxable income. The institution where you have the account should be able to give you the precise proration of interest and principal in your annual distribution. If fact, if you check your annual distribution statement, you may find it listed. Otherwise, call the institution that handles your account.


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