Taking Back a Home Deeded Away
Q: I recently deeded my home to my daughter who lives with me, but I think I made a dreadful mistake and I want to undo it. I wasn’t feeling well when I made this transfer. Is there anything I can do about it now? My daughter is willing to go along with anything I decide. The house is worth about $100,000.-- M.E.L .
A: It probably was a mistake to deed your home to your daughter. By making the gift while you are alive, you transferred to your daughter your basis in the home. She will be liable for income taxes on its appreciation above that amount when she sells the home. Assets bequeathed at death, however, are valued as of the donor’s date of death, and only appreciation above that amount is taxable upon their sale. (Estate taxes are an entirely separate issue. Assets bequeathed at death are included in the deceased’s estate for determining the amount of estate taxes owed. However, no taxes are assessed on estates worth less than $600,000.)
What can you do about all this now? The answer hinges on how unwell you were when you deeded away the home. According to the Internal Revenue Service, gifts given in the expectation that the donor is about to die--the term is “causa mortis”--can be taken back if the expected death doesn’t occur. The principle, derived from English common law, is based on the notion that a gift cannot be considered completed unless either it is given unconditionally or all the conditions surrounding it are satisfied. If you gave your home to your daughter because you feared you were about to die--and she understood and/or is willing to attest that those were the conditions--then you can simply rescind the gift and take back title to the home. If you filed a deed in the county recorder’s office, you should file another one returning the home to your name.
But what if you weren’t at death’s door? What if you simply made a mistake? Given the value of your home and your apparent naivete in estate planning matters, the IRS isn’t likely to go after you with guns blazing. If you quietly unwind the transaction, you should escape the notice of the IRS. “Sometimes we do try to be pragmatic and reasonable,” said one IRS estate lawyer.
How Interest Works On Long-Term Securities
Q: How does the government pay interest on longer-term securities, such as 10- and 20-year notes? Do I get a monthly or quarterly interest payments? Is it sent directly to me?-- J.Y.
A: Interest on Treasury Notes--securities held for one year or longer--is deposited directly into a checking or savings account of your choice twice a year. You designate the account to receive the direct interest deposit when you open your account with the Treasury Department.
Some Passive Income Is Subject to Being Taxed
Q: I am 66 years old and receive Social Security. I own part of an orange grove and receive income from its operation. The income is passive since the grove is managed by a hired employee.
Is it true that I have to pay self-employment taxes on my passive income? Should these taxes increase the amount of Social Security benefits I am entitled to receive?-- S.A .
A: Passive income--revenue you get without directly working for it--can be subject to self-employment taxes; it depends on the business the partnership is operating. Farming, which is what owning an orange grove really is, qualifies as an income-generating “enterprise,” and owners are subject to self-employment taxes up to the applicable annual limits. (Perhaps the most prevalent sources of passive income--investment interest and dividends and real estate investment revenue--are not subject to self-employment taxes because these activities are not ongoing business operations.)
Self-employment taxes pay for Social Security and Medicare benefits. Employees of a business typically pay half the tax, with employers contributing the other half. The self-employed pay it all. This year the self-employment tax rate is composed of two rates: 15.3% on earnings up to $55,500 and 2.9% on earnings between $55,500 and $130,200. Taxpayers are subject to self-employment taxes regardless of their age or whether they are already receiving Social Security benefits.
By the way, your self-employment taxes will count toward your benefits and could potentially increase the amount you are entitled to receive.
However, if your earnings from the orange grove are substantially less than your pre-retirement earnings, the impact will be negligible since Social Security benefits are based on your highest wage-earning years.
Good Bookkeeping for Your Investment Club
Q: I am thinking of starting an investment club with some friends. How should we handle the reporting of dividends and sales income for their members?-- T.J.P .
A: According to the National Association of Investor Clubs, which has overseen the creation of thousands of investment clubs, virtually all groups are organized as simple general partnerships. Someone within each group is designated as the treasurer or bookkeeper, and it is the job of this person to keep track of the club’s expenses, its trades and the dividend income generated by the investments.
After organizing as a partnership, the groups usually petition the Internal Revenue Service for exemption from reporting income on IRS Form 1065, the partnership income form. If the exemption is granted--and it usually is--the treasurer keeps track of dividend payments and any income or losses generated by the trades. At the end of the year, the treasurer determines each partner’s share of the total. It is the responsibility of each member to report that share on his income tax filing.
For more information, ask the investment club association for its free pamphlet. The group’s address is 1515 E. Eleven Mile Road, Royal Oak, Mich. 48067.
