DMV Tax Break Varies by County
Q: I know that at least some portion of the annual automobile registration fees we pay to the California Department of Motor Vehicles is tax deductible. The only problem is that I can’t figure out what the correct amount is. Can you help? -- M.H .
A: Every year, the Department of Motor Vehicles sends out about 33 million renewal notices for automobiles and commercial vehicles registered in the California. Those registration renewal forms clearly note that the “license fee” is the only portion of the charge that may be claimed as an income tax deduction. As a taxpayer, it is in your best interest to retain these forms when they arrive to aid in the preparation of your tax returns.
However, if you didn’t keep the forms, you may call your local DMV branch office to get this information. Have your license plate number available for prompt service. The precise amount you may claim as “license fee” deduction varies because each county is entitled to levy its own road and improvement assessments that are not tax deductible. Further, these charges may change from year to year.
Here are the current amounts residents of Southern California may deduct on their 1993 tax returns: Owners of non-commercial passenger vehicles registered in Los Angeles, San Diego and Riverside counties may deduct all but $35 of the annual renewal fee for each vehicle. In Orange County, you may deduct all but $36. In Ventura County, you may deduct all but $34.
Present Tax Basis on Community Property
Q: I am a recent widow. My husband had a revocable personal trust that is now irrevocable. I had a similar trust. However, we signed a legal document reaffirming that the property in each of the trusts was community property. I have been told that because of my husband’s death, the tax basis of the assets in my trust were reset as of his date of death. If that is true, I am anxious to give my children and grandchildren the full amount of the gifts I am entitled to make this year. Please advise: Will my gifts carry a capital gains problem? -- M.B .
A: Our experts say that if the assets in your revocable trust were in fact properly characterized as community property, their tax basis was reset as of your husband’s date of death. In this case, any gifts you make of these assets at this point would carry little or no capital gains “problems” since their tax basis has been stepped up to their value as of your husband’s death, thus eliminating any untaxed appreciation they accumulated over the years.
Expenses in Lawsuit May Be Deductible
Q: I sold a home in 1992 and was sued by the buyer in early 1993. Although I ultimately prevailed, my legal fees amounted to $9,500. Since this money was paid in 1993, may I deduct it as a miscellaneous expense on my 1993 income taxes? The home in question was a non-rental second home, not my primary residence. -- N.N.R .
A: Your ability to deduct the legal fees hinges on the reason for the lawsuit and whether you reported a taxable gain on the sale. If you were sued because of a matter relating to the sale of the home and you reported a taxable gain on the sale, you are entitled to deduct your legal fees as a miscellaneous itemized deduction. If you reported a loss on the sale, your legal fees are not deductible.
Taxable Profit on Sale of Refinanced Home
Q: I refinanced my mortgage last year and rolled all the costs and points into the refinanced loan. Later in the year, I sold that home and purchased another. Is my taxable profit the difference between the sales price and the original purchase price or the sales price and the refinanced mortgage? Also, what loan costs are tax deductible on my 1993 tax return? -- R.C .
A: Your potential taxable profit on the sale is the difference between the sales price and your original tax basis in the home. If this was the first home you purchased, your tax basis would be your purchase price plus the cost of any permanent improvements you made to the home. If it was not your first home, then your potential taxable profit would be based on the difference between the sales price and the taxable basis you had when you purchased the home plus the cost of any permanent improvements you made to that home. The amount of the refinanced mortgage is irrelevant.
Finally, because you sold your home within the same year you refinanced the mortgage on it, you are entitled to deduct the entire amount of the points you were charged for the refinancing. If you had not sold the home, the points would have to be amortized over the life of the loan.
Weigh Enjoyment Against Tax Saving
Q: My wife and I own an out-of-state vacation home that we want to give to our son and daughter-in-law because we are no longer able to use and maintain it. We paid $10,000 for it and it is now worth about $24,000. We know we can make a gift of the house by using the $10,000 per person gift limit each taxpayer has every year. But what tax basis are we passing on to our son and his wife? -- R.A .
A: The vacation home carries your original tax basis which is probably the $10,000 you paid for it. If you waited until your death to make the bequest, the home would be valued as of your date of death, eliminating the potential taxable appreciation the house has enjoyed. However, you would be wise to weigh the relatively modest taxable increase you are passing on against the enjoyment your son’s family will no doubt have in the house and the freedom from responsibility that you and your wife stand to gain by getting rid of it.
