Of Primary Concern
The primary residence capital gains exclusion is one of the biggest and most accessible tax breaks out there today. At its best, you can walk away from a home sale with $250,000 in federally tax-free capital gains. Here’s how it works.
This primary residence capital gain exclusion is $250,000 per person. Simple math shows that a married couple can take advantage of a $500,000 capital gain exemption if their home value increases. Likewise, three friends sharing a home in co-equal ownership could enjoy a whopping $750,000 capital gain exemption. That apartment that John, Francois, and Otto bought in Southie 12 years ago for $450,000 and just sold for $1.2 million dollars is entirely non-taxable from a capital gains perspective. If this exemption hadn’t been in place, then the capital gains tax per person on this property would have ranged from $37,500 at the lowest 15 percent rate, all the way up to $59,500 at the highest 23.8 percent rate. And that doesn’t even include potential state capital gains taxes, which vary significantly.
However, there are a few caveats – there are always strings attached. The first thing to keep in mind with this exemption is that you must have claimed the property as your primary residence for at least two out of the last five years if you want to enjoy the $250,000 capital gain exemption (exceptions to this rule are made for military personnel and in other special circumstances). Additionally, this exemption can only be used once every two years, so if you are bouncing between multiple cities on a yearly basis and still attempting to buy and sell property each time you move, you’re likely to run into some timing issues on being able to apply this to every potential sale. Another important factor to consider is that the property itself actually has to increase in value. Seems obvious, right? But remember, this exemption applies to the property if its value has grown since you purchased it. So if you bought a house for $400,000 and sold it for the same amount, you wouldn’t pay capital gains taxes under any circumstances. In fact, you’d have a capital loss – something we’d all like to avoid, but ultimately won’t cost you anything in capital gains taxes, since there is no capital gain.
If you’re selling a primary residence and trying to figure out what the potential tax burden is, make sure you understand how the capital gains tax exclusion for a primary residence works prior to doing so. Please consult a qualified tax professional to get a full analysis for your particular situation.
Take it to the Limit
For 2023, the contribution limit for IRAs and Roth IRAs is $6,500 per individual. If you are over age 50, you are able to contribute an extra $1,000, for a total of $7,500 this year. But who can actually contribute to an IRA and receive a deduction for the contribution? There are income limits as to what you can earn and still be able to contribute while receiving a tax deduction. Here’s what the IRS has to say on the matter, with the language taken directly from their website:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000, up from between $109,000 and $129,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
This means that you have to be cognizant of both your income and whether you have a workplace retirement plan, such as a 401(k), 403(b), 457, SIMPLE IRA, or other qualified retirement plan available to you in order to figure out whether you can contribute to an IRA in a tax-deductible manner.
For a Roth IRA, the rules are different as well. For single taxpayers, the ability to contribute to a Roth IRA in any fashion phases out at incomes between $138,000 and $153,000. For those filing jointly, it phases out between $218,000 and $228,000. So just because an account has the letters “I-R-A” in its name does not mean that the contribution rules are the same.
Lastly, IRA and Roth IRA contributions for 2023 can be made up until the tax filing deadline in 2024, which is April 15, 2024. This means that you can consult with a qualified tax professional next filing season, and they can help to guide you as to whether you should be contributing to one of these accounts, and the amount you are allowed to contribute. If you’re looking for assistance in building a financial plan or managing the investments within an IRA or Roth IRA, you can also reach out to Armstrong Advisory Group via this link to schedule a time to chat with a member of our team.
Stop Spending So Much on Cars
Rarely do we have such a blanket statement, but in this case, it’s very simple logic.
Cars are expensive. Cars depreciate in value. You should spend less money on cars.
According to the latest date from Kelley Blue Book, the average new vehicle transaction for September 2023 clocked in at $47,899. That’s actually down 0.7 percent from the same period last year, as inventories have built somewhat, and we are seeing a bit of a return to some of the incentives we used to see on vehicles prior to the pandemic. But it is still nearly $50,000 on a depreciating asset, at a time when the U.S. Census Bureau notes that median household income in the U.S. last year was just under $75,000 per year. Let’s run some numbers.
Suppose your household is making $75,000 per year. Pre-tax, that works out to $6,250 per month, and individual tax situations can vary based on whether you are single or married, whether you have earned income or are retired, and the state you live in. For the purpose of this example, we’ll use 15 percent as an estimate for the tax burden, meaning you have $5,312.50 left over once the tax man has taken his share. If you are buying a $50,000 vehicle with $5,000 down, a $5,000 trade-in, and a 48 month loan at 10 percent, you are spending $956 of that income per month to buy something that typically loses value the longer you own it. That is nearly 20 percent of your after-tax income. Sure, you could take out a 60-month, 72-month, or 84-month loan, but that just means you are paying more interest on a depreciating asset over the length of the loan.
One industry rule of thumb that we like is the 20/4/10 rule. Your down payment should cover 20 percent of the total cost of the vehicle, it should not take longer than 4 years to finance the car and you should not spend more than 10 percent of your monthly income on all associated monthly expenses (car payments, insurance, maintenance, etc.). This rule should help you find your price range when looking at cars and considering financing.
But if you want another one that we think is really clean, try this one. Take your income. Divide it by five. That’s the highest price you should pay for a new vehicle. If you make $75,000 a year, you need to find a used car for $15,000. If you make $120,000 a year, you need to find a car for $24,000 or under. The only people who should be buying cars at $50,000 or above are those making more than $250,000 per year. One possible exception to this is if you’re able to pay cash for a vehicle because of assets you have accumulated. Suppose you are retired and your income is $60,000 a year, but you’ve built a portfolio of $750,000 and have $100,000 put aside in a bank account. If you wanted to spend $50,000 of the money in that bank account on a car, you’re not hurting your finances the same way that someone who needs to borrow that money is doing so. Consider the context when making a car purchase as well.
Now, this may mean you can’t get a car with all the features you want. We get it. But ultimately, the excitement or value you get for those new features wears off quickly, and you’re stuck with a loan for the next six years paying off a bad financial decision. Look, we love cars too. But we also believe that there’s a responsible way to buy them such that you are able to still have access to a vehicle without handcuffing yourself financially.
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