Taxes tell you not to work

Q. I have a moderate IRA portfolio (six figures, not seven) and am presently working again. Because I am 71 years of age I am precluded from participating in a 401(k) or similar shelter at my job. In addition, I must now take a Required Minimum Distribution on my past sheltered earnings. These factors--- my present earnings, RMD, and Social Security benefits--- place me in a high income tax bracket.

Is there any income deferment available to me? ---V.K., by email from Dallas

A. You've probably heard the joke, "Death is Nature's way of telling you to slow down."

Well, taxes are government's way of telling you not to work. Once you turn 70  ½ you can no longer tax defer income and must start drawing down your tax deferred savings.

Your only options are to reduce the amount you earn by working or to reduce your Required Minimum Distributions. You can do the latter by investigating a Roth IRA conversion. This would reduce the assets subject to the RMD--- at the expense of paying deferred taxes.

Before you do this, I suggest a serious discussion with a good CPA.

Taxes on home capital gains have been eliminated for most homeowners

Q. I am 65 years old, single, retired, and have lived in my home for 30 years. When I decide to sell my home, the tax exclusion would be $250,000. Given that the estimated selling price would be about $550,000 I will be royally screwed on taxes. I bought my house for $42,000 in 1976 and have made about $75,000 of improvements since then.

From what I understand, Congress eliminated the one-time, tax-free sale of a home in 1997. I'm hoping you will tell me I am wrong. The proceeds from the sale would definitely help me in my old age, something Congress didn't consider when taking this action which is inherently unfair to the majority of citizens.

Could you explain the current law? How can we get Congress to amend the tax law--- I've written my Senators and a Representative and received "canned" responses. ---J.R., by email from Seattle

A. I hate to rain on your dark cloud with happy talk, but you're much less oppressed than you think. The old laws for the taxation of gains in residential real estate allowed two things. First, you could a rollover of all gains to another property of the same or greater cost. Or you could have a one-time exclusion of $125,000 if you were over age 55.

The law was changed in May 1997 to allow an unlimited number of $250,000 gains for a single return, tax-free and without any age limits. Those filing joint returns could realize $500,000 in gains, tax-free. The only requirement is that you must have lived in the house as your primary residence in two of the preceding five years.

As a consequence, you will pay less in taxes, not more, when you sell your home. Under the old rules if your house sold to net $510,000 after commissions and other expenses, you would have had a cost basis of $117,000 plus a one-time exclusion of $125,000, leaving $268,000 subject to capital gains taxes.

Under the revised laws you'll have the same cost basis plus a $250,000 exclusion leaving only $143,000 subject to capital gains taxes, currently 15 percent. The taxes you will pay will be at least $18,750 lower than they would have been under the old law.

You should also know that some of that gain came from the tax reduction itself. Making gains on home ownership virtually tax-free for most Americans increased the relative value of owning a home. The effect is called "tax-capitalization"--- reflecting the fact that an asset with low taxes will be worth more than an asset with high taxes. Add low interest rates and you've got a recipe for the bull market in housing we've seen since 1997.

Bottom line: You should thank our elected representatives.

Sadly, they weren't serving the young nearly as well. While they were busy creating a capital gain on your house and lowering the tax you'll pay on it, they were doing really nasty things to the young. In the process of buying your vote with a prescription drug plan in 2003, they added $8 trillion in new unfunded liabilities to Federal commitments, all to be paid for by taxes on the young, many of whom will never be able to buy a home in Seattle or elsewhere.