Since we are in a new year, it seems appropriate to kick in a couple of taxing scenarios. Let’s start with an honest mistake. In the rush of the holidays, it is not surprising that some of us might forget to take a required minimum distribution (RMD). The bad news is that if you don’t correct the situation, you will incur a 50% penalty on the amount you should have taken. The good news is that, in most cases, the IRS will waive the penalty if you initiate action to correct the oversight. So, as soon as you discover the error, take the “missed” RMD immediately. You then will report the distribution on a Form 5329, where you tell the IRS what the required amount was and that you failed to take it. On the form, you report the 50% penalty, but don’t pay it. Instead, attach a statement stating that you made up the shortfall to include a short explanation on why you missed the original due date. Because the IRS is dealing with senior citizens, they generally are lenient, understanding that we are over 70 1/2 and maybe we got confused, or had a medical issue, or a medical issue, or a death in the family, or bad advice. Attach the Form 5329 with your tax return and keep your fingers crossed. It won’t hurt to ask for help from a trained tax advisor. You might also consider taking your current RMD to avoid the chance of missing another distribution.
Here is an idea that could help your son or daughter with their taxes while providing you with some cash. If you sell your home at fair market value to your child, you will get a lump sum from your home equity without having to make a loan. You now have use of the equity to invest as you see fit. Your child can then charge you a fair market rent (which can be reduced by 20%, since they are renting to relatives). Please note that both the purchase price and the rent must be documented fair market value numbers to avoid problems with the IRS. The new owner of the property can take deductions against the rental income, like utilities, maintenance, insurance, repairs and supplies. Depreciation expense can be taken on the home (not the land) to offset rental income. Also, travel to “inspect” the home periodically can be deducted. At some point, the property will be available to sell, rent or move into. Again, consult with a qualified tax advisor for direction.
In “The True Measure of a Man”, there is a reference to writings of Steven Covey, where he states that if men are going to truly lead healthy, vibrant lives, their ideas about life must be rooted in what is true. He illustrates this with a parable that I will paraphrase. If you were trying to navigate New Orleans, a street map might be helpful. However, if, due to a printing glitch, the map labeled New Orleans was a map of Houston, you would have great difficulty reaching your destination. You could try harder, work faster, be more diligent, but your efforts would only get you to the wrong place faster. You could work on your attitude—think positively—but you still would not get to the right place. You have the wrong map. With the correct map, your hard work, your diligence, your positive attitude is rewarded. When obstacles are encountered, they can be overcome successfully. The key is the correct map. As we meander through 2019, let’s pray that we are wise enough to find, accept and follow the map that our God and Father in heaven is making available to us. He who has an ear, let him hear. Happy Mardi Gras!
Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed. This material is intended for informational purposes only and should not be construed or acted upon as individualized tax, legal or investment advice. FSC Securities Corporation does not offer tax or legal advice. The views expressed are not necessarily the opinion of FSC Securities Corporation. Financial Solutions Group is a marketing name. Financial Solutions Group is located at 128 Versailles Blvd, Alexandria, LA 71301. We can be reached at (318) 448-3201. Securities, insurance and advisory services offered through FSC Securities Corporation, member FINRA/SIPC.