Monday, July 31, 2017

Tips on Income Taxes and Selling a Home

IRS July 31, 2017
Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home.
Below are tips to keep in mind when selling a home:
Ownership and Use. To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:
  • Owned the home for at least two years  
  • Lived in the home as their main home for at least two years 
Gain.  If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return
Loss.  A main home that sells for lower than purchased is not deductible.
Reporting a Sale.  Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.
Possible Exceptions.  There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.
Worksheets.  Worksheets are included in Publication 523, Selling Your Home, to help you figure the:
  • Adjusted basis of the home sold
  • Gain (or loss) on the sale
  • Gain that can be excluded
Items to Keep In Mind:
  • Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.
  • Taxpayers who used the first-time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account Look-up to get account information such as the total amount of your credit or your repayment amount.
  • Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.
  • Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.
  • Taxpayers who purchased health coverage through the Health Insurance Marketplace should notify the Marketplace when moving out of the area covered by the current Marketplace plan.
Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on to find out.

Sunday, July 23, 2017

How Do We Fix Social Security

Bloomberg July 20, 2017

Alicia Munnell wants to make one thing clear. Social Security is not going bankrupt. The program that the economist calls “the most valuable component of our retirement system” is a sustainable system and can be fixed. America has just been avoiding the hard choices it has to make if it wants to keep Social Security around for future generations.

Munnell, who worked at the Federal Reserve Bank of Boston for 20 years, the Treasury Department for two years during the Clinton administration 1 , and served on a U.S. Social Security Advisory Board in 2015, is director of the Center for Retirement Research at Boston College. She has parsed just about every argument for how to reset Social Security’s finances. In a recent conversation and paper, Munnell, 74, laid out the stark choices Americans face, and the solutions suggested by two diametrically opposed pieces of legislation.

We all know Social Security has long-term cash-flow issues. How would you describe the challenge?

Munnell: It’s a very simple system. It’s not like the health-care system, where you have insurance companies and doctors and patients. This is money in, money out.

The recent Social Security trustee’s report said the same exact thing it’s said almost every year since 1992 or 1993. We have a deficit—it’s a little bigger now than in the past—that’s equivalent to 2 percent to 3 percent of taxable payrolls, and we need to fix it. Every year the actuaries tell us there’s a deficit; every year as a nation we do nothing. It’s very easy to put off making changes for something that won’t happen. You really won’t see anything until the trust fund actually is exhausted in 2034. At that point, benefits have to be cut or revenue increased, because the system is not allowed to pay out money that it does not have.

By the way, when people talk about how the Social Security deficit will lead to big increases in the budget deficit, well, Social Security can’t run a deficit. When people say that, either they don’t understand how the law works or are trying to create alarm about the system.

One misperception about Social Security is that it should be enough to live on, which was never really the intent. How much income does it actually replace for workers?

The current level of tax revenues coming in mean that the replacement rate—benefits relative to preretirement earnings—would drop from 36 percent for the typical 65-year-old worker right before the trust fund is exhausted to about 27 percent by 2070. That’s a level we last saw in the 1950s. Right now, the replacement rate is already set to decrease from 39 percent to 36 percent for those claiming Social Security benefits at age 65. That’s because of the gradual increase in full retirement age, from 65 to 67, that was part of the legislation in 1983. 

Credit: Center for Retirement Research at Boston College

You describe two proposals out there as good “bookends” to consider when looking at ways to get rid of the deficit facing Social Security.

I like the proposals as bookends because they are so different, they don’t compromise at all. One is all on the benefit side, just big benefit cuts. The other says it would enhance benefits a little and make big tax increases. And those are the two ways to go. They highlight the notion that we should really decide politically—and I don’t know quite how we do this—what share of the solution Americans want in benefit cuts, and what share they want in tax increases.

It’s not really arguing about the specific provisions—should we change the inflation indexing to the Consumer Price Index for the Elderly, the CPI –E [an inflation measure geared to rising costs faced by the elderly, such as medical expenses]. The big question: Is this program important enough to people that we as a nation want to pay up and maintain current benefit levels, or are people willing to split the reform between benefit cuts and tax increases somehow.

Where do you stand on that?

Surveys say that Americans want—and this is my instinct—to pretty much maintain current benefit levels. When I look at how much money, or how little money, people have in 401(k) plans, I just don’t see any other sources of retirement income out there. So I’d argue for fixing it on the revenue side. But I do believe in democracy, and if the American people writ large want to do it on the other side, in benefit cuts, we should do it.

The first proposal you analyzed in a recent paper was legislation proposed last year by Representative Sam Johnson, a Republican from Texas who is chairman of the House Ways and Means Social Security Subcommittee. What does he propose?

The Johnson proposal wants to cut benefits sharply so that the reduced benefits match the current income for the program. He would raise the age when you can collect full benefits to 69, cut benefits for above-average income earners, and reduce cost of living adjustments (COLAs) for people making more than $85,000 ($170,000 for couples). For those who would get COLAs, he would use a chain-weighted Consumer Price Index. [That index “employs a formula that reflects the effect of substitution that consumers make across item categories in response to changes in relative prices,” according to the Bureau of Labor Statistics website.]

What would the impact of that be on average Americans?

I looked at the ratio of proposed to current benefits at different points on the earnings scale. Since doing away with COLAs has a bigger impact as retirees age, I looked at individuals who were 85 years-old. It has no impact on the benefits of lower earners. But medium earners—which I calculate as having an income of $49,121—would see benefits cut to 77 percent of what they would get under current law. [That would be for someone born in 1995, turning 85 in 2080.] Those making $118,500 would get 34 percent of what they would get under today’s benefit schedule.

Credit: Center for Retirement Research at Boston College

What does the other proposal, from Representative John Larson, the Connecticut Democrat who is the ranking member of the House Ways and Means Social Security Subcommittee, suggest?

His proposal, a few years old, has some small enhancements to benefits and two big revenue changes. He would raise the total payroll tax paid by employers and employees by 0.1 percent a year until it reaches 14.8 percent in 2042. And he would have the payroll tax apply to earnings over $400,000. The current cap on wages that the payroll tax is applied to is $127,200. [The current gap between $127,000 and $400,000 would not be subject to payroll tax.]

It would also use a different measure of inflation when adjusting benefits—the CPI-E. This rises faster than the inflation measure used now, the CPI-W, the CPI for Urban Wage Earners and Clerical Workers. The income threshold for the taxation of Social Security benefits would be raised. [The threshold at which a portion of one’s Social Security benefit gets taxed hasn’t been adjusted since 1984. It is $25,000 for singles and $32,000 for married couples.] Larson would raise it to $50,000 for singles and $100,000 for marrieds. His proposal would also increase the “special minimum benefit” that goes to long-term low earners or people with sporadic work histories.

Are there proposals out there now that advocate for a middle ground between the two proposals?

No. But you could do it. You just raise payroll taxes by half as much and cuts by half as much. There are infinite ways of doing it, and no new ideas particularly. This is a solvable problem. We can’t solve other things, but this should be easy.

Sunday, July 16, 2017

Health Insurance Rate Increases for 2018

Oregonians in the individual insurance market should brace themselves for yet another year of double-digit rate hikes.

Eight insurance companies are seeking increases ranging from 6.9 percent to 21.8 percent over 2017. The companies had until Tuesday to submit their 2018 rate requests with the Oregon Insurance Commission.

Some consumers will also face dwindling choices for insurance. In Lane, Lincoln and Tillamook counties, just two insurance companies applied to do business in the individual market.

State regulators will consider the rate requests and negotiate final numbers by July. The ratemaking process always requires a good deal of educated guesswork about the health and likely medical claims of the customers.

It's even more fraught with uncertainty this year as President Donald Trump and a Republican controlled Congress hope to dismantle the Affordable Care Act, the Obama-era legislation that radically changed the insurance market. While Obamacare has been hailed for extending medical coverage to millions of additional Americans, it's been far from a smooth rollout.

In Oregon, medical claims were far higher than expected, and the federal programs reneged on financial assistance to some insurance companies, like Moda Health of Portland, that were counting on it.

Some insurers have suffered big losses. Some have folded and others have exited the state or certain regions of the state.

"We continue to be concerned about the level of choice for Oregonians across the state," said Patrick Allen, DCBS director. "In the coming weeks, we will be exploring our options to ensure all Oregonians have access to plans that fit their needs."

Oregonians who get their coverage through their employers have been relatively lightly impacted by the Affordable Care Act.

In the newly filed 2018 rate requests, companies offering so-called "small-group" policies are seeking rate hikes from 2 percent to 8.5 percent.

Those in the individual market were not so lucky. Premiums for an individual policy on average jumped 23 percent in 2016 and 27 percent in 2017.

Individual policies will likely increase in price again in 2018. Of Oregon's big four insurers: Kaiser Foundation Health Plan of the Northwest wants a 12.4 percent hike, Moda Health Plan is proposing a 13.1 percent increase, Regence Blue Cross Blue Shield of Oregon is asking for 18.7 percent and Providence Health Plan wants 20.7 percent.

Atrios Health Plan submitted the biggest rate increase proposal at 21.8 percent over last year.

Starting Monday, May 22, Oregonians will be able to search rate filings and submit comments at

It's unclear what will happen if Republicans in Washington succeed in killing Obamacare. They claim the repeal bill that passed the House last month will give Americans more choice. Critics say it will result in millions of Americans losing health care coverage.

-- Jeff Manning 503-294-7606

Sunday, July 9, 2017

The Economy Added 222,000 Jobs in June

Total nonfarm payroll employment increased by 222,000 in June, and the unemployment rate was little changed at 4.4 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care, social assistance, financial activities, and mining.

For more details, please visit Bureau of Labor Statistics website:

Monday, July 3, 2017

Things to Know for Deducting Losses from a Disaster

IRS Tax Tip 2017-01
The IRS wants taxpayers to know it stands ready to help in the event of a disaster. If a taxpayer suffers damage to their home or personal property, they may be able to deduct the loss they incur on their federal income tax return. If their area receives a federal disaster designation, they may be able to claim the loss sooner.
Ordinarily, a deduction is available only if the loss is major and not covered by insurance or other reimbursement.
Here are 10 tips taxpayers should know about deducting casualty losses:
  1. Casualty loss.  A taxpayer may be able to deduct a loss based on the damage done to their property during a disaster. A casualty is a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism.
  2. Normal wear and tear.  A casualty loss does not include losses from normal wear and tear. It does not include progressive deterioration from age or termite damage.
  3. Covered by insurance.  If a taxpayer insured their property, they must file a timely claim for reimbursement of their loss. If they don’t, they cannot deduct the loss as a casualty or theft. Reduce the loss by the amount of the reimbursement received or expected to receive.
  4. When to deduct.  As a general rule, deduct a casualty loss in the year it occurred. However, if a taxpayer has a loss from a federally declared disaster, they may have a choice of when to deduct the loss. They can choose to deduct it on their return for the year the loss occurred or on an original or amended return for the immediately preceding tax year.

    This means that if a disaster loss occurs in 2017, the taxpayer doesn’t need to wait until the end of the year to claim the loss. They can instead choose to claim it on their 2016 return. Claiming a disaster loss on the prior year's return may result in a lower tax for that year, often producing a refund.
  1. Amount of loss.  Figure the amount of loss using the following steps:
    • Determine the adjusted basis in the property before the casualty. For property a taxpayer buys, the basis is usually its cost to them. For property they acquire in some other way, such as inheriting it or getting it as a gift, the basis is determined differently. For more information, see Publication 551, Basis of Assets.
    • Determine the decrease in fair market value, or FMV, of the property as a result of the casualty. FMV is the price for which a person could sell their property to a willing buyer. The decrease in FMV is the difference between the property's FMV immediately before and immediately after the casualty.
    • Subtract any insurance or other reimbursement received or expected to receive from the smaller of those two amounts.
  1. $100 rule.  After figuring the casualty loss on personal-use property, reduce that loss by $100. This reduction applies to each casualty-loss event during the year. It does not matter how many pieces of property are involved in an event.
  2. 10 percent rule.  Reduce the total of all casualty or theft losses on personal-use property for the year by 10 percent of the taxpayer’s adjusted gross income.
  3. Future income.  Do not consider the loss of future profits or income due to the casualty.                                                
  4. Form 4684.  Complete Form 4684, Casualties and Thefts, to report the casualty loss on a federal tax return. Claim the deductible amount on Schedule A, Itemized Deductions.
  5. Business or income property.  Some of the casualty loss rules for business or income property are different from the rules for property held for personal use.
Call the IRS disaster hotline at 866-562-5227 for special help with disaster-related tax issues. For more on this topic and the special rules for federally declared disaster-area losses see Publication 547, Casualties, Disasters and Thefts. Get it and other IRS tax forms on at any time.
Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on to find out.