Advanced Underwriting Consultants

Question of the Day – June 10

Ask the Experts!

Here’s the question of the day.

Question:  My client is widowed and wants to sell his primary residence.  His basis in the property is $250,000, and he expects to net $550,000 from the sale.  Can he defer paying capital gains tax on the transaction if he plans to buy a new primary residence?

Answer:  No.

The ability to continue to roll over primary residence capital gains from one property to the next ended in 1997, and was replaced by the $250,000 exclusion ($500,000 for married couples) of capital gains on disposition of a primary residence.

Here’s a link to a website where the rule is explained by a CPA.

http://cpa-services.com/special_sal.shtml

So if your widowed client sells his primary residence and recognizes a $300,000 gain, the first $250,000 will be exempt from tax, and the other $50,000 will be subject to capital gains tax.  Your client must check with his own tax advisor to double-check his own numbers and whether he is eligible for the exemption.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – November 8

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client’s CPA says that my client’s business can take a deduction for the life insurance premium if the client is willing to get a taxable death benefit.  Is that true?

Answer: No.

The premium for business life insurance is not deductible for the business, nor is the premium for personal life insurance deductible personally.  See Revenue Code Sections 264 and 262.

Tax advisors sometimes confuse the rules with regard to business life insurance with the rules about disability income coverage.  The premium for disability insurance is treated as accident and health coverage.  The business and participant have the option to treat the premium as deductible by the business and non-taxable by the participant.  If the premium is treated that way, the disability benefit payable to the insured employee will be taxable.  Code Section 106 says that the premiums paid by an employer to a health plan are not included in the employee’s taxable income.  Section 105(a) states that most benefits received by an employee through accident or health insurance for personal injuries or sickness are included in gross income if the contributions by the employer were not included in the employee’s gross income.

On the other hand, the business can pay the premium as a bonus to the employee, and the employee would recognize the premium as taxable income.  If the premium is treated that way, the disability benefit would be tax free.  See Revenue Code Section 104.

We’ve heard that some CPAs recommend waiting until the end of a calendar year to decide whether to treat the disability income premium should be treated as a pre-tax benefit or a taxable bonus.  Waiting arguably allows the insured to hedge his bet about whether a disability benefit paid will be taxable or not.

The same technique does not work with life insurance because there’s no pre-tax option built into the Revenue Code with regard to the premium.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.