Only Main Residence Gets Home-Sale Tax Break

Q: May I sell two homes, both personal residences, to buy one of greater value than the two combined--and defer paying taxes on gains I realize from the sales? --E.J.W.

A: No. You are allowed to defer paying taxes on gains you have from the sale of only your principal residence. And a person or married couple is deemed to have only one.

However, others might be interested in knowing that two people may each sell their principal residences, pool their proceeds to purchase a single replacement residence and still qualify for the tax break. Taxes on their gains are deferred if the replacement home has a greater value than the combined value of the two houses being sold. In essence, the law treats the deal as the sale of a home and the purchase of a 50% interest in the replacement residence.

Getting Social Security at 62 Has Drawbacks

Q: My wife turned age 62 a few months ago. Because she didn’t work much outside the home, she is not entitled to her own Social Security benefits. I will soon turn 62 but do not want to retire. I plan on continuing to work but am thinking of registering for Social Security anyway. I realize that I may not receive any benefits because my earnings will exceed the limits that Social Security allows. But may my wife begin collecting spousal benefits? What are the advantages and disadvantages of proceeding this way? --T. I.

A: Experts in the Social Security Administration recommend against your plan for a variety of reasons.

In the first place, your wife cannot receive spousal benefits unless you register to receive Social Security yourself. By doing this, you set your benefits at the rate of a 62-year-old beneficiary.

However, because you will be working and will have earnings above Social Security’s limits, you will receive nothing.

In addition, your wife’s benefits may be reduced as well because of your earnings. The Social Security Administration’s test is applied to total household income, not just an individual’s earnings. This year, if you are between 62 and 65, you may earn $6,840 before losing $1 in benefits for every $2 of earnings. A salary of $30,000 would be enough to preclude benefits for both the wage earner and spouse.

Another consideration is that by filing for benefits at 62, the survivor’s benefits that your wife could receive upon your death would also be lower than if you waited.

After 70, Contribution to IRA Will Be Taxable

Q: I am still working and will be 70 years old on March 3, 1991. I expect to earn at least $2,000 next year. May I make a tax-deductible contribution of $2,000 to an IRA in 1991? Also, I have been withdrawing $2,400 per year from my IRAs. When I turn 70, must I recalculate that withdrawal based on my life expectancy and that of my wife? -- G.S.C.

A: The answer to the first question is no. You may not make a tax-deferred contribution to an IRA in the year in which you turn age 70 1/2. The last year for which you may make such a contribution is 1990, the year in which you turned 69 1/2.

The answer to the second question is yes. Once you turn 70, your withdrawals must match those calculated according to your life expectancy and that of the beneficiary of your IRAs.

By the way, the first withdrawal under this formula must be made by April 1 of the year following that in which you turn 70. For you, that would be April 1, 1992.

When to Get Special Power of Attorney

Q: When my husband retired, he put his pension fund into an individual retirement account that now contains a considerable sum. I am worried about what would happen if he became incompetent and was unable to tap the account. Is there something I can do to make sure that some of this money comes to me to handle his care? --L.B.B.

A: If your husband, or any IRA holder, becomes incompetent, account beneficiaries or family members certainly can obtain access to the funds. However, this mechanism must be set up before the illness or infirmity to assure a smooth transition.

Typically, when someone wants to hand over responsibility for his affairs to another person, he assigns a power of attorney to that person. However, a traditional power of attorney can remain in full force only with the continuing consent of the giver. So, if the giver becomes so incapacitated that he cannot give that consent, a normal power of attorney transfer can be nullified.

To avoid problems of this nature for all assets, not just IRAs, our experts recommend that you sign what is known as a “durable power of attorney.” This document will remain in effect even after the consent giver becomes incompetent, which would allow you to access your husband’s account should you need assistance with any medical bills.