Tax Tips

These brief tips discuss the fact that the IRS now views the unexpected birth of a child an “unforeseen circumstance” when it applies to the home sale exclusion, detail the new parameters the IRS has established for making a late election for estate planning portability and explain how children can take advantage of a tax-free Roth IRA.

Home sale exclusion: Unexpected birth is “unforeseen circumstance”
The unexpected birth of a child qualified as an “unforeseen circumstance” in a recent IRS Private Letter Ruling. The IRS permitted the parents in this case to exclude the gain on the sale of their two-bedroom condo because of the unexpected birth, even though they didn’t meet the “two-out-of-five-years” requirement.

Internal Revenue Code Section 121 allows you to exclude from income up to $250,000 in gain ($500,000 for married couples filing jointly) on the sale of a principal residence. To qualify, you must own and use the home as your principal residence for at least two years during the five-year period before the sale. There’s an exception, however, for unforeseen circumstances, such as changes in employment, health issues and, according to the Letter Ruling, the unexpected birth of a child. In that case, the couple already had one child and the unplanned pregnancy rendered the condo unsuitable.

Be aware that, in the event of unforeseen circumstances, the exclusion is prorated.

Extra time granted for portability election
In a recent Revenue Procedure, the IRS permitted certain estates to make a late portability election without filing a ruling request. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exclusion (currently, $5.49 million), but only if the deceased spouse’s executor makes an election on a timely filed estate tax return (even if a return isn’t otherwise required).

Ordinarily, the only way to file a late portability election is to request a Private Letter Ruling from the IRS, which can be an expensive, time-consuming process. The Revenue Procedure grants an automatic extension for taxpayers not otherwise required to file an estate tax return. That’s provided they file a return making the election on or before the later of 1) the second anniversary of the deceased’s death, or 2) January 2, 2018.

A tax-free Roth IRA for your kids
Contributions to Roth IRAs are nondeductible, but qualified withdrawals are tax-free. However, if your dependent children work after-school or summer jobs, they can take advantage of a tax-free Roth IRA. How? Kids can earn up to the standard deduction amount (currently, $6,350) tax-free and contribute 100% of their earned income or $5,500, whichever is less, to a Roth IRA. The bottom line: Both contributions and withdrawals are tax-free. And so long as your kids have earned income, it doesn’t matter if the contributions come from their funds or yours.