Tax Return Questions and Observations | Your Financial Choices

0:00Your financial choices may discuss various financial-related topics, and thus would like to offer the following disclosures. Laurie Sebert is employed by Valley National Group, the Valley National Financial Advisors Group of Companies. Investments are offered through Valley National Investments Incorporated, Member, FINRA. We inform you that any federal tax, state tax, financial advice, or information contained in this communication is not intended to be personalized or specific in nature or to be relied upon for your personal situation in any circumstance. The advice and information are not intended and cannot be used as a tax opinion letter nor used for the purpose of avoiding tax-related penalties. For personalized advice specific to your own situation, we recommend that you consult your CPA, CFP, or attorney. Good evening everyone and welcome to the show. This is your host Laurie Sebert.

1:01I am a CPA, CFP professional, and AEP on the web at yourfinancialchoices.com. You can listen online each and every week at WDIY.org under Public Affairs or on the WDIY app and many streaming services. The markets were, today is March 11, 2026. The markets were mixed today with the Dow closing down at 47,417, the NASDAQ up at 22,716 and the S&P down at 6,775. Our topic tonight, just more tax questions. For any listeners who do have tax questions or tax observations or things you may have learned in doing your own tax return even, you're welcome to give us a call. The phone number is 610-758-8810. We are live in the studio this evening. We will answer your calls, take your information and we ask you to mute your radio so you can hear me without the delay and we can talk without confusion.

2:04We discuss general financial planning topics and not specific investments and while I typically have a topic each week, you can ask questions off topic and I will do my best to answer them. The number again is 610-758-8810 and you can talk live on air with me or if you're not comfortable talking live on air, just give your question to Cindy and she'll bring it into the studio for me. Email is also available at yourfinancialchoices.com. So I did have a question come in from the show we did a couple weeks ago and I thought I would share it in case anyone else might have misunderstood. She where he had asked that I had described a couple who had hefty dividends with only 5% of them. Well, what I had said in qualified dividends but the listener thought I meant qualified accounts. So I wanted to make sure I mentioned the difference in what I meant because they went

3:08on to say that I talked about a reallocation of the investments to make the individual or joint brokerage account more equity exposure and thought perhaps that what I was discussing, the reallocation meant moving money from the IRA and that isn't exactly what I was mentioning. So I just wanted to kind of go over this. What I had mentioned was the couple had a lot of dividends of which only 5% or qualified dividends. That means they qualified for the lower capital gains tax rate. So if you have investments in individual or joint accounts and you look at your 1099 that you get from the broker or from the transfer agent like equitable or whoever it might be these days. If you look at the 1099 div, you're going to see there's two boxes.

4:11One is ordinary dividends and the second box is qualified dividends. It's not the double. All the qualified dividends means is the qualified dividends are part of the total ordinary dividends and those are the dividends that qualify for the lower tax rate. So when you look at it, like if you got a dividend directly from a company that you had shares direct, I'm going to use Procter and Gamble as an example. Let's pretend the dividend was $500 and the qualified dividend would be $500 because it's a corporation that qualifies for better tax treatment on its dividend. So of the total dividend in my story here of $500, $500 qualifies for the lower tax rate. There are sometimes where people don't own individual stocks, they might own mutual funds. The mutual funds is a basket of different kinds of investments which may include stock alone,

5:12like equities, like those kinds of companies. But it might also include some fixed income where a money manager in that mutual fund might have some exposure to stocks and might have some exposure to bonds. And those bonds then, even though bonds normally pay interest when they're part of a mutual fund, that mutual fund pays out a dividend. But in that case, the dividend isn't qualified. It's ordinary, just like interest income is ordinary. That dividend that comes from fixed income is also considered ordinary. So your total dividend is the total and what qualifies for the lower tax rate is in a separate box. So to further explain the scenario here, the clients' overall risk tolerance included equities in their IRA and more fixed income in their joint account. So in my story, they only had 5% equity exposure in these funds and their dividends.

6:15And they had equities in their IRA. Well IRAs, when they pay out, when you have to take a distribution, they pay out as ordinary income. So generally, I like to see if I have to have a client who has to have ordinary income, fixed income exposure for their risk tolerance. I like to see that more in the IRAs because they are, it's taxed as ordinary income. Now keep in mind, when you're young and you're investing, your IRAs, your 401Ks may have a high allocation to equities. That could be okay for you too. Because then that's growth, grow, grow, grow, grow, eventually when people have to take money out though, you have to have some fixed income typically because when you have to take a distribution out, you don't want to have to be taking out when the market's down and selling equities maybe when the market's down. So that's why I tend to like the fixed income exposure in the IRAs, particularly as we

7:16near retirement. So in my story, what I was suggesting was when we look at the overall risk tolerance and we have more equity exposure in an individual account, that's tax-favored treatment on income that's getting taxed today, the IRA may not get taxed again until those distributions come out later, but I can transact in an IRA with no tax consequence until the distributions mean. So I can buy in sell and sell and sell in an IRA and I don't pay tax on those transactions, but in an individual account we do pay tax when we sell, you know, equities or mutual funds or whatever it might be. So to rebalance the overall allocation, it's fairly easy to reduce the equity exposure in an IRA and put more fixed income there. Maybe lower the fixed income in the brokerage or individual account and get more equity

8:19exposure. This is just an example. Recall this show is for educational purposes. Your situation may be different and I often mention to listeners that your financial situation is as unique as your thumbprint and so it's never a good idea to take anyone's opinion or idea, your neighbors, your friends, somebody you heard on the radio, something you read in a magazine, you know, you want to make sure that whoever's helping you knows your particular situation and that it's applicable to you, okay? And I further mentioned to this person that years ago dividends were also taxed as ordinary income and under the Bush administration to ease the double taxation of corporate earnings, they changed the qualified dividends to the capital gains tax rates. That's where that comes from. So the qualified dividends are typically dividends paid by domestic corporations and their earnings paid out to investors.

9:21The fixed income is interest paid out to investors from like basically loaning money, like when you buy a bond. Mutual funds that people invest in may have both fixed income and qualified dividends depending on how the mutual fund manager invested the money. That's how some clients will have ordinary dividends from their investment. So I appreciate the question because I wouldn't have realized that someone might have misinterpreted when I said qualified dividends is very different than qualified accounts. Qualified accounts sometimes people use that terminology for retirement accounts. So qualified money versus non-qualified money, very, very different than what I'm talking about with qualified dividends. So thank you for that question. If you have any questions, the phone number is 610-7588810 and we're just talking taxes tonight. So we'll be back in just a minute. WDIY thanks its members and Valley National Financial Advisors offering a broad spectrum of financial services for more than 25 years including fee-based asset management.

10:23It all starts with personal goals and an understanding of risk tolerance, investment objectives and the markets on the web at valleynationalgroup.com or 610-868-9000. The power of a pint campaign is off to a great start. Thank you to everyone who gave blood last week. Now we want to keep that momentum going. For the month of March, every blood donation made at a Miller Keystone blood center location will also trigger a $50 contribution to WDIY from an anonymous supporter. Help the national blood shortage and help WDIY by giving blood today. For more information and registration, visit wdi.org. Welcome back to the show. This is your host, Lori Seiber, you're listening to your financial choices. We're just kind of doing some text questions. If you have any, the phone number is 610-7588810 and you can talk live on air with me or if you're not comfortable talking live, just give your question to Bob and Cindy and they'll bring it in for me.

11:26So just some observations I like to share observations during tax season because it kind of comes fresh of mind and may apply to any of our listeners as we just talked about looking at your 1099 to see what kind of dividends qualify for the lower tax rate. That's always really exciting and important. If you're anybody who self-preparers, that could be a little bit more complicated for you to figure out. And if you do self-preparering, you don't pay attention to that. You could be missing out on some tax savings. So because there is a worksheet you have to go through if you do have qualified dividends in your self-preparering. So many people now do use software but I will tell you two of my own siblings do their own tax returns and I'm slowly convincing them to let me prepare their returns for them because we've seen where they've missed out certain things like the extra standard deduction when you turn 65 and the taxation calculation for social security and of course the benefit

12:28of the qualified dividends at a lower tax rate. So let me talk for a minute about cost basis which is something that sometimes people miss as well and what do I mean by cost basis? When you have any kind of investment, it might be securities, stock, bonds, investments. You might have rental properties, you might have land, you even have a house. You've invested in and there's a cost on that original investment. That's the cost basis. And a holding period, the holding period is usually when you buy something. Many years ago, pre-2011, the brokerage firms when you were investing investments were not required to report cost basis to the IRS. If you sold something, they only reported the sales. They didn't report the cost basis.

13:28Now it didn't mean they weren't tracking it because quite often they would give you what we would call supplementary pages to your 1099 and on those supplementary pages it would show what the cost basis was. And as tax preparers, we used to either attach a PDF copy to the tax return or print out the pages and attach it if it was a paper copy to say see attached because sometimes there would be so many transactions and in lieu of typing out all those transactions, we could supply that supplementary pages. So back in 2011, there were some new IRS regulations that required financial institutions to start tracking the cost basis and reporting the cost basis on the 1099 B, B is a boy when you would sell stock. And now what happens when you get your 1099 from your broker?

14:28It's often part of a consolidated statement, the consolidated statement that would show interest dividends and sale proceeds. They typically will show the cost basis and it could be broken up in any number of ways. We can have short term gains and long term or losses, gains and losses, short term, gains and losses, long term. And even amongst the short term gains, you might have short term gains or losses that have the cost basis that the custodian tracked for you. And it could be 10 pages of, you know, buys and sells, buys and sells. I mean, I hope not, you know, but let's pretend you did and you're buying and selling. And at the end of the day, you might have had, I'm going to make up a story, 50 different sales. And that custodian has reported all of the sale proceeds to the IRS and all of the cost basis to the IRS and the bottom line might be 100,000 of sales and 90,000 of cost

15:34basis with the $10,000 gain because that has all been reported to the IRS. The IRS doesn't care if we put on the tax return those totals. We can just say the totals, it's already been reported to the IRS, they already have that information. We don't have to detail that. Now that couldn't just go on schedule D on the top line of schedule D on the top section under short term gains or losses. Same thing applies for long term where the gain, the proceeds and the cost basis is all paid reported to the IRS and we have to make no changes. Very easy top line of the schedule D on the bottom section under long term gains or losses. Simple, simple. Now there could be other kinds of short term gains. There could be short term gains or losses where you do have to make an adjustment. So for example, you might have had something called a wash sale, meaning you sold something but then bought it back within 30 days.

16:35And if you sold it at a loss and then bought it back within 30 days, the IRS deems that be kind of like a wash, they're not going to recognize that loss for you because they said, oh, you didn't really mean to sell that because you bought it right back within 30 days. So people who think they're clever in recognizing a loss or realizing a loss, but then buy it back before 30 days unbeknownst to you, you might not have realized the IRS isn't going to allow that loss and you'll see that adjustment on the 1099, which means then you have to put that on a separate line on the schedule D, which comes from a form 8949. So there could be six schedules, I think it's six schedules that could support the schedule D that report various short and long term transactions depending on what happened. You might have to provide that extra information. So it's not simply reporting on the schedule D like we used to.

17:38You may have to use the form 8949 to document various changes like a wash sale adjustment. So then when you put in the wash sale adjustment, it takes away that amount of the loss, all right? So that could be an adjustment. The other thing that might show up is maybe there was missing cost basis. Maybe you brought it over from a different broker. You transferred it and you never made sure the cost basis came over. Maybe it was a gift and you never let the custodian know that it was a gift. And maybe in fact, it wasn't a short term at all. It was long term. Then you would have to let the IRS know that the holding period was incorrect or the cost basis was incorrect and then you make the adjustments. So those adjustments get reported on the 8949. And then let's talk about missing out. And the reason we have short term and long term separated is because the short term gets

18:40taxed at ordinary income tax rates and the long term gets taxed at more favorable capital gains tax rates. And they, in the short term section, short term gains can first be offset by short term losses. So it's by holding period first, those get offset first, short against short, long against long. In the extent you have extra short term losses, we can use those against long term gains. And or if we have long term losses in excess of our long term gains, we can use those against our short term gains. So we first offset them per category and then it can go to the other. To the extent we have losses that exceed all of our gains, then we can use up to $3,000 against ordinary income and any excess carries forward indefinitely until we use them up. We are at our next break.

19:40So when we come back, I'm going to talk about some ideas if you have missing cost basis and why you might have missing cost basis and ways that we can kind of do a little bit of research to see if we can help you find cost basis. If you have questions, phone number 610-758-888-10, we'll be back in just a minute. WDIY thinks its members and Valley National Financial Advisors offering a broad spectrum of financial services for more than 25 years, including income tax preparation for individuals, businesses, estates and trusts. Tax preparation involves more than putting numbers on a return. It requires planning. On the web at valleynationalgroup.com or 610-868-9000. Spread the word about your business or organization to a well-informed audience, becoming under rider with WDIY. Our lineup of NPR News and locally produced programs reaches thousands of engaged listeners in the Lehigh Valley and beyond. Underwriting on WDIY is an affordable and effective way to provide information about your product and services to people who care.

20:42To learn more about underwriting opportunities, 610-694-8100 or WDIY.org. Welcome back to the show. This is your host, Laurie Siebert, listening to your financial choices. If you have questions, phone number is 610-7588810. Tonight's show topic is just more tax questions. So if you have any, you're welcome to call in, talking live with me or off-air Cindy can write the question down and bring it in. So let me talk a bit more about the cost-basis issue and right now I'm focusing on investments, but I'm going to give you some tips on some other things as well. So as far as the investments go, there still could be times where you have that missing cost-basis, even though the brokers are required to track the cost-basis. As I mentioned, it could come from maybe you transferred an asset in. Maybe it was gifted and you never updated the custodian with the correct cost-basis.

21:47It could be, I'm trying to think what else it might be, well, any other kind of situation where there might be something that would be missing. So here's what you need to do. If you see a 1099 that has missing cost-basis, you want to track that down. Don't let it just go. You could either go and say, hey, this was maybe a merger or a spinoff that never got properly allocated. So that's one thing it might have been. It might have come from a spinoff or a merger that from a prior broker that it didn't transfer over properly, so you could track it down that way. Number two, if it was gifted to you, you may not have realized that you had to give the cost-basis to the custodian for the gift value. And this is something I want to explain because sometimes people don't understand it. If mom or dad or grandma or grandpa give you some stock that's worth $10,000 today, and they give it to you and you say, oh, they gave me a gift of $10,000. My cost-basis is $10,000.

22:48That is not the case. If they give you stock that they have held and owned for some time, and they gift it to you, what happens to it in your records is you take on their cost-basis and their holding period. So you might be 18 years old and grandma gives you $10,000 worth of stock, ABC stock, grandma paid $1,000 for it, you know, 50 years ago, your cost-basis is $1,000, even though it's worth $10,000. And grandma bought it 50 years ago, well, guess what? Your holding period is 50 years, even though you're only 18. So the holding period is long term because grandma bought it 50 years ago, all right? So I would hope that grandma wouldn't at her old age wouldn't give you highly appreciated securities because if you hold it until you die, it gets a step up in basis. And then the cost-basis would be $10,000 on $10,000 of value, and it would have a still

23:54a long-term holding period that is in inherited assets. When you inherit stock, it is automatically long-term and has the step up in basis. All right. So you want to pay attention. If someone's gifting you something, you have to ask them, oh, if you're gifting me stock, what is the cost basis and what is the holding period, all right? And then you can notify the custodian and let them know. And then typically they're relying on that information from you. They may or may not verify that, so you've got to watch out for that. Sometimes people forget to make adjustments on certain stock that they might own for mergers or spin-offs. Frankly, we have pretty sophisticated software that we use in the case where someone doesn't know what the cost basis is. As long as I have some kind of anchoring information, and what I mean by anchoring information is when was, you know, whatever stock first purchased.

24:58If someone comes in and they say, oh, I have Verizon that I'm selling, well, when did you get it? Oh, well, we've had it since the 1980. Well, that means it was part of the baby bell blow up back in the early 80s. And, you know, frankly, it probably has barely any cost basis at this point if that's the story, because there were so many spin-offs of AT&T back. I think it was like an 83, if I'm remembering. There were so many spin-offs, they called them the baby bells that AT spun off. And then the baby bells spun off some baby bells. And then the baby bells all, you know, then they kind of started coming back together and emerging. So the cost basis calculation on something like that could be very difficult. It can be done, again, if we have some anchoring information, kind of hard to track. If you don't know the cost basis and have no history, then the IRS assumes the cost basis is zero. And you would go from there and you would have the full gain. This is where we would look for clients who may be philanthropic when you don't know

26:02the cost basis and maybe the position has appreciated significantly. If you're philanthropic, if you have charities that you like, donations that you would like to make, you can use that kind of stock for that. I heard Margaret on the commercial or excuse me on the underwriting sponsor note coming in to the show tonight, Margaret was talking about different ways, the executive director Margaret McConnell was talking about various ways you can give to WDIY, WDIY in any 501C3 can accept appreciated securities. And in that case, it doesn't matter what the cost basis is because the donation is based on the fair market value when that organization receives it and sells it. So they will tell you what the donation is upon sale, but you don't have to recognize it as a sale because nonprofits don't pay taxes. So in those circumstances, maybe it doesn't matter if you don't know what the cost basis

27:03is, if you're going to donate it. But otherwise, I like to encourage people to either figure out the cost basis, calculate the cost basis, get it from whomever might have given it to you and understand the impact of any mergers or spin-offs because that affects the cost basis. Let's pretend I paid $10,000 for a stock five years ago and now it spun off a new company. Part of my $10,000 cost basis usually follows those new shares that I got. So if I have 100 shares of a company that I bought for $10,000 and now the spin-off says you got a half share for every share you had. So now I have 50 shares in this new company, but maybe I only allocate not half the cost basis. The companies always will give you like a formula for what it is. Maybe only a third of the cost basis would follow those 50 shares. So of my $10,000, maybe it would be $3,333.

28:05So of my new 50 shares, the cost basis is $3,333. And now the cost basis of my remaining 100 shares because my 100 shares didn't change. I just got 50 shares in the new company. My 100 shares cost basis is no longer $10,000 now it's $6,000, $667. So you have to kind of pay attention to how that works. So now I just kind of want to mention that cost basis could be important across other investments too. You might have artwork, you might have collectibles, real estate, land, a principal residence. These would all have different implications. You have to understand that things like collectibles, cars, and, you know, chachkis that could appreciate significantly in value. You want to keep track of those if you think it would be something you'll sell later. Collectibles have a different tax rate on those gains.

29:05Collectibles tax rate. Oh gosh. 28%. So you want to make sure you're keeping track of cost basis on things like that. If you own land, you may not realize if you own land for investment purposes and you're paying real estate taxes every year and most of us don't, well, I still itemize, but most people don't itemize anymore because the standard deduction is so high. You could make an election each year to capitalize the real estate taxes for that land. If it's held for investments, you're not getting into deduction. If I paid $5,000 for it and I'm paying $500 of real estate taxes and I elect to capitalize those real estate taxes, now my cost basis is $5,500. The next year I do it again is now $6,000, the next year I do it again, it's now $6,500. You can elect to capitalize real estate taxes on investment property if you like. When we get back, the show's going very fast. I'm going to talk about principal residence and some little cautionary tales there because everyone thinks it's all tax-free now and it's not.

30:06We're going to talk about that. If you have questions, the phone number is 610-758-8810, we'll be back in a moment. WDIY thinks it's members in Valley National Financial Advisors offering a broad spectrum of financial services for more than 25 years, including a state planning and tax preparation, especially for Pennsylvania and New Jersey residents subject to state inheritance tax reporting. On the web at valleynationalgroup.com or 610-868-9000. Welcome back. If you have questions, phone number is 610-758-8810. I didn't know that talking about cost basis was going to go to this level, but it's so important. If you remember at the top of the show, I talked about the capital gains tax rates and that's why I said it was so important because capital gains tax rates are lower. We want to make sure that we understand what cost basis is and the holding period's

31:07long term to get those better capital gains tax rates. We did have a listener call in, Paul from Schnecksville, and asked, what do I do with $10.99 B. B is $10.99 B. B for brokerage is the sales of investments you have in your brokerage account, which would be individual account or a joint account, or it could be a $10.99 B from a transfer agent if you owned the stock individually and it's held in like street name with a transfer agent. The $10.99 B should show the stock or mutual fund or bond that you owned that you sold, so it'll give a name description, it'll give the acquisition date typically, it'll give the sale date, it will give the proceeds, and it will give the cost basis if it is one

32:12that has been tracked since 2011 when they had to start tracking the cost basis. So hopefully that is all showing up on that $10.99 B. Occasionally, if you've sold one position over several lots, they might not show a specific date, it might be like XXX or if you bought it over more than one time, it might also show XXX. But basically, you need to know if it's long term or short term, but Paul, you would enter that if you're doing your software, if you're doing your tax return yourself, if you have software, sometimes you can just import that $10.99 B right into the tax software and it hopefully would put it in the right place if all of those boxes are completed appropriately. If for any reason those boxes are not completed for whatever reason, maybe no cost basis, then you would have to manually enter that, but you do have to report that information if you

33:14received a $10.99 B. You definitely have to report it. So hopefully it's all filled out. If it's not, this is what we're talking about that cost basis may be unknown and you might have to do a little homework, a little extra work to find it and dig that up. Okay, I hope that answered your question. And that $10.99 B people could be its own separate document or it could be part of what I called the Consolidated $10.99 reporting. The Consolidated is the $10.99 INT for interest, $10.99 DIV for dividends and the $10.99 B for brokerage sales. Okay, it could be on a Consolidated one. So make sure you have that cost basis. As I said, it could be from pre-2011 periods, but your broker still might have that information and provide that to you. It could be missing. It could be from a gift. It could be inherited. So just find out,

34:14you know, see if you can track down how you acquired the stock or mutual funds. Then I talked about collectibles that you want to make sure that you're keeping track of things that you're buying, art or collectibles. Land, I had mentioned you could capitalize the real estate taxes. A lot of people might not know that and it really, really could be something that you might want to think about over these years when we haven't been itemizing real estate taxes as a deduction. Now granted, they took the, they raised the salt cap, the state and local tax deduction on Schedule A. They raised it, but I still have a lot of people who still are not hitting the standard deduction amount with their itemized deduction. So if you're getting no benefit from the deduction of the real estate taxes on land that you may have invested in, you can choose to capitalize those, but it is an election you need to put it on your tax return that election and then just track it. Keep tracking the cost basis of the land. If it's something

35:16you're going to hold till you die and you don't plan to ever sell it, well then maybe that doesn't even matter and it doesn't mean anything because you get a step up a basis or your family or your airs get a step up a basis when you die. But I will say I've had clients tell me they don't have no plans to sell. They don't do it. They don't capitalize the real estate taxes because they think they're never going to sell it. The kids want it. Well, the kids want it until they don't. And then, you know, you go to sell it before you die because you don't want to be burdened with it. You don't want your kids to be burdened with it anymore. And now you have a really big gain. Still would be favorable tax rates, capital gain tax rates, anything over long term, but, you know, you kind of want to watch and navigate those opportunities. Let me talk about the principal residence for a minute because that could be important. Years many, many years ago because some people still remember this. They say, oh, Lori, if I, you know, if I buy a new house, I can roll my

36:18gain into my new house. Well, that's really, really old rules though. That's been gone for a long time. It used to be, if you were age 55 and you bought, you sold your house and bought a new house, you didn't have to realize the gain on the sale of your first house because you rolled the proceeds into the new house. So you didn't have to pay tax on that gain then those rules that changed long time ago. Now they just have the principal residence exclusion. So you have to live and own your home, your principal residence, two out of five years, two out of five years. You have to own and live in the home two out of five years and you don't have to realize a gain as a single person up to 250,000 and as a married couple, you each get the 250. So it's 500,000. So if you own a home for 400, that's worth $400,000 that you paid 104 and you sell it today, you don't even probably have to report it. You check the boxes when you go to sell and you say, yep, it's under 500,000. The gain was, you know, 400, 300 in my story. We owned it. We lived in it

37:25two out of five years, two out of five years and they don't even give you a tax document for it. Typically, when you sell real estate, you would get something called the 1099 S, S is in Sam and you may have to report that on your return, but you may not have any reportable gain or loss. So occasionally, maybe someone didn't know how to answer the questions and they sold their house for $520 and they paid $104. That would be a $420,000 gain for the couple. Well, it's under 500. They don't have to report it, right? But the broker issues or prepares a 1099 S. Well, now the IRS knows that you sold a house for $520,000. They don't know what your cost basis is. Even though you do and you say, oh gosh, it's not reportable and you throw it away, then you get a letter from the IRS. So you do still want to report it and then what you would have to do is include the cost basis and show that yes, the gain was less than 500,000 for this married

38:27filing joint couple and there's no reportable gain. It shows up on that schedule. D I mentioned earlier, but it's just no gain or loss. Nothing shows. You don't get a loss either. It's a personal loss and you don't get to take personal losses. So that would be the principal residence. So some people in their minds have said, well, you know, I don't have to keep track of the cost basis then because, you know, I'm never going to make $500,000. Well, there might be times where you might make $250. What do we know happens in this country? We know that people get divorced. So while you're married, you have a $500,000 exclusion. But if you're single, you've either lost your spouse to death or divorce, whatever it might be. Now your exclusion is only $250,000. There is a little reprieve for people who have passed away. If you were a married couple, and I think within two years you sell it, they will still honor the 500,000. Don't quote me on

39:29that. I think it's two years I haven't had it happen. But then after that period of time, now you're on your own again after that, you know, two years after the death of the spouse, you're kind of on your own. So now it's back to that $250,000 exclusion. So you just lost $250,000 when your spouse passed away and you decided to stay in the home for another, you know, three years. So you really should keep track of the cost basis. And what do I mean by that? The cost basis, settlement sheet when you buy it. You want to keep that in a, you know, a folder for the house in your records, either online or in, you know, the old filing cabinet. So keep the settlement sheet of when you bought the house. Then if you do any major improvements, now if you do repairs and maintenance, that does not count. If you're painting and refreshing and putting in, you know, new light bulbs, that doesn't count. What I mean is capital improvements, landscaping is considered capital improvements, a new garage, new driveway, new pool, fence, new siding, new kitchen cabinets,

40:36new kitchen completely, renovation of the bathrooms. That's all capital improvements. You want to keep track of that because you don't know what's going to happen in 10 years that maybe your situation changes. And when you bought your $100,000 house and you thought it was only worth 350, you know, you thought, oh, 350, that's 250. But now it's worth 500 and you're divorced. Now I have a $400,000 gain. I only have a $250,000 exclusion. Now all of a sudden I have exposure to capital gains. But oops, I forgot, you know, that I put in new kitchen, new bathroom and landscaping for, you know, 120,000. So you want to kind of still keep track of your major improvements and renovations. All right. So that's kind of like for a principal residence. Rental properties. Don't lose track of what you're doing on a rental property. Let's pretend you're you're just all excited. Your friends all have rental properties. You think this is the greatest

41:41thing going. And wow, you know, your tenants are going to pay the mortgage and it all sounds great. Well, you want to make sure you understand what you're getting into because yes, you can, you know, buy into a rental property as an investment property. And some people think, oh, this is great. I'm going to get these deductions. And my friend has losses and isn't that great. I get to take these losses on the tax return and the tenants paying the mortgage basically. Well, it might not work that way for you because there are limitations. And when you can take the loss, the passive loss on the rental property. And you may not be able to take the loss. It could be suspended. So if your income is over 100,000 or over 150, absolutely. The passive loss is suspended. But between 100 and 150, it's it's phased, you know, it's phased out a little bit. The deduction that you could take. Now that deduction is suspended. As you heard me say, and it can carry forward until you have

42:42other passive income or until you sell the property. So just keep in mind before you go into a rental property, why, you know, how it's all going to work. Why would someone go into a rental property and Lori and have a loss? Why would they want to do that? Or, you know, don't we want to have income? Well, the loss could come from something called depreciation. You get a deduction for depreciation. And that's often what causes the loss because it's usually a pretty decent deduction. But that affects your cost basis. It lowers your cost basis. So in your mind, you bought a property for 150,000 and, you know, 10 years later, it's worth 250. And you think, oh, I'm only have $100,000 gain on that. Well, you forgot that you took, you know, X amount of depreciation, which lowers the cost basis. And now you're going to have a much bigger gain than you thought about that you realized. So kind of know what you're investing in and the implications of what you're investing in, how it applies, you know, so that you can do your tax, your tax planning accordingly

43:47and you're not surprised. All right, folks, we're at our last break. If you have questions, the phone number is 610-758-8810. We'll be back in just a minute. WDIY thinks it's members in Valley National Financial Advisors, offering a broad spectrum of financial services, including portfolio management, tax return preparation and financial planning for the accumulation years, retirement years, and a state distribution on the web at valleynationalgroup.com or 610-868-9000. American folk music offers a variegated pattern of performers and styles. I'm Tom Druckemiller, your host for In the Tradition. Together, we'll trace the roots and branches of American folk music from the earliest recordings and performers through today's talented players. In the Tradition, Wednesday evening from 7 to 9 p.m. on WDIY-88.1 FM and WDIY.ORG. Welcome back. This is your host, Laurie Sieber. It's still time for questions. 610-758-8810. You can

44:49also email questions through yourfinancialchoices.com. I do want to mention one other thing about the principal residence I forgot. Remember I told you you want to keep track because you never know what's going to happen because so many people get divorced and you might be single. But I also said someone might die and then you'd be single. Do keep in mind though when you own a principal residence jointly and you decide to stay in the property for x number of years beyond that $500,000 exclusion allowance in the case of a death. There is a step up and basis on half the property. So if you pay $100,000 for the home and when your spouse passes it's worth 500, your basis for half was 50 and their basis for their half gets a step up and basis to fair market value. So if it's worth 500 when they died then their basis would be 250 and your basis is 50. So now the basis is 300 on a $500,000 value. So that helps take the sting out of that what otherwise

45:56might be a huge gain. So that that helps as well. But in that story I said it's worth 500 and your cross basis is 300. You hold it for another 10 years. Now we might be over that 250 gain. So that's why you want to always make sure you're keeping track of the big expenses. With the time that we have left I'll talk a little bit about IRA contributions and Roth contributions and just some reminders for 2026 and then I'll talk about the 25 numbers. For 2026 total contributions you can make each year to all your traditional IRAs and or Roth IRAs can't be more than $7,500 if you're under age 50 if you're 50 or older it's $8,600. This is for 2026 or your compensation if it's less. So if you only make $5,000 you can only contribute $5,000. But if you make more than that your contributions would be limited but then your contributions could further be limited

47:01depending on how much income you make. So for example in 2025 we could make contributions of $7,000 if we're under age 50 or 8,000 if we're over age 50. We have until April 15th of 2026 to make contributions for 2025. Again the compensation limit let's say we're over the compensation but then we want to make a deductible IRA there are income limits and those income limits depend on if someone also is a participant in a retirement account at work. So for married filing joint for example a deductible IRA income limit is if it's over 146,000 you you don't get the deductible IRA if it's under 126,000 you can and there's a phase out in between but if you're married filing joint and if the taxpayer is covered by an employer plan the spouse could do a covered spouse could do a contribution if their income is under 236,000 so there's something called a

48:08spousal IRA that perhaps one spouse doesn't work and the other spouse does you can do IRA contribution for your non-working spouse based on your wages with a higher income limit so they allow the the non-covered spouse to be able to make a contribution at higher income limits. Now the Roth IRA has higher income limits for married filing joint it's 236 or last 236,000 or less for 2025 you can make a Roth contribution phase out between 236 and 246 and cannot make one over 246 and then for single people it is 150 to 165 phase out range and below that you can do it above that you can't but there is something called the backdoor Roth as well this really works for people who don't otherwise have any IRAs because the IRS always allows us to make what's called

49:08a non-deductible IRA contribution. Now if I qualify because of my income to make a contribution to the Roth well then I'm going to go right to the Roth if I can and I have the money available I'm going to go right to the Roth but if I have the money available but my income is too high and it doesn't allow me to do the Roth IRA then I could do a non-deductible IRA contribution as long as I have no other IRAs and let's pretend I contribute 8,000 I can convert 8,000 at no tax cost I didn't take a deduction I have basis in my IRA if I convert it I just convert it to a Roth that's why they call it a backdoor Roth. Now if I have a million dollars in my IRA and I put 8,000 in a non-deductible IRA when I go to convert that it doesn't matter if I've kept it separate or not the IRS looks at IRAs all as one so then they would say oh you converted 8,000 of a million

50:09dollar 8,000 IRA and most of that conversion would be taxable and you kind of just lost the whole benefit of it. So again the the thought is if you're listening I don't have any IRAs I don't have any other IRAs but my income is too high to do a Roth this is one way to get money into a Roth. Now with the most recent tax legislation the one big beautiful bill they've also changed what happens when you're at work and you have make contributions into a 401k if your income was over a certain threshold in 2025 I forgot what it was like 145,000 or something if your income in 2025 was over that amount then any ketchup contributions you do in 2026 have to automatically go into a Roth portion of your 401k. Now let's pretend that happens to you and the ketchup contribution let's pretend you were going to do 8,000 as a ketchup contribution into your 401k your income was higher

51:14than 145 and 20 and again I think it's 145 your income was higher than that in 2025 so it has to go into Roth the employer has a Roth feature in their 401k so my ketchup has to go into the Roth and let's pretend it was you know 8,000 dollars that I put into there so that is one way to have Roth money but that's Roth 401k that is a separate strategy from the regular Roth meaning if I don't have any other IRAs I have a 401k with now this Roth money going in but now I don't have any other IRAs outside I could still do that backdoor Roth because remember my income might be too high to do a regular Roth I have no other IRAs the Roth 401k is a completely separate kind of entity or strategy to my individual Roth I could do a non-deductible IRA and convert it to Roth and

52:18still do that at 8,000 dollars if I'm over 50 I could do 8,000 for 2025 and now I would have 8,000 in my Roth as an individual and I would have 8,000 in my 401k Roth okay because the limits are different they're separate so it's you know you've got to have a lot of income you know and be able to do all this but that is a strategy for higher income earners so 2026 the amounts are 7,500 if you're over 50 it's 8,600 that includes the catch up that is for individual IRAs and individual Roths and when I say individual IRAs that's traditional IRAs typically deductible again if you're below those income limits 2025 the 2025 numbers were 7,000 and 8,000 if you're 50 you're over less if you have less compensation but you have until April 15th to do those contributions for 2025 so that's a nice strategy that you could still do maybe you already filed your tax return

53:25if you haven't you can still look to see if it would make any difference for you sometimes what we're finding is it could make a difference for someone who might kind of be in that income range where maybe you're you know a senior and you kind of retired from your regular full-time job but your part-time worker and you made $10,000 and maybe you have some social security and your income with some other investments that you have kind of put you over the limit for the enhanced senior deduction well maybe if you did a traditional deductible IRA it might bring your income down a little bit to give you you know the opportunity to get more of the enhanced senior deduction all right other kinds of IRA reporting that we might see with tax returns is the 1099R think retirement 1099R typically on a 1099R we say things like rollovers for IRAs or 401k so if someone

54:33takes retires and they take their 401k money and put it into an individual retirement account it could be titled individual rollover so rollover IRA excuse me rollover IRA and that terminology tells us that that came from qualified money from a 401k or a 403b and we rolled that money from that qualified account into an individual retirement account that's going to be self-managed and that is a rollover IRA and you could have a rollover from one 401k to another 401k and sometimes these rollovers get reported on 1099Rs and sometimes they don't and frankly I don't I'm not even sure what triggers it one way or another the 1099R but if you get one and it was a rollover it's typically a tax-free rollover and it's going to have the gross distribution in one box and then it would show you know zero taxable and then box seven is going to be code G

55:38and the G tells us that it was a rollover now you might rollover a Roth IRA and that would have a little bit of a different code and that also would be tax-free so just be aware of when you're you know trying to fund IRAs or Roth IRAs that it has a compensation limit it has an income limit and it depends on your filing status as well and for what you're you're doing it so for example I had a young client tell me oh I'm going to send in the check for 7500 well we were funding it for 2025 and her check should only be 7000 so you want to make sure you're funding it appropriately if people put in excess contributions let's pretend you funded your for your IRA and you found out your income was too high the IRS is going to give you a little reprieve if you get it out before April 15th before you file your tax return so if you did an excess contribution to an IRA you thought your income was going to be lower than it was now it's

56:39too high you need to take it out you can pull it out by April 15th and the IRS isn't going to charge you any you know penalties for that because under the new legislation there could be a 6% excise tax excise that's on top of your ordinary income if you put too much into an account that you weren't allowed to into an IRA that you weren't allowed to they're going to charge you 6% and continually year after year until you put it out pull it out so you want to pull that money out by the tax filing deadline and they're giving even another additional reprieve if you've already filed your tax return on time and you didn't realize that they're going to give you another 6 months to still correct it but then you have to file a form 5329 to kind of go through those calculations because you also have to remove any income that was earned on that excess contribution and the excess tax penalty used to be you know much higher so they've kind of

57:45you know trying to manage that a little bit understanding that people sometimes make mistakes there could be a penalty for also excess contributions you know excess contributions which I said was a 6% I'm trying to think oh if you don't take a required minimum distribution from an IRA when you're supposed to there could be penalties for that too don't have time to talk about that tonight I could talk about that maybe next week next week I'm actually was going to talk about things let me see if I can find my little note what are you making and what are you missing in your financial life so next week what are you missing in your financial life maybe I could add that comment if I remember talking about excess contributions from failing to take a required minimum distribution because there's been so many changes to that in recent years it gets quite confusing even for professionals I want to thank Bridger for being here I want to thank Cindy

58:45and Bob for being here thank you Paul for calling in with your question and for listeners coming up next we have Tom Druckermiller within the tradition folk music remember pay attention be proactive not reactive make the best of your financial choices and have a great week