Roth Rollover Prior to Marriage; IRA or Roth Eligibility; and Estate Tax Threshold

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, March 22, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

Question: If I rollover my Roth before I marry, will I still qualify for the rollover if we file separately this year?

Answer: No. Married couples must file jointly to secure the Roth rollover. Marital status is determined on December 31, 1998. If you rollover your Roth when you are single and marry by the end of the year, you are ineligible. You may either marry and file a joint return, or delay your marriage and file as a single person in 1998. Note: If you marry and file jointly, your combined adjusted gross income (AGI) cannot exceed $100,000.

The converse is also true: A married couple divorcing in 1998, who filed separately, becomes eligible for the Roth conversion, provided each individual meets the $100,000 AGI limitation.

Note: If you complete your IRA rollover to a Roth as a single person this year, you may marry and file separately the following year, and continue to gain the benefit of the four-year tax averaging on the conversion (this benefit is available for Roth conversions completed in 1998).


Question: Last year my spouse and I lived off savings and investments, and were not active participants in a employer-maintained retirement plan. I started a home-based company, but my deductions exceeded by income. May either of us contribute to an IRA or Roth?

Answer: No. As a self-employed person, you must have "earned income" that is includable in gross income. Earned income, in general, is net earnings from self-employment for social security tax purposes. Since your deductions exceed your income, you do not have earned income and cannot contribute to either an IRA or a Roth this year. Neither your spouse nor you may contribute to IRAs since neither of you earned compensation.

If one spouse has at least $4,000 of earned income and a joint return is filed, in general each spouse may contribute up to $2,000 to an IRA. In effect, one spouse may "borrow" the compensation earned by the other to contribute to an IRA.


Question: I owned a home for seven years and divorced four years ago. Pursuant to the divorce decree, I transferred title to my house to my wife. When it is sold, we will split the profits equally. Am I entitled to the new residency exclusion?

Answer: No, but your wife, as owner and occupant of the residence, is entitled to a $250,000 exclusion. New residency rules exclude up to $250,000 ($500,000 for couples) in gain from the sale of a principal residence, provided you have owned and lived in your residence for at least two of the past five years prior to its sale.

If she had sold the house within three years of your transferring it to her, then each of you would be entitled to the $250,000 exclusion, because each of you would have owned and used the house as your residence for at least two of the past five years prior to its sale.

If your wife sold the house within two years of the transfer, she could add your prior ownership to fulfill her two-year ownership requirement. Also, if you retained ownership of the house, you could have included your former spouse’s use of your home as her residence to satisfy the exclusion’s two-year use requirement.

Note: If one spouse dies, leaving the house to the surviving spouse, he or she may tack on the deceased spouse’s period of ownership and use to meet the residency exclusion.


Question: What are estate tax rates for 1998. What is the estate tax for a $1 million estate?

Answer: There has been absolutely no change in estate tax rates. However, the Unified Estate and Gift Tax Credit (Unified Credit) has increased from $192,800 to $202,050, thereby exempting a taxable estate up to $625,000. Estate tax for an individual dying in 1998 with $1 million taxable estate would be $143,750 (tax on $1 million is $345,800, less the $202,050 Unified Credit).

For decedents dying in 2006 and after, the Unified Credit exempts estates of $1 million. A married couple can exclude estate tax on a taxable estate of $2 million when they properly plan their estate to maximize their Unified Credits ($1 million each) and live past 2005.





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