Unlocking Tax Savings: Documenting Home Improvements and Understanding Worker Classification
Preserving Memories, Preserving Savings
After nearly 50 years in your family home, you’ve finally sold it, but a fire 15 years ago destroyed all documentation of the numerous improvements you made. Now, you’re wondering how to prove these upgrades for capital gains tax purposes. Fear not, as there are ways to reconstruct your records and minimize your tax liability.
The Importance of Record-Keeping
As you may know, the IRS allows homeowners to exclude up to $250,000 ($500,000 for couples) of capital gains from the sale of a primary residence, provided you’ve lived in the home for at least two of the previous five years. However, with rising home values, it’s essential to document qualifying home improvements to increase your tax basis and reduce your tax bill.
Rebuilding Your Records
If you hired contractors, ask them to provide written verification of their work. You can also check with your property tax assessor to see if your home’s assessment was adjusted to reflect any improvements. Create a list from memory of the upgrades you made, including the year and approximate cost. Even photos from friends and relatives can serve as supporting evidence.
Tax Breaks for Widows and Widowers
If you’re a widow or widower, you may be eligible for an additional tax break. In most states, the half of the home owned by the deceased spouse receives a step-up in tax basis to the current market value. In community property states like California, both halves of the house get this step-up.
Digital Record-Keeping: A Lesson Learned
To avoid losing important documents, consider scanning or photographing your records and storing them in multiple secure locations, such as your computer and a cloud account.
The Misclassification Epidemic
Many workers, believing they’re pocketing more money, fail to realize the implications of being classified as independent contractors. In reality, they may be employees misclassified by employers seeking to avoid paying Social Security and unemployment taxes. If you suspect misclassification, you can file IRS Form SS-8 and Form 8919 to correct the issue.
Understanding Worker Classification
The key to determining whether a worker is an employee or contractor lies in control. Who controls the work and how it’s done? The more control the employer has, the more likely the worker is an employee. However, the IRS acknowledges that no hard and fast rules exist, and factors relevant in one situation may not apply in another.
A Call to Action
It’s essential for employers to clearly inform independent contractors of their status and the need for estimated tax payments. Perhaps it’s time for a law requiring transparent disclosure to protect workers from unexpected tax liabilities.
Leave a Reply