Questions about a house sale

[Jimbo513]

Hi guys, thanks for reading.

I have a few questions regarding a few different topics. If anyone can answer one, or all of them, I would be thankful.

I live in North Carolina if it matters.

My mother is selling her house. She lost her job due to her employer moving operations oversees. She is currently getting unemployment benefits and going to school for nursing. Her unemployment also pays for her tuition, books, supplies and mileage for up to 2 years.

She decided to sell her house and live with my sister until she finishes school. She wants to sit on the money from the sale in case she needs it for school, then when she starts a new career and the economy settles down, she'll buy again.

The house will sell for $68,000 and she owes $28,000, so she will get $40,000 profit.

My first set of questions deals with the house sale.

1) Any profit from the house sale is taxable right? What is taxed, the amount she sells for or the amount she receives after paying the balance on her mortgage?

2) Is there any way to estimate how much these taxes will be or do we have to wait until she files taxes for 2008?

3) Is there any special rule regarding her unemployment / school situation that may lower her tax burden on the sale?

4) Is there any way to lower the tax burden from the sale by putting the money into an investment or using the money a special way?

5) Is the profit from her house sale going to cause her to lose her unemployment benefits?

The next set of question deals with medical bills and collections.

She has quite a lot of medical debt. She had breast cancer about a year ago. She had health insurance, but the insurance did not cover everything. She ended up owing about $15,000. Also, after losing her job she was hospitalized with gall stones. She owes the hospital about $7,000 for that because her insurance was canceled upon losing her job.

6) If she puts the money from the house sale into a bank account, can collection agencies or the hospital see that she has the money in her bank and take the money? Can the bank be ordered to freeze the money?

7) Can the hospital sue her and if they win can a judge order the house profit be seized to pay these bills?

8) Is there a safe way to handle this money so it won't be jeopardized by these debts?

I know this may sound like she is trying to weasel out of this debt, but this is the only chance she has at building a new career. She only has a high school education at the moment and has been a blue collar worker all her life. This money needs to be used to ensure she can finish her schooling and get a good job.

Thanks so much for your time.

[Jimbo513]

OK, I may have answered by own questions about the tax part.

If the gain is not over $250,000 for a single filer, which she is, she will not owe taxes if she has lived in the home 2 out of the last 5 years and she hasn't sold another house in the last 2 years. Correct?

She bought the house in Jan 06 and it was her primary residence, so she has lived there for 2 years. She sold her last house in Sep 05, so it has been over 2 years since she last sold a house.

So she will not owe taxes on this sale right?

Any answers about the debt questions are still welcomed.

Thanks.

[rizzmo]

Correct me if I am wrong. As I understand it medical bills cannot go into collections as long as you make a minimum monthly payment. Friend of mine had a $3,000 hospital bill, and has faithfully made a $20/month payment the last three years.

[Jimbo513]

OK, I will ask her. I think she has been making small monthly payments.

[jIM_Ohio]

1-5- you answered your own questions

6) If she puts the money from the house sale into a bank account, can collection agencies or the hospital see that she has the money in her bank and take the money? Can the bank be ordered to freeze the money?

Yes- not a simple answer, but ultimately the bank account is part of her net worth.

7) Can the hospital sue her and if they win can a judge order the house profit be seized to pay these bills?

maybe sue- but I would guess collections would be used before suing.

8) Is there a safe way to handle this money so it won't be jeopardized by these debts?

I believe IRAs would be exempt, but your mother could only contribute to the level of earned income.

If she pays the medical bills, you should look at the following:
1) What is here adjusted gross income for 2008? 2009 projected?
2) What is the total medical bills she can afford to pay? 2008 and 2009 list by year.
3) Note the standard deduction for 2008 (single-$5450) and 2009 (single-$5700)

You need to compare 92.5% of #2 to #3.

If medical bills amount is greater than 92.5% of AGI, then she can deduct any medical bill on schedule A and use that to offset the taxes earned while working.

Example- mother earned 30k in 2008. Standard deduction is $5450, plus exemption for self ($3500) so your mother would owe taxes on 21.05k ($2740). In this example 30k is AGI and 21.05k is taxable income.

If she paid $10,000 in medical expenses (note she must have PAID the expenses, with checks to prove it- this is not when the treatment was incurred, but when the bills were PAID), she would be able to use the itemized deduction.

AGI is 30k. 7.5% of this is $2250. Any medical expense above $2250 is deductable (10000-2250=$7750).

so the 30k is reduced by $7750, then also reduced by the exemption ($3500) and taxes are owed on 18.75k ($2395).

Her tax bill was lowered by $300 if she pays the medical expenses now in 2008. If her earnings in either year exceed $33950, that would be the best year to pay the medical bills from the cash to offset taxes.

This also assumes no other itemized deductions were taken. If she paid mortgage interest, 15% of the mortgage interest could be used to reduce taxable income. Many other smaller deductions exist and there are also some tax credits she might qualify for if she does her taxes right- all of this greatly depends on AGI.

[maat55]

You might have your mother see if the hospital or doctors will settle for a lower cash settlement. Many would rather get a bigger chunk now than small payments.