These brief tips discuss how the IRS now views the unexpected birth of a child an "unforeseen circumstance" when it applies to the home sale exclusion and also explains 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.
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.