Ask Liz Weston

Q: My wife and I just owed a ton of money for taxes because we had to take the standard deduction. How in the world to people accumulate enough deductible expenses to be able to itemize? I refuse to believe that the average individual makes thousands of dollars of deductible purchases or donates thousands to charity.

A: Well, you’re right on that score. About two-thirds of the nation’s taxpayers take the standard deduction, typically because they don’t have enough deductible expenses to itemize.

What usually allows people to itemize is mortgage interest, often combined with property taxes and state and local taxes. (For years, only state and local income taxes qualified as deductible expenses, but now you can choose to deduct sales taxes instead.)

So it follows that people who live in areas where real estate is expensive and taxes are high are more likely to itemize than those who don’t. Someone who buys a house in Amarillo, Texas–where the median house price is $97,100, according to the National Association of Realtors, and there is no state income tax–may not have enough deductions to itemize, whereas someone who buys a home in Orange County, California–median home price $627,300–almost certainly does.

Amarillo homeowners who put 10% down on median-priced homes would pay just $4,777 a year in interest during the first year of ownership, assuming a 30-year loan at 5.5%. That’s well short of the $9,700 standard deduction in 2004 for a married couple filing jointly.

San Francisco homeowners, by contrast, would pay $30,862 in mortgage interest during the first year.

Some commentators have used these differences to asset that folks in many parts of the Midwest and South are subsidizing those on the coasts and in the Northeast, thanks to the mortgage interest deduction. While that might be a bit of a stretch, it is true that the ability to itemize isn’t evenly distributed.

You may never have enough deductions to itemize, but you have a few other ways to avoid a big bill on April 15. Making contributions to a 401(k), if available, is one such way. If you’re not covered by a workplace retirement plan, or you are but your income is below certain limits, you can make deduction contributions to an individual retirement account.

You also should take time now to estimate your taxes for 2005 and adjust your withholding accordingly so you don’t face such a big bill next year. The IRS has a withholding calculator on its site, www.irs.gov, that can help.

Q: I need help with deciding on where to take my 81-year-old mother to review her huge stack of IRAs and advise her on what to do with them. I have no clue on how to read them and neither does she.  Do I take her to a financial advisor? A tax pro?

Q: I just finished my taxes, and I know my refund would have been bigger if I had been able to find more of my tax-related receipts. You’ve talked about how to organize your records and when to get rid of old paperwork. Do you have any suggestions for tracking receipts?

A: Essentially, you need to figure out a way to separate your important receipts from all the other paperwork you carry around, and to be consistent with whatever system you set up.

Professional organizer Debbie Stanley has some great tips about handling receipts in her book, “Organize Your Personal Finances in No Time” (2004, Que). She notes that most receipts for purchases, ATM withdrawals and credit card transactions need to be retained for short periods of time only; typically three months or less, which is long enough to compare them against your statements or return an unwanted item.

So your first step is implementing a system in your wallet or purse that allows you to separate these short-term receipts from those you’ll need to retain longer, such as tax-related paperwork or sales slips for major purchases.

Some folks will have a third category: receipts that they need for reimbursement or rebates. If you’re an employee who regularly travels or entertains clients, you’ll want to include this category so you can get paid back for your expenditures.

Fortunately, many wallets have a number of different compartments where you can stow receipts of different types, or you might want to carry envelopes for this purpose in your backpack or purse.

Then, every night–or at least a few times a week–you can empty your receipts into an appropriate file folder or box: one labeled for short-term receipts, one for taxes and one for reimbursements or rebates.

The key to being able to find your important receipts when you need them is to put them in the same place every time–both when you receive them and when you get home. Don’t stuff them in your pants pocket or let clerks put them in the bags, and don’t let them linger in your wallet or purse.

Stanley also has a pretty nifty idea for dealing with short-term receipts. Rather than waste much time sorting through them, she set up three file folders, labeled “This Month,” “Last Month” and “Two Months Ago.” She empties her short-term receipts from her wallet into the “This Month” folder; at the end of the month, she transfers the contents of that folder to the “Last Month” folder. The previous contents of the “Last Month” go into the “Two Months Ago” folder, and whatever’s in the “Two Months Ago” folder goes into the trash. After three months, her receipts have spent time in each folder and she’s had plenty of time to retrieve them if necessary.

Question: I am 51 and recently retired from a company after 30 years. I realize my savings will need to last for a long time and want to be as careful as possible. I’ve been talking to a financial planner that a friend has been using for several years. What questions should I be asking, and how can I research his background?

Dear Liz: I read your column regularly and have found useful information in it.  However, I think you were wrong in your advice when you said, It doesn’t make much sense to have a big cash stash when you have credit card debt, even when you’re not currently paying interest on those cards.

Q: My wife and I are considering tapping her 401(k) for home improvements. But we’ve heard there could be some penalties involved if she loses her job and can’t pay the loan back. What’s the worst that could happen if we borrow, say, $10,000?

A: If you can’t pay the money back in short order, what was a loan becomes a taxable distribution. You would owe a 10% federal penalty plus income taxes on any outstanding balance. If you’re in the 25% tax bracket, you would have to come up with $3,500 to pay the Internal Revenue Service — plus any penalties and income taxes your state might assess.

The greater damage, though, is the loss of future tax-deferred earnings that money could have made for you. The $10,000 could have grown to $100,000 in 30 years, assuming an average 8% annual return.

That’s why it’s not a good idea to tap retirement funds, particularly for discretionary spending such as home improvements. Trim your other expenses and save up the money instead. You’ll be better off in the long run.

Q: My husband and I have managed to get ourselves into a serious debt problem. Our credit card tab alone is $30,000, and that doesn’t count the money we owe on our car, our recreational vehicle and our house.

Dear Liz: My husband was married and owned a home with his first wife. In the divorce, she got the house with the stipulation that he would receive one half of the $25,000 down payment when it was sold. She defaulted on the mortgage, however. The lender sold the house at auction and then came after my husband for the amount that was still owed. The divorce papers had stated he would not be liable for such a debt. My husband attempted to sue her for the $9,000 he paid the lender plus the $12,500 he was promised but she filed for bankruptcy and his claim was one of the debts that was discharged. I’ve done research on the Internet and it seems like his debt shouldn’t have been erased. Do you think we have a case?

Answer: It depends.

If your husband’s ex filed her bankruptcy case before Oct. 17, 2006, when the new bankruptcy reform law took place, then her debt to him could legally be erased, said Leon Bayer, a Los Angeles bankruptcy attorney.

The new law, by contrast, says that a debt created by a divorce agreement isn’t dischargeable in Chapter 7 bankruptcy liquidation, although it may be erased in a Chapter 13 repayment plan.

If the debt was incorrectly discharged, your husband would be able to pursue his former spouse for the $12,500, Bayer said. In addition, he could sue her for the $9,000 he paid to the lender if the divorce court required the ex-wife to hold him harmless from that debt, as your letter seems to indicate.

By the way, there is a chance that the lender shouldn’t have been able to dun your husband for the $9,000 debt. Several states, including California, have “anti-deficiency” laws that prevent mortgage lenders from trying to collect such debts if the loan in question was a “purchase money mortgage”–in other words, if the loan was used to buy the property. If the loan was subsequently refinanced, though, anti-deficiency laws typically don’t apply.

If you still think your husband might have a case, Bayer recommends contacting a local attorney for help.