Q&A: How to pay taxes electronically

Dear Liz: You recently wrote about check theft and the fraud possibilities when paying with checks through the mail. The largest checks that I send are to the IRS and California’s Franchise Tax Board. Is there a way to send in tax payments electronically rather than by check?

Answer: Absolutely, and tax authorities typically encourage you to use these electronic payment methods.

The IRS has a number of options. Its Direct Pay service allows you to schedule payments from your bank account at no cost. You also can pay using a credit card, debit card or digital wallet service such as PayPal, although these methods incur a processing fee. California’s FTB also has electronic options. (Electronic payment options for other states can be found by searching for the state tax agency’s name and the word “payment.”)

Q&A: More reasons to ditch paper checks

Dear Liz: Personal checks are not stolen while in transit; they’re stolen from mailboxes which are, for the most part, unprotected and not covered by security cameras. So, if you want your check to go through the mail, walk it into the post office. More than once I’ve found that previous mailers had just slipped their letters into the chute of the drive-up mailbox and driven off. In their ignorance or naivete they left their letters for the thieves, but I shoved their letters downward into the chute. One of my neighbors whined that someone altered a check that she had made out to “AT&T.” She left a lot of room on the payee line and that’s something one never wants to do.

Answer: Checks are not just stolen from unprotected mailboxes. Thieves have attacked mail carriers for keys to secure mailboxes. Checks also can be stolen in transit and from the recipients’ mailrooms. Even people who have mailed their payments at a post office have reported being the victims of check theft.

There are some ways to reduce your risk, but that doesn’t change the fact that writing checks is a risky habit.

Take a moment to look at your checks. Each one is printed with your name, account number and bank routing number. That’s all the information a thief needs to create new checks and make fraudulent payments.

Also, check washers can remove all the writing from your checks except for the signature, so just filling out the payee line won’t prevent fraud. (If you must write a check, consider using a gel pen, because the gel is generally harder to remove with solvents than ballpoint ink.)

Electronic payments, by contrast, offer a secure way to pay that’s faster and easier to track than a check through the mail. Electronic payment options are nearly ubiquitous now, so it’s a good time to break the bad habit of writing checks.

Q&A: What to know about capital gains tax on a house sale

Dear Liz: My husband died in November 2022. I was told that if I sell the house within two years of his death, I can benefit from two capital gains exclusions, his and mine, each for $250,000. The house was appraised at $912,000 based on his date of death. I don’t imagine it would sell for much more than that now. Can you tell me approximately what I would owe in capital gains? My tax rate is 24%.

Answer: That’s a great question to ask a tax pro, since there are a number of variables involved.

If you live in a community property state such as California, then both halves of the property got a favorable step-up in tax basis when your husband died. That means the house’s new tax basis would be $912,000.

If you don’t live in a community property state, then only half of the house got the step up at his death (to $456,000, or half of $912,000). The other half — yours — retains its original tax basis. If the original purchase price of the home was $300,000, for example, your basis would be $150,000. The home’s total basis would be $606,000 (which is $456,000 plus $150,000). If you sold the house for $912,000, your capital gain could be $306,000, which would be well below the $500,000 exemption you could take if you sell the house within two years of the death. If you sell after the two-year mark, the gain above your single $250,000 exemption would be taxable.

The rate you would pay depends on your taxable income and what state you live in.

For example, a single person with taxable income of between $47,026 and $518,900 in 2023 would pay a 15% federal capital gains rate, plus whatever rate their state imposes. (California doesn’t have a separate capital gains tax system, so any taxable gain would be subject to the state’s regular income tax.)

These numbers are just to give you an idea of how capital gains taxes work. Your mileage may vary. If you renovated the kitchen or did any other significant improvements on the home, those costs could be added to your tax basis to reduce any potentially taxable gain. Also, selling costs will reduce what you actually pocket from the sale and your potentially taxable gain. For more information, see IRS Publication 523, Selling Your Home.

Taxes shouldn’t be your only consideration, of course. Relocating can be disruptive and expensive. Getting the house sold before the two-year mark makes sense if you were planning to move anyway, but don’t let fear of taxes scare you out of a home that otherwise suits you.

Q&A: Using 529 accounts on groceries

Dear Liz: You said 529 accounts could not be used for groceries. I searched on the internet and found that students can use 529 money to purchase meals off campus and buy groceries. Which is correct?

Answer: The original letter writer’s child lived on campus, so the amount the family can withdraw tax free from the 529 account is limited to what they spent on a campus meal plan. Grocery runs and restaurant meals aren’t covered.

Once the child moves off campus, the family can use the college’s official “cost of attendance” figures to determine the maximum they can withdraw tax free to pay for food. The child should keep all receipts as proof to back up the withdrawal.

Please be careful about assuming that the results of any internet search are reliable, especially if artificial intelligence is involved in creating — or inventing — the answer. Tax law can be particularly tricky to interpret, which is why I rely on tax experts such as Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, who helped with the original answer.

Q&A: 529 college savings rollovers

Dear Liz: The beneficiary on the 529 college savings account I manage has no education plans so they cannot use the 529 funds without tax penalty. They also do not work, so I cannot roll the money over into a Roth IRA for them because there is no earned income to qualify for the rollover contribution.

However, I understand that 529 beneficiaries can be changed to a qualified relative. If the 529 beneficiary were changed to a relative, could funds be rolled over to the new beneficiary’s Roth account? Does the 15-year clock reset on the 529 account when changed to a different beneficiary, effectively delaying such a rollover?

Answer: 2024 is the first year that unused money can be rolled penalty- and tax-free from a 529 college savings account into a Roth IRA for the same beneficiary. The law that created these rollovers specified that money can’t be rolled over until the account has been in existence at least 15 years. The IRS has yet to say if the clock restarts when the beneficiary changes, but many tax experts believe that will be the case.

Q&A: Social Security versus government pensions

Dear Liz: I have a dear friend who after 48 years of marriage went through a horrible divorce. She worked for a school district that did not pay into Social Security but her ex was self-employed and did pay into the system. I advised her to apply for spousal benefits but she was told she was not entitled due to her pension. Is this right? Social Security is a federal program. What does it have to do with a state or county pension? I feel she is being cheated out of income she could desperately use.

Answer: It’s unfortunate that your friend is struggling. But she’d be worse off trying to live on a spousal benefit from Social Security than she is now.

People who get pensions from jobs that didn’t pay into Social Security may be subject to two provisions, the windfall elimination provision and the government pension offset. WEP can reduce but not eliminate any Social Security retirement benefit they earned from other jobs that paid into Social Security. Typically, the Social Security benefit at full retirement age won’t be reduced by more than half the pension amount.

GPO, by contrast, reduces a Social Security spousal or survivor benefit by two-thirds of the amount of the pension. That means GPO can entirely eliminate a Social Security benefit based on someone else’s work record. If your friend can’t qualify for a divorced spousal benefit, that means she’s already receiving more from her pension than she would get from Social Security.

Consider helping your friend look for other ways to make ends meet. Benefits Checkup, offered by the National Council on Aging, could help her find programs that could help pay for medical care, groceries, utilities and other necessities.

Q&A: Here’s a 2024 resolution: Stop using paper checks. Fraud is soaring

Dear Liz: I had several checks stolen from the U.S. Postal Service. The thieves altered and cashed the checks. I monitor my bank accounts religiously and discovered the altered checks quickly. I immediately put holds on the checks and for the most part I have been reimbursed. One check, however, was written out to one bank for $4,339 and then cashed through another bank. The first bank told me they were pursuing the second bank for payment, and that when they get reimbursed, I’ll get reimbursed. I’ve been waiting since October 2022! Recently I received a letter from the first bank saying, in effect, that the other bank hasn’t responded so they consider the case closed. Basically, I’m out the money. This is obvious fraud and no one is taking it seriously.

Answer: Check fraud is soaring even as the use of checks has declined. Thieves take signed checks from mailboxes, sometimes using keys stolen from mail carriers, and “wash” them with common solvents such as nail polish remover. Once the checks dry, they change the amounts and payees and then cash the altered checks.

If you report the problem to your bank promptly — typically within 30 to 60 days of your statement date, depending on state law — then you should be made whole.

You can start by making a complaint to the Consumer Financial Protection Bureau online or by calling (855) 411-2372. The CFPB has a pretty good track record of getting companies to respond.

Also, please look into other payment methods. Electronic payments are much more secure as well as faster and easier to trace.

Q&A: What is financial infidelity? And what should you do about it?

Dear Liz: My sister is married to a man who is considerably older. They’ve been married for eight years. He has cancer and the outlook isn’t good, but he refuses to discuss their financial status. As a result, she has no idea what’s going on. How can she force him to tell her their financial situation? They aren’t getting divorced, and every article I’ve read only addresses financial disclosure in divorce cases. I will probably be the one helping her figure this out after he passes away.

Answer: Refusing to discuss the details of shared finances is at best a form of financial infidelity. A recent NerdWallet survey conducted by the Harris Poll found that many Americans aren’t sharing financial secrets with loved ones, including their income, credit card debt and how much they’ve spent on a purchase.

But at worst, it can be a sign of abuse. If he’s controlling or abusive in other ways, her physical safety may be at risk. Encourage her to call the National Domestic Violence Hotline at (800) 799-7233, which can help her assess her situation and connect her to resources that can help.

Even if she doesn’t plan to divorce, a consultation with a divorce attorney could still help. The attorney could suggest ways to piece together some of the details of their financial life and advise her about state laws regarding shared responsibility for any debts.

Q&A: Should you close a credit card?

Dear Liz: You recently wrote about how closing credit cards can hurt your credit scores. I’m wondering what impact closing a business credit card would have on my personal credit score.

For many years I have been working in the film industry under contracts with my personal services loan-out company. My company has two credit cards, including a travel rewards card with a hefty annual fee. This card has been useful to me because my job involved a lot of international travel. But as I’m now nearing retirement and traveling less, I’m considering closing that account. Will closing the card affect my personal credit scores?

Answer: The answer lies in your credit reports, which you can view for free at AnnualCreditReport.com. (Type that address into your browser rather than searching for it, because the top results are likely to be sites that want to charge you for credit monitoring. If you’re asked for a credit card, you’re on the wrong site.)

Typically, business cards don’t show up on personal credit reports and thus won’t affect your credit scores. But check to make sure.

Before you actually call to close the card, however, you should know that the company probably will want to keep your business. You may be offered a hefty wad of rewards points as an incentive to keep the account open. The points could be worth enough to offset some or even all of the annual fee.

Also, review all of the benefits the card offers. Many premium cards offer various credits to offset the fee, and not all of them are related to travel. Even if those aren’t enough to entice you to keep the card, you may want to use the credits before shuttering the account for good.

You also may have the option to swap your card for one with a lower annual fee, something known as a “product change,” so you’ll also want to investigate whether one of the issuer’s other cards might be a better fit.

Q&A: Social Security survivor benefits

Dear Liz: I am trying to understand the Social Security survivor benefit. I delayed starting to receive my benefits until I reached age 70. My wife just started receiving benefits at 66 and 10 months. Upon my passing, will she receive my benefit at full retirement age, plus the 8% annual delayed retirement credit plus the annual cost of living increases?

Answer: Assuming your benefit is larger than hers, then yes — her survivor benefit would be the amount you were getting at your death. The survivor gets the larger of the two checks a couple was receiving, and the other benefit goes away.