April 29, 2024 By Leave a Comment

Q&A: Remarriage wouldn’t affect her divorced survivor benefit if she’s over 60

Dear Liz: I’m a CPA and getting conflicting answers from the Social Security office about a case I’m working on. Both clients are 70 and they’re considering legal separation or divorce. She took Social Security at 62 and receives about $1,500 a month before deductions. He started Social Security at 70 and receives about $4,600. How would her Social Security change at his death or their divorce, if she doesn’t remarry?

Answer: Based on the amounts involved, both parties are receiving their own retirement benefits and those aren’t affected by divorce, said William Reichenstein, a principal at Social Security Solutions, a claiming strategy site. (If the wife were receiving spousal benefits, those would continue after divorce as long as the marriage lasted at least 10 years and she did not remarry.)

If the husband dies and they haven’t divorced, the wife would be entitled to survivor benefits equal to his full monthly benefit amount ($4,600, plus any future cost of living increases). If they divorce and the marriage lasted at least 10 years, she also would be entitled to his full amount. Remarriage wouldn’t affect her divorced survivor benefit since she’s over 60, Reichenstein said.

Filed Under: Q&A, Social Security
April 29, 2024 By Leave a Comment

Q&A: Managing mortgage debt in retirement

Dear Liz: My husband and I are Gen Xers who are renting. We have enough cash from the sale of our last home to make a small down payment on another. If we moved to a more affordable community, we could manage the payments, but it would still be a stretch. That scenario would not have bothered me 10 years ago, but now I’m close to 50. Is it a good idea to take on a mortgage at this point? What is the best way to ensure I can afford to keep the roof over my head when I can no longer work full time?

Answer: Having a mortgage in retirement used to be uncommon, but that’s no longer the case. The Joint Center for Housing Studies of Harvard University found 41% of homeowners 65 and older had a mortgage in 2022, compared with 24% in 1989. Among homeowners 80 and over, the percentage with mortgages rose from 3% to 31%.

The amounts owed have skyrocketed as well. Median mortgage debt for those 65 and older rose more than 400%, from $21,000 to $110,000 (both figures are in 2022 dollars). Median mortgage debt for those 80 and over increased more than 750%, from $9,000 to $79,000.

Mortgage debt doesn’t have to be a crisis if you can afford the home and the payments don’t cause you to run through your retirement savings too quickly. In fact, some retirees are better off hanging on to their loans. It may not make sense to prepay a 3% mortgage when you can earn 5% on a certificate of deposit, for example. Paying off a mortgage early also could leave you “house rich and cash poor,” with not enough savings to deal with emergencies and later-life expenses.

But the key is affordability. A mortgage that’s a stretch now might become easier to afford if your income rises, which was almost a given when you were younger. Now, however, you’re approaching the “dangerous decade” of your 50s, when many people wind up losing their jobs and failing to ever regain their former pay, according to a study by ProPublica and the Urban Institute.

Renting has its risks as well, of course. You aren’t building equity and you typically have little control over rent increases, other than to move.

For help in sorting through your options, consider talking to a fee-only, fiduciary advisor. Among the most affordable options are accredited financial counselors and accredited financial coaches, who typically are well-versed in the money issues facing middle-class Americans. You can get referrals from the Assn. for Financial Counseling & Planning Education at www.afcpe.org.

Filed Under: Mortgages, Q&A, Retirement
April 22, 2024 By Leave a Comment

Q&A: Can my credit score really be marred over $20?

Dear Liz: I have had great credit for years. Late last year, I somehow overlooked a $20 payment due from one of my credit cards. My score dropped by more than 50 points, from about 815 to 765. I quickly paid the $20 and contacted the issuer. They told me they were required by law to report my delinquent payment, which I found out was not true. I went back and forth with them, but they would not do anything to help. I did file an inquiry with one of the credit bureaus, but I was told there was nothing they could do without the issuer’s cooperation. I spoke with someone in the issuer’s corporate offices, but he could not have cared less. It turns out that this hit on my credit could last seven years — and all over $20. I charge thousands of dollars every year on credit cards and pay the balance every month. Is there anything else I can do to restore my credit to the previous levels?

Answer: The federal Fair Credit Reporting Act does require creditors to report accurate information to the credit bureaus. However, some people say they’ve been able to get their accidental late payments removed by writing “good will” letters to their issuers. These letters explain what happened, emphasize the customer’s previous record of on-time payments and politely request the issuer extend some good will by removing the one-time lapse from their credit reports.

Your issuer is under no obligation to grant your request, and some categorically say they won’t. But it can’t hurt to try.

You also can use this incident as a reason to review how you pay your credit cards. Setting up automatic payments to cover at least your minimum payment will ensure this doesn’t happen again. Keep an eye on your credit utilization as well. Aim to use 10% or less of your credit limits. If you find it difficult to keep your charges below that level, consider making multiple payments each month to keep your balance low.

The unexpected drop in your credit scores was painful, but the good news is that you still have great scores. This oversight is unlikely to have any lasting effect on your financial life. And if you continue to use credit responsibly, your scores will improve over time.

Filed Under: Credit Scoring, Q&A
April 22, 2024 By Leave a Comment

Q&A: Complicated condo question

Dear Liz: You recently answered a question about gifting a condo. I understood the first part of your answer: If the person receiving the gift lives in the condo for two of the last five years, then there is no capital gains exposure. The second part of your answer is a little confusing to me. You wrote, “However, her taxable gain would be based on your tax basis in the property: basically what you paid for the home, plus any qualifying improvements.” So, if my mother gifted her condo to me and she paid $50,000 for it 40 years ago, and the condo today is selling for $250,000, what is my capital gains exposure? To keep it simple, assume no capital improvements or other factors.

Answer: Living in and owning a home for two of the previous five years does not erase someone’s capital gains exposure. Instead, they’re entitled to exclude up to $250,000 of home sale gains from their income.

In the case you describe, your potentially taxable capital gain would be $200,000. That’s the selling price of $250,000 minus your mother’s tax basis (which is now your tax basis) of $50,000.

If you owned and lived in the home at least two of the previous five years, your exclusion would more than offset your gain, so the home sale wouldn’t be taxable. If you didn’t make it to the two-year mark, you could get a partial exemption under certain circumstances, such as a work- or health-related move. For more details, see IRS Publication 523, “Selling Your Home.”

Filed Under: Inheritance, Q&A, Real Estate, Taxes
April 15, 2024 By Leave a Comment

Q&A: Handling family property, when to take retirement and building credit history

Dear Liz: My wife and I plan to leave our house to our four children. My concern is that one may want to sell and split the proceeds; another may want to keep the house, rent it and divide up the income; and of course there’s always the real possibility that one may want to move in and live in it (we live in a nice community in California). My goal is to prevent doing anything that drives a wedge between them. Any advice on how best to approach this issue short of requiring the house be sold?

Answer: You’ve identified some of the complicating factors of leaving property to multiple heirs. There are many others, including changing circumstances and inclinations. The one who now wants to move into the property may be nicely settled elsewhere when the time comes. Or the one who’s keen on creating a rental may decide that screening tenants, collecting rent and fielding 3 a.m. calls about plumbing problems is too much hassle. Some of the heirs may be in a better position than others to absorb the ongoing costs of maintaining the home, including taxes, insurance and repairs. Even if their financial circumstances are roughly equal, they may have trouble agreeing on the timing and cost of repairs or improvements. And that’s assuming there are no reversals of fortune. Someone who is adamant about keeping the home may find themselves in need of funds later. And so on.

Your life isn’t immune to change either, by the way. You, or your widow, may want to downsize someday or need to sell the house to fund long-term care needs.

An experienced estate planning attorney can help you sort through your options because this is a common scenario and one that can be approached in different ways, including requiring the house to be sold, creating a trust or forming a family partnership to manage the property.

The attorney also can help you frame the discussion you’ll want to have with the kids. Knowing their current preferences and circumstances may be helpful, but given your goal, it’s also a good opportunity to emphasize the importance of family unity. Let your kids know you expect them to put family first and that harmonious relationships are worth more than any piece of real estate could be.

Filed Under: Credit Scoring, Q&A, Real Estate, Retirement
April 15, 2024 By Leave a Comment

Q&A: Waiting to apply for retirement benefit or not

Dear Liz: I am recently divorced but was married for 20 years. My ex is 12 years older and he waited until 70 to start collecting Social Security benefits. I am 62 and self-employed. My retirement benefit is greater than half of his (but not by much). It is my understanding that after his death I can collect his full benefit, provided I am at least 67 when I apply, even if I start taking my own benefit now at 62. Is that correct?

Answer: Yes, but he could live a long time. Starting your own benefit now means you’ll get much smaller checks for years, perhaps even decades, compared with what you’d get by waiting. Plus, any benefit you take before your full retirement age would be subject to the earnings test, with $1 withheld for every $2 you make over a certain amount ($22,320 in 2024).

You may not have much choice, but if you do, waiting to apply is usually the best option.

Filed Under: Q&A, Retirement, Social Security
April 15, 2024 By Leave a Comment

Q&A: Retail cards are often easier to get than credit cards

Dear Liz: You recently answered a question from someone who was rejected for a credit card because of a lack of credit history. Years ago, my wife was rejected for similar reasons. She signed up for a card with a local retailer, then successfully reapplied for the credit card six months later. Maybe the industry has consolidated enough that this won’t work anymore, but it did then.

Answer: Retail cards are often easier to get than credit cards, although these days people also can start their credit histories using secured cards or credit-builder loans. Secured cards offer a credit line equal to a deposit made to the issuing bank. With a credit builder loan, the borrowed amount is stored in a savings account or certificate of deposit that the borrower can claim after a set number of monthly payments.

The original questioner already had a credit history, however, along with high credit scores. The issuer that rejected their application cited a lack of an installment loan history. In other words, there was no mortgage, student, auto or personal loan showing on their credit reports. That’s not something that typically would keep someone from getting approved for a credit card, hence the recommendation that the questioner call the issuer and ask for a reconsideration.

Filed Under: Credit Cards, Q&A
April 8, 2024 By Leave a Comment

Q&A: Closing accounts won’t help your credit scores

Dear Liz: I have an 834 credit score, with three credit cards. I don’t carry debt or pay annual fees. I’m considering closing one of my cards and replacing it with one available through my credit union. Is it worth the hassle?

Answer: Closing accounts won’t help your credit scores and may hurt them. If there’s no compelling reason to close a card, you might consider leaving the account open and using the card occasionally to prevent the issuer from closing it.

You also might want to rethink your stance on annual fees. These days, few cards without annual fees offer rewards, while many cards offer rewards that more than offset their fees. If you’re new to the rewards card world, consider getting a simple cash-back card. If you’re interested in travel benefits, look for a card that gives you points that you can transfer to frequent traveler programs.

If you’re determined to close the account and open another, apply for the new card first since the closure may drop your scores.

Filed Under: Credit Cards, Credit Scoring, Q&A
April 8, 2024 By Leave a Comment

Q&A: Avoid deducting personal expenses

Dear Liz: I am the sole owner of a condo. I am getting ready to realize a dream of mine by traveling around the world. I will be gone indefinitely. Thus, I am thinking about renting out my condo. I know I get a write-off for repairs on the unit, cleaning supplies, etc. What about the storage unit where I will need to store my things from my unit. Can I write off the storage unit?

Answer: Congratulations on your upcoming adventure! You’ll have excitement enough without defending yourself in an IRS audit, so avoid deducting personal expenses such as a storage unit.

The IRS says you can deduct the “ordinary and necessary” expenses for managing and maintaining a rental property. That includes mortgage interest, taxes, operating expenses, depreciation and repairs.

“If the storage unit was used in conjunction with the rental activity, such as storing maintenance supplies for doing work on the rental property, a deduction could perhaps be justified,” says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

However, you won’t be around to do that work, so deducting the storage unit isn’t going to fly.

Filed Under: Q&A, Taxes
April 8, 2024 By Leave a Comment

Q&A: To qualify for Social Security survivor benefits

Dear Liz: I am 85 and have been living (unmarried) with a man since about 1977. We have always filed our tax returns separately and now we both collect Social Security. I have been told that when one of us passes, the other cannot collect the deceased one’s benefits. We have been thinking about getting married and would like to know if there is a time regulation involved.

Answer: You generally must be married for at least nine months to qualify for Social Security survivor benefits. Keep in mind that the survivor will collect only the larger of a couple’s two checks; the smaller benefit goes away.

So marriage could benefit the lower earner financially, and give the higher earner peace of mind, knowing that their lower-earning partner will have access to the larger benefit. Marriage has a number of other financial and legal benefits, including the ability to make decisions for your spouse should they become incapacitated.

Marriage would end your ability to collect a divorced spousal benefit from a previous spouse, however. If either of you have been married before and the marriage lasted at least 10 years, investigate whether you might qualify for a larger benefit based on that partner’s work record. If the previous spouse has passed, you may qualify for a divorced survivor benefit. Unlike divorced spousal benefits, divorced survivor benefits don’t end at remarriage as long as you’re 60 or older when you remarry.

Filed Under: Couples & Money, Q&A, Social Security