Ask Liz Weston

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Taxes

Q&A: How do I claim fire-damage losses on my taxes?

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Dear Liz: My home in Pacific Palisades is still standing after January’s fire, but was damaged by smoke and ash. The remediators deemed hundreds of personal property items unsalvageable. Our insurance company is paying us a highly depreciated amount for these items, with the full amount to be received upon the actual purchase of each replacement.

Since we won’t replace every item, we’ll end up with a sizable loss, which I understand can be claimed on our 2024 or 2025 tax return. I’m concerned that we won’t know the total amount of loss by the end of 2025. Could you please discuss how to handle this?

Answer: Casualty losses are deductible in the year you sustained the loss. That’s typically the year the loss occurred, although you may be able to deduct the loss in the previous tax year when it’s part of a federally declared disaster, such as the January 2025 wildfires in Los Angeles, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

However, you aren’t considered to have sustained a loss if there remains a reasonable prospect of recovery through a claim for reimbursement, Luscombe says. You can’t take the deduction until the tax year in which you can determine with reasonable certainty whether or not you will receive such reimbursement.

If you won’t know the amount of the loss by the end of 2025 due to this uncertainty, you can wait to deduct the loss until the year in which the amount of reimbursement is known, Luscombe says.

For personal use property, the deductible loss is the lesser of the adjusted basis of the property (typically its cost) or the decrease in the fair market value of the property as a result of the casualty (which may be determined by an appraisal or the cost of repairing the property), Luscombe says.

Q&A: Follow the rules for IRA donations

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Dear Liz: Hello. I’d like to use my IRA for charitable donations when I’m required to make minimum distributions. The problem I’ve encountered is that I want to use a debit card for donations. I prefer to donate to small art organizations, which are set up for online donations and definitely not paper checks. I found one brokerage that offers an IRA with a debit card but when I spoke with them, they said it can’t be used for charitable donations. I’m at a loss. Do you know of any way to make charitable donations from my IRA with a debit card? It’s 2025! Surely someone has figured this out.

Answer: You’ve missed a key component of how this particular tax break works.

Qualified charitable distributions allow people 70½ and older to donate money from their IRAs directly to charity, without the money being taxed. The donations can count toward the required minimum distributions that must otherwise begin at age 73 (or 75 for those born in 1960 and later).

Note the word “directly.” The transfers must go straight from the IRA to the charity, without passing through your hands. The IRA custodian will be the one to send the money, either through electronic transfer or check.

Q&A: How to finance a remodeling project

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Dear Liz: I am doing a small remodeling job to my home that will cost $80,000. I have enough in my investments to withdraw the $80,000. Is it better, tax wise, to get a home equity loan to pay for it?

Answer: Like so many tax questions, the answer depends on your circumstances. How your investments would be taxed depends in part on what account they’re in. Withdrawals from most retirement accounts are taxed as income, and can incur penalties if you take the money out too early.

Withdrawals from regular brokerage accounts also can be taxed as income if you’ve held the investments less than one year. If the investments have been held for more than one year, you can qualify for more beneficial capital gains tax rates. The amount of tax you would pay depends on how much the investments appreciated in value since you bought them as well as your income tax bracket. Most people pay a federal capital gains rate of 15%, although lower income taxpayers can qualify for a 0% rate while higher earners pay 20%.

You may have the opportunity to engage in what’s known as “tax loss harvesting.” That means selling investments that have lost value since you bought them, and using that loss to offset the gains on other investments you’ve sold.

Interest on home equity borrowing, meanwhile, may be deductible if the proceeds are used to improve your home and the combined total of your mortgage debt doesn’t exceed $750,000 for a married couple filing jointly or $375,000 for singles.

To deduct the interest, though, you must itemize your deductions. The vast majority of taxpayers now take the standard deduction of $31,500 for married couples or $15,750 for singles. People 65 and older can take an additional $1,600 per qualifying spouse or $2,000 if single. In addition, people 65 and over can take an additional $6,000 bonus deduction if their income is under certain limits. The bonus begins to phase out for single filers with modified adjusted gross income over $75,000, and for joint filers over $150,000.

That’s the long answer. The shorter answer is that the taxes you’ll pay cashing in your investments are likely to be less, and perhaps significantly less, than the interest you’d pay on the loan. But you’ll need to do your own math, or ask a tax pro for help.

Q&A: Approaching retirement? Don’t count on rules of thumb

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Dear Liz: I have a few questions about my income taxes during my upcoming retirement. I would like to know if doing a Roth IRA conversion will be worth it for me since I might be in a higher tax bracket when I retire. Is there a rule of thumb in regards to doing this conversion? I’m also getting considerable income from my tax-free municipal bond and money market fund. Will that income be taxable when I retire and will it count toward how the government calculates my Medicare premiums?

Answer: Rules of thumb can be incredibly helpful in many areas of personal finance. Guidelines such as “spend less than you earn” and “pay yourself first” apply to virtually everyone. Even more specific recommendations, such as the 50/30/20 budget, can apply to many if not most situations. (The 50/30/20 budget recommends limiting “must have” expenses to 50% of after-tax income, leaving 30% for wants and 20% for savings and extra debt repayment.)

As you enter retirement, though, you’ll be making decisions that may be irreversible. It can be much harder to rebound from mistakes and you’ll have fewer years to do so. That’s why it’s important to get individualized advice from pros you can trust.

Converting a regular retirement account to a Roth IRA can make sense if you expect to be in a higher tax bracket in retirement and can pay the taxes on the conversion without raiding the account. But the conversion also can trigger higher Medicare premiums.

The same is true for municipal bond interest. Muni bond interest typically avoids income tax, but will be included in Medicare premium calculations and may cause more of your Social Security benefit to be taxable as well.

A tax pro can advise you about these issues and offer strategies to lower your lifetime tax bills.

Q&A: Filing a tax return after a parent dies

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Dear Liz: My mother’s only income was Social Security. Her accountant told her many years prior to her passing that she didn’t need to file a tax return. I was the executor of her trust and told the attorney I hired to help settle the estate that I would file her final tax return. I never did. That was 10 years ago. Now I feel that I should have filed it back then and am wondering if I should do it now or forget about it.

Answer: If you still have access to her paperwork, you can review her bank statements to see if there is any indication her income climbed enough in her last years to require filing an income tax return. If so, you can consult a tax pro about next steps.

But you’re probably fine, says estate planning attorney Jennifer Sawday in Long Beach.

If your mother was under the threshold for filing an income tax return, there would have been no reason to file a final return after she died, Sawday says.

Q&A: Don’t need your RMD? Consider a QCD

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Dear Liz: When you’re writing about required minimum distributions from retirement accounts, please make sure people know about qualified charitable distributions. Those of us lucky enough not to need the money can donate it directly from an IRA to the nonprofits of our choice. That way, we don’t even have it in our income column, and there are no taxes. I am looking forward to making many qualified charitable distributions to my favorite nonprofits when I turn 73.

Answer: You don’t have to wait. Qualified charitable distributions from IRAs can start as early as age 70½. The distribution limit for 2025 is $108,000 per individual. If you’re considering this option, please familiarize with the IRS rules for such distributions and consider consulting a tax pro.