Ask Liz Weston

Get smart with your money

Taxes

Q&A: Homeownership can be a joy. It’s also full of complicated financial decisions

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Dear Liz: We replaced our original, fire-vulnerable cedar shake roof with 40-year asphalt shingles 17 years ago. I know that home improvements are added to the basis for capital gains calculation when selling the home. But when we get ready to sell the home in a few years, should the actual cost on the project be used? Or, since it was several years ago, should we calculate what a “present value” of the 2007 dollar amount would be? For that matter, should the purchase price of the home be updated to a present value?

Answer: You don’t have to discount the costs of home improvements, but you also don’t get to boost your tax basis to reflect your home’s appreciation.

To review: Your tax basis is the amount you paid for your home, plus the cost of qualifying capital improvements — projects that added to the value of your home, extended its useful life or adapted it to new uses. The tax basis is subtracted from home sale proceeds to determine the potentially taxable capital gain. If you’ve lived and owned a home for at least two of the five years before the sale, you can exempt $250,000 of home sale profits per owner.

Keeping good records of your improvements has become increasingly important over the years, because that exemption amount hasn’t been updated since it was established in 1997. Back then, the median home sale price was less than $150,000 and most home sellers didn’t have to worry about capital gains taxes. Today, the median sales price nationally is over $400,000 and there are hundreds of cities where the typical home is worth $1 million or more, according to real estate site Zillow. That means more sellers are facing capital gains that could be reduced if they have the paperwork to prove they made qualifying improvements.

You can’t include the cost of maintenance or repairs, such as painting, patching or replacing broken hardware. If the repair is part of a bigger project, though, it may qualify as a capital improvement. Replacing a broken window pane is considered a repair, for example, but replacing the whole window is a capital improvement.

You also can’t include in your cost basis any improvement that was subsequently removed or redone. If you’d replaced your roof previously, for example, you couldn’t include that earlier expense when calculating your basis.

Q&A: Long overdue to dust off that living trust

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Dear Liz: It’s been over 25 years since we paid for a living trust from a lawyer. We have since misplaced the original document. Our house is all paid up and we have one child. In case of our death, can he request a copy of the living trust from the county register?

Answer: Some states do allow living trusts to be registered with local courts, but typically these documents are private and never filed with a government agency.

You’re long overdue for an updated document, in any case. Estate plans should be reviewed every three to five years, after major life changes and whenever estate tax laws change — as they did in 2001, 2010 and 2017.

Q&A: Rob Peter to pay … off the mortgage?

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Dear Liz: Would it make sense to pay off a low-balance, refinanced mortgage at 3% using a portion of my wife’s 401(k)? Would that not be better than paying the mortgage off from my IRA? I am 70 and on Social Security. My wife still works, at least till her birthday in December. She will then be 70 as well and should qualify to maximize her Social Security payout.

Answer: It’s not clear how a withdrawal from one account would be “better” than the other, given your similar ages and the fact that either withdrawal would be taxable as income. The more appropriate question might be why you’re in such a rush to pay off this mortgage.

At this point, you’ve paid most of the interest on this loan and your payments are largely principal, so you won’t save much by paying the loan off early. If there’s a compelling reason to do so, then you may want to postpone the withdrawal until your wife retires and you’ll presumably be in a lower tax bracket. A tax pro can help with that projection.

You should be consulting a tax pro in any case, since required minimum withdrawals from most retirement accounts have to start at age 73 and you may need help managing that tax bill.

Q&A: The fine print on deducting medical expenses

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Dear Liz: I take $5,000 per month out of my brokerage account (and the $1,400 in taxes when I withdraw the money) for my husband’s Alzheimer care facility where he now lives 24/7. Can I only claim that on my taxes under medical expenses if I itemize my deductions on my taxes? I don’t have any other deductions.

Answer: Your husband’s expenses may be enough to justify itemizing even if you don’t have other deductions.

The standard deduction for married couples in 2024 is $29,200. To itemize, your deductions would need to be higher than that amount. Furthermore, medical expenses must exceed 7.5% of your adjusted gross income to be deductible, notes Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

If your husband meets certain criteria, however, the deduction can include the expenses related to meals and lodging at the facility as well as the medical care portion, Luscombe says.

A licensed healthcare professional must certify annually that your husband is chronically ill and living in the care facility due to medical necessity, he says. A tax pro or the facility itself can provide further details.

Q&A: More about health savings accounts and the ‘deathbed drawdown’

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Dear Liz: I just read your column on HSA accounts. I was with you right up until “deathbed drawdown.” I sincerely hope that I am not thinking about my HSA when I am nearing death. I’d just rather pay the tax.

Answer: That’s certainly your prerogative, but financial planners note that good record keeping can allow those with large HSA balances to avoid an otherwise unnecessary tax bill.

HSAs offer a rare triple tax break: contributions are tax-deductible, the money grows tax deferred and withdrawals are tax free when used for qualifying medical expenses. Furthermore, HSAs can be rolled over from year to year and invested for growth, which has led some people to accumulate substantial sums as a supplement to their retirement funds.

Fortunately, you don’t have to take a withdrawal in the same year you incur an unreimbursed medical expense. As long as the expense was incurred after you established the HSA and before your death, it can justify a tax-free withdrawal years or even decades later. Those who have kept good records of their unreimbursed medical expenses can justify last-minute withdrawals if necessary.

Q&A: A retirement catch-22 and health savings accounts

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Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?

Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.

As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.

The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.