June 27, 2022 By

Q&A: How previous home sales might affect your capital gains taxes

Dear Liz: I am selling my house and will not be buying another one. I believe that I know the rules of capital gains taxes in general. However, must I include the capital gains of previous homes, even those experienced many years ago?

Answer: Possibly.

Before 1997, homeowners could avoid capital gains taxes by rolling their profits into another home, as long as the purchase price of the new house was equal to or greater than the home they sold. Homeowners 55 and older could get a one-time exclusion of up to $125,000.

The rules changed in 1997. Now homeowners can exclude up to $250,000 of home sale gains as long as they have owned and lived in the home at least two of the prior five years. A married couple can exclude up to $500,000.

If you have not sold a home since the rules changed, however, any previously deferred gains would lower the tax basis on your current home.

Let’s say you bought your current home for $300,000 prior to 1997. Normally, that amount (plus certain other expenses, including qualifying home improvements) would be your tax basis. If the net proceeds from your sale were $500,000, for example, you would subtract the $300,000 basis from that amount for a capital gain of $200,000.

But now let’s say you rolled $200,000 of capital gains from previous home sales into your current home. That amount would be subtracted from your tax basis, so your capital gain would be $400,000 — the $500,000 net sale proceeds minus your $100,000 tax basis.

Before selling any home, you should consult with a tax pro to make sure you understand how capital gains taxes may affect the sale. You don’t want to find out you owe a big tax bill after you’ve spent or invested the proceeds.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , ,
June 27, 2022 By

Q&A: Riding the market waves

Dear Liz: Today’s stock market is one of the most volatile of all time. So many issues affect it, and there seems to be no end in sight to war in Ukraine, inflation, high fuel prices, the pandemic, China conflict concerns and more. Any one of these would cause the market pain, but together it’s scary. I have a broker who’s used to riding ups and downs, and says to me to be patient. In the meantime I’ve lost 25% of a portfolio that was extremely fruitful until January of this year. Please give me guidance on working with a broker, finding one who knows how to navigate this market and isn’t mired in some tradition of riding waves. I need one who sees opportunity and knows how to take advantage and get out appropriately.

Answer: The reason your broker is “mired in some tradition of riding waves” is because that’s the one approach that consistently works. It’s the advisors who promise you that they can “see opportunity” and “get out appropriately” that can cost you big time. Advisors who try to time the market — which is what you’re asking them to do — inevitably fail. They might get out in time to avoid the crash but rebounds happen so swiftly that they’ll miss a good chunk of the recovery before they get back in.

There is no reward without risk, and riding out inevitable downturns is how investors get ahead over time. Trying to outsmart the market just leads to extra costs that lower your ultimate returns.

Filed Under: Investing, Q&A Tagged With: , ,
June 27, 2022 By

Q&A: Finding divorce papers

Dear Liz: My ex passed three years ago. I have done everything to try to get a copy of our divorce papers. I’ve lost out on three years of divorced survivor benefits. Social Security said I must have a copy of the papers before I apply. I have contacted the last places where he lived and sent money orders to the capital cities of those states to no avail. I’m at a loss.

Answer: You need to contact the court clerk in the county where your divorce was finalized and ask for instructions on getting a copy of the documents. Sending out money orders at random won’t do anything but waste your cash. (You may be able to get some money back if the money orders haven’t been cashed, however. You’ll need to contact the issuer, provide a receipt and pay a cancellation fee.)

Filed Under: Divorce & Money, Q&A Tagged With: ,
June 21, 2022 By

Q&A: How contribution rules differ for IRA and 401(k) accounts

Dear Liz: I recently changed jobs. Typically I max out my 401(k) contributions each year. I contributed $20,700 to my previous company’s plan before quitting. Eligibility for my new company’s 401(k) doesn’t kick in until after 12 months of continuous employment, so I won’t be able to access this benefit until 2023. Can I set up an IRA or Roth IRA to reach the $27,500 limit for people 50 and older? I am married, filing jointly and our combined income exceeds $214,000.

Answer: Please talk to your company about fixing this outmoded requirement, which is costing its workers enormously in lost matching funds and compounded returns. Most companies have much shorter waiting periods, and the most enlightened employers enroll workers immediately. It’s hard enough to save adequately for retirement without an arbitrary yearlong delay.

The limits for contributing to workplace plans are separate from those for IRAs and Roth IRAs. For 2022, the limits for 401(k)s are $20,500 for people under 50 and $27,500 for people 50 and older. The contribution limits for IRAs (regular or Roth) are $6,000 for people under 50 and $7,000 for people 50 and older.

If you had access to a workplace plan at any point during the year, your ability to deduct your contribution would phase out with modified adjusted gross income between $109,000 and $129,000 if you are married filing jointly, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. The phaseout is between $68,000 and $78,000 for single taxpayers.

Normally when you can’t deduct an IRA contribution, you’re better off contributing to a Roth IRA. Contributions to a Roth aren’t deductible but withdrawals are tax-free in retirement.

However, the ability to contribute to a Roth IRA phases out with modified adjusted gross incomes between $204,000 and $214,000 for married joint filers and between $129,000 and $144,000 for single filers.

If you can’t contribute directly to a Roth, you could consider what’s called a “back door” Roth contribution, in which you contribute to a regular IRA and then convert the money to a Roth. Although direct Roth contributions have income limits, Roth conversions do not. However, you are required to pay income taxes on a typical conversion, so this maneuver works best if you don’t already have a large pretax IRA.

Filed Under: Q&A, Retirement Savings Tagged With: , , ,
June 21, 2022 By

Q&A: Mortgage payoff or emergency savings?

Dear Liz: My husband was laid off recently, and he quickly took a new job with a 25% pay cut to continue insurance benefits and the same retirement program. We regularly pay $500 to $1,300 extra on our house payment. We cannot keep that up. However, with his severance package and vacation day payout, we now have more in our bank account than we owe on our mortgage. If we paid off the $80,000 mortgage now (house is valued at $600,000), we’d have an emergency fund of only $10,000, but we could replenish those savings slowly each month with no house payment. We have no other debts. How do we know when is the right time to pay off the mortgage?

Answer: Think about what would happen if you paid off the mortgage and your husband were to be laid off again or you suffered some other financial setback. The $10,000 left in your emergency fund could be depleted quickly. If you don’t have stocks or other assets you could sell, you might have to raid your retirement accounts or turn to high-cost loans.

This is why financial planners recommend having an emergency fund equal to three to six months’ worth of expenses if possible — and why using your savings to pay off a low-rate debt might not be the best use of your money.

If you’re determined to pay off your mortgage, consider setting up a home equity line of credit first. That will give you a relatively inexpensive source of credit in an emergency.

Filed Under: Mortgages, Q&A, Saving Money Tagged With: , ,
June 13, 2022 By

Q&A: Identity theft fears? Get a credit report, credit freeze

Dear Liz: I divorced 32 years ago. Recently, I received calls from a collection agency about a debt that has not been paid. I discovered that my ex used my phone number as one of his contact numbers. My number is supposed to be unlisted and unpublished, but he found it online. I have stopped receiving calls from the agency, but how do I stop this from happening again?

Answer: Please check your credit reports to make sure your ex didn’t swipe even more sensitive digits: namely, your Social Security number. If his credit is bad, he may be tempted to pretend to be you in order to get credit cards, loans or other accounts. That’s identity theft, and there are steps you should take now to protect yourself.

You can access your credit reports for free at AnnualCreditReport.com. (If you’re asked for a credit card number, you’re on the wrong site.) Look for any accounts that aren’t yours and consider freezing your credit reports at each of the bureaus. Credit freezes prevent someone from opening new accounts in your name. You can thaw the freeze whenever you need credit, also for free.

You can’t prevent someone from adding your phone number to their credit applications, but under federal law you can tell a collection agency to stop contacting you, and it must comply. Make the request in writing.

Filed Under: Credit Cards, Identity Theft, Q&A Tagged With: ,
June 6, 2022 By

Q&A: How to start an IRA for your new Gen Z college graduate

Dear Liz: My son is about to graduate from college and, as a present, I want to use $10,000 to start an IRA for him. But which is better? A Roth or a standard IRA?

Answer: Congratulations to both of you! Starting a retirement account is a great idea, but you should be aware of the numerous rules that limit who can contribute and how much.

Let’s start with the annual contribution limit, which for 2022 is $6,000 for people under 50. (People 50 and older can make an additional $1,000 “catch up” contribution.) Also, your son needs to have earned income — such as wages, salary or self-employment income — that is at least equal to the size of the contribution you want to make. In other words, he needs to earn $6,000 for you to contribute $6,000. If he’s about to start a full-time job, that probably won’t be an issue, but if he’s not working, or working only part time before starting graduate school, that might further limit how much you can contribute.

For all of those reasons, a Roth IRA contribution may be best. He won’t get an upfront tax deduction but withdrawals in retirement will be tax free. He can withdraw Roth contributions at any time without taxes or penalties, so the Roth can serve as a de facto emergency fund. Obviously, it’s better to leave the money alone to grow, but having access to the cash could be helpful while he builds a regular emergency fund.

Filed Under: Q&A, Retirement Savings Tagged With: , ,
June 6, 2022 By

Q&A: How to get tax return copies

Dear Liz: Isn’t it the duty of an accountant to send their client the final tax forms that they filed with the IRS and the state? My accountant keeps “forgetting” to do so, and I’ve called him twice to do this. I’m not sure if his constant “forgetfulness” is due to laziness or a health issue such as dementia. I suspect it might be the latter, as he never used to be this way in past years.

Is there another way to get a copy of my returns? I will obviously be looking for a new accountant.

Answer: Yes, you can request copies or transcripts of your returns from the IRS and your state tax agency.

Transcripts are free, and are available for the previous three years. Personally identifiable information such as your name, address and Social Security number will be hidden, but you’ll be able to see all the financial entries, such as your adjusted gross income, taxes paid and so on. You can request transcripts online at irs.gov/individuals/get-transcript, by phone at (800) 908-9946 or by mail using either Form 4506-T or Form 4506-T-EZ and using the IRS address listed on the form.

Copies of your actual tax returns will cost you $43 each. You can request those by filling out and mailing Form 4506.

Your state will have similar procedures, which you can find by searching for your state’s name and the phrase “How do I get a copy of my state tax return?”

Filed Under: Q&A, Taxes Tagged With: ,
June 6, 2022 By

Q&A: Why credit scores drop suddenly

Dear Liz: The same thing happened to me as to the person in your column whose credit score dropped more than 100 points after large purchases. We bought plane tickets for international travel and our credit score took a significant but temporary hit. This also happened when we made a charitable gift by credit card. After an appeal, I was able to get the credit limit on the credit card we use the most increased, and I’m waiting to see if that prevents the credit score from dropping going forward. I did check our credit reports and there were no missed payments or other problems.

Answer: Credit scores can drop when you use a lot of your available credit, but a 100-plus-point drop is unusual and should be investigated. You’re smart to look for ways to mitigate the damage from high usage. Asking to have credit limits increased is one way; another is making a payment before the statement closing date. The balance on that closing date is what’s generally reported to the credit bureaus, and thus what’s factored into your scores. Just remember to pay off any remaining balance before the due date.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
May 30, 2022 By

Q&A: Homeownership and taxes

Dear Liz: Five years ago I co-signed on a mortgage for my daughter’s condo in another state. I provided the down payment and paid to upgrade the water, HVAC and kitchen appliances. She paid the mortgage and all other expenses. She also claimed the mortgage interest on her taxes every year. She just sold the condo and is moving to another state. The net proceeds will mostly be used for the down payment on the next property. My name will not be on that one. She will pay me back for the down payment in installments.

I’m aware that the year a property is sold is the only time to claim the upgrades for a deduction. I haven’t been claiming any part of the condo in the last five years. Is there some way to do that on my 2022 taxes? Or should she take the deduction and pay me back in more installments down the road? Obviously, I don’t want to make a claim that will hurt her 2022 taxes, but it would be nice to recoup some of it.

Answer: Home improvements on a personal residence aren’t deductible. If your daughter had paid for the upgrades, she could use the cost to reduce the amount of home sale profits that might otherwise be subject to capital gains taxes. These upgrades can be added to the home’s tax basis, which is typically the amount that was paid to purchase the home. The basis is what is deducted from the amount realized from the sale. It’s the sales price minus any selling costs, such as real estate commissions.

People who live in a home for two of the five years prior to the sale can exclude up to $250,000 of those profits from taxes. (Married couples can exclude up to $500,000.) Unfortunately, those limits haven’t changed since 1997 even as the average home sale price has nearly tripled.

Too often, people don’t discover they owe a tax bill until after they’ve invested the money in another home or otherwise spent it. If your daughter hasn’t already, she should consult a tax pro so she understands what, if any, taxes she may owe on her sale.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , ,