May 6, 2019 By

Q&A: Timing those spouse benefits

Dear Liz: My husband and I are retired. He is 67 and I’m 65. We have been delaying Social Security as we are financially able to wait until he turns 70 to begin benefits. We both turned 62 before January 2, 2016, and are wondering how the “restricted application” rule applies to us. My husband was the primary worker and will have a payout at 70 that is more than twice what I will be paid, so I would be the one taking the spousal benefit. Would you recommend we continue to wait until he is 70 to start benefits, or does the rule make it smarter for us to begin sooner?

Answer: Typically when someone applies for Social Security, she is “deemed” to be applying both for her own benefit and for any spousal benefit that might be available. Restricted applications allowed someone to apply only for a spousal benefit, allowing her own benefit to grow, since delaying the start of benefits increases the amount by about 7% to 8% each year. She could switch to her own benefit when it maxed out at age 70.

Congress changed the rules to eliminate restricted applications for people who turn 62 on or after Jan. 2, 2016. Although a restricted application is still available to you, your husband must be receiving benefits before your spousal benefits can begin. (There used to be something called “file and suspend,” that would allow your husband to trigger spousal benefits without receiving his own, but that has been eliminated. He would have had to reach his full retirement age and requested the suspension before April 30, 2016.)

One other detail that’s important: While your husband’s benefit will continue to grow if he doesn’t start until age 70, the spousal benefit will not. The maximum spousal benefit is 50% of your husband’s benefit at his full retirement age, which was 66. The spousal benefit is further reduced if you should start it before your own full retirement age (which is also 66).

In most cases, it’s best for the higher wage-earner to wait as long as possible to begin, which would mean you would start spousal benefits in three years when your husband turns 70. Remember that it’s the larger check one of you will have to live on after the other one dies; you don’t continue to receive two checks, so it’s usually worth trying to max out the larger one. If you file a restricted application for spousal benefits only, you’d have the option of switching to your own benefit at 70 if it’s larger. You may want to use the Social Security claiming calculator at AARP’s site to evaluate your options.

Filed Under: Medicare, Q&A Tagged With: , ,
May 6, 2019 By

Q&A: Here’s a big tax mistake you can easily avoid

Dear Liz: I’m self-employed and my wife wasn’t working last year. In December, we returned to California and found a small home to purchase using $107,000 I took out of my IRA. Since we weren’t quite certain of what our income would be, we received our health insurance in Oregon through an Affordable Care Act exchange.

When we filed our taxes we got hit with a $20,000 bill for the insurance, because we earned too much to qualify for subsidies, and a $10,000 bill for the IRA withdrawal. Our goal was to own our home outright, which we do, but now we have a $30,000 tax bill hanging over us.

Can we work with the IRS somehow on this? We didn’t “earn” the $107,000; we invested it in a home. It wasn’t income, so why should we be punished for using our savings to purchase a home?

Answer: If you mean, “Can I talk the IRS out of following the law?” then the answer is pretty clearly no. The IRA withdrawal was income. It doesn’t matter what you did with it.

Consider that you probably got a tax deduction when you contributed to the IRA, which means you didn’t pay income taxes on that money. The gains have been growing tax deferred, which means you didn’t pay tax on those, either.

Uncle Sam gave you those breaks to encourage you to save for retirement, but he wants to get paid eventually. That’s why IRAs and most other retirement accounts are subject to required minimum distributions and don’t get the step-up in tax basis that other investments typically get when the account owner dies.

(If you did not get a tax deduction on your contributions, by the way, then part of your withdrawal should have been tax-free. If you’d contributed to a Roth IRA, your contributions would not have been deductible but withdrawals in retirement would be tax-free.)

The IRS does offer long-term payment plans that may help. People who owe less than $50,000 can get up to six years to pay their balances off. You would file Form 9465 to request a payment plan. The IRS’ site has details.

Here’s a good rule to follow in the future: If you’re considering taking any money from a retirement account, talk to a tax professional first. People often dramatically underestimate the cost of tapping their 401(k)s and IRAs; a tax pro can set you straight.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , , , ,
April 29, 2019 By

Q&A: Figuring homes’ adjusted basis

Dear Liz: In your response to a question about the adjusted basis of a residence after the death of a spouse, you state that the surviving spouse may add to the adjusted basis “any commissions or fees paid to purchase the property and the cost of improvements.” Your example adds $150,000 in “improvements over the years” to the $850,000 value of the home at the time of the spouse’s death in 1992. Wouldn’t those improvements (and other costs) have to be made after the date of the spouse’s death, since otherwise they would already be included in determining the value of the home at the date of death?

Answer: Good point. If the surviving spouse lives in a community property state, only improvements that happened after the date of the first spouse’s death would increase the basis, because both halves of the property get a step up to the current fair market value when one spouse dies. In other states, only the deceased spouse’s half of the property would get the step up. The surviving spouse can add his or her half of the improvements made before the death, and anything done after the death, to the tax basis to determine home sale profits.

Filed Under: Q&A, Real Estate Tagged With: , , ,
April 29, 2019 By

Q&A: His Social Security claiming decision could use a second opinion

Dear Liz: I retired in 2013 at 55. I purchased an annuity, which will pay $1,000 a month for life for me and my wife as well. That starts in February 2020. My retirement fund, meanwhile, was rolled into an IRA and I’m withdrawing about 10% of that annually. The balance is about $650,000.

My advisor wants me to start my Social Security at age 62. I would receive $1,800 a month and could reduce my withdrawal rate to 4%. I’ve also been told, however, that it would be better to wait until my full retirement age (66 and 6 months) or 70, when my benefit maxes out. At full retirement age, my monthly benefit would be about $2,500, and at 70, it would be $3,000.

I’m not sure what to do. My wife will be retiring next year and her monthly pension will be about $3,700. We still owe on our house and have other debt as well. What’s my best option?

Answer: There’s a lot of research showing that single people and “primary earners” — the higher wage earner in a married couple — are better off delaying the start of their Social Security benefits. (The article “Understanding Social Security Claiming Decisions Using Survey Evidence” in the November 2018 issue of the Journal of Financial Planning does a good job of summarizing the research.)

Longer life expectancies mean most people will live beyond the “break even” point at which the larger benefit more than makes up for the checks they pass up in the early years. These larger checks are a kind of longevity insurance, as well. The longer you live, the more likely you will have spent your other resources and wind up depending on your Social Security income to live.

Having the primary earner delay is especially important for married couples because at the first death the number of checks the household receives will drop from two to one. Because the survivor receives the larger of the two checks, it’s usually wise to make that check as large as possible.

The benefits of delay are so substantial — one study shows that the sustainable standard of living is 30% higher for people who start at 66 rather than 62 — that advisors often recommend tapping other resources, including retirement funds, if it enables people to put off starting their checks.

Your situation may be a bit different, though because you mention that your wife has a pension. If the pension is from a job that did not pay into Social Security, it would affect her ability to receive survivor’s benefits from the Social Security system. Something known as the government pension offset would reduce her survivor check by two-thirds of the amount of her pension, which could eliminate her survivor benefit entirely. If that’s the case, it wouldn’t be as crucial for you to delay.

Given how much is at stake, though, you might want to get a second opinion from another advisor who can review the specifics of your situation.

Filed Under: Q&A, Social Security Tagged With: , ,
April 22, 2019 By

Q&A: Capital gains on house sale

Dear Liz: I am one of those seniors who purchased their house in the 1970s. I would like to move but I’m reluctant because of the huge capital gain tax that I would have to pay. The exemption amount has not been raised since 1997 when it was enacted. In comparison, the estate tax exemption has risen from $600,000 in 1997 to more than $11 million currently. Wouldn’t raising the capital gain exemption stimulate the real estate market as more people would put their homes on the market and give more first-time buyers a chance at homeownership?

Answer: Perhaps, but you shouldn’t let tax law be the sole determinant of what you do or don’t do. Minimizing taxes can be a factor in your decisions but shouldn’t be the only one.

Also, keep in mind that the median home price in the U.S. is currently $226,300, according to real estate site Zillow. Most homeowners haven’t seen and probably won’t see enough appreciation to use a single $250,000 exemption, let alone the $500,000 available to couples.

So you may have a problem, but it’s an enviable problem. Even if you pay taxes at top rates, you’ll still have a substantial sum left over. And you may be able to spread out the tax bill using an installment agreement, in which the buyer pays you over time. You’ll want a tax pro’s help if you go that route, but you should consult one in any case to make sure you’re taking advantage of every other legal opportunity to reduce what you owe.

Filed Under: Q&A, Real Estate Tagged With: , ,
April 22, 2019 By

Q&A: Loans, taxes and home sales

Dear Liz: You recently answered a question about determining home sale profits for a widow. My question is how you calculate taxes when there’s a loan in the mix. For instance, when I bought my home, I took out a mortgage. Subsequently, I took out a second mortgage to pay for a pool and landscaping. I also refinanced several times, but never took a mortgage with cash out. Please advise me how to calculate my cost basis given these loans. Of course, you can broaden your response to include other loan scenarios and how they play into cost basis.

Answer: This will be a short answer, because they don’t. What you owe the mortgage lender(s) is typically irrelevant for calculating your capital gain.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , ,
April 22, 2019 By

Q&A: Facing retirement with parent student loans? Transfer them to the kids

Dear Liz: I’m 60. Should I take a $50,000 distribution from my 401(k) to pay down my $146,000 parent Plus college loan and then try to refinance the balance with a private lender at a lower interest rate? I have $364,000 in my 401(k). I’m paying 8% interest on the parent Plus loan and planning to retire at age 66 years and 10 months, my full retirement age for Social Security.

Answer: Are you sure you can afford to retire?

You would still have a massive amount of education debt even after paying it down, plus a smaller nest egg. Unless you have a substantial amount of savings outside your 401(k) or another source of income besides Social Security, you could run a substantial risk of running short of money even if you can persuade a private lender to refinance your debt.

That may not be the best option, in any case. Federal loans have more consumer protections, including deferral and forbearance options and income-contingent repayment plans that could lower your payments.

Refinancing with a private lender might make the most sense if you can transfer this debt to the child or children who benefited from the education. Several private lenders offer this option if the kids have good credit and decent incomes.

In any case, you’d be smart to consult a fee-only financial planner who can review the specifics of your finances and offer advice.

Filed Under: Q&A, Student Loans Tagged With: ,
April 15, 2019 By

Q&A: Student loan forgiveness fail

Dear Liz: You recently answered a question from someone who had defaulted on federal student loans. You mentioned ways to get out of default and qualify for income-driven repayment plans that could reduce her monthly payments. Couldn’t she also qualify for student loan forgiveness?

Answer: There are programs that are supposed to allow federal student loan balances to be forgiven after 10 years of payments for people in public service jobs and after 20 or 25 years for other borrowers. It’s questionable how much anyone should count on getting this relief, however.

Last year was the first time borrowers qualified for forgiveness under the 10-year public service program, which was enacted under President George W. Bush in 2007. The Department of Education has denied the vast majority of applicants their expected relief. Nearly 40,000 people had applied by Dec. 31 and fewer than 300 people have been approved, according to the Washington Post.

Critics say the U.S. Department of Education has set much more rigid standards for approval than anything Congress envisioned when creating the program. Many applicants also relied on erroneous advice given by the private companies that service federal student loans.

It’s possible that lawsuits, or Congress, will force the Education Department to forgive more of the debt. But if this is what can happen to people who have given a decade of their lives to public service, one has to wonder how much relief other borrowers can expect to get.

Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.Distributed by No More Red Inc.

Filed Under: Q&A, Student Loans Tagged With: ,
April 8, 2019 By

Q&A: Figuring home-sale taxes

Dear Liz: My husband and I bought a home in Los Angeles in 1976 for $200,000. He died in 1992. The value of the house was at that time about $850,000. (I had it appraised.)

I want to sell the house now. The value is about $2 million. How much would be the stepped-up base for capital gain tax when I sell it?

Answer: In most states, only your husband’s half of the home would have gotten a new tax basis at his death. (A tax basis is used to determine potentially taxable profit.) In community property states such as California, however, both halves of a property get the step up in basis when one spouse dies.

You can add to your basis any commissions or fees paid to purchase the property and the cost of any additions or improvements. What you spent on maintenance and repairs doesn’t count. The improvement must add to the value of your home, prolong its useful life or adapt it to new uses to qualify, according to the IRS.

To figure your taxable profit, you’ll take the net amount you receive from the sale — the sale price minus any commissions or fees paid to sell the home — and subtract your basis from that. You can exempt up to $250,000 of the home sale profit, but you would pay long-term capital gains rates on the rest.

Let’s say you invested $150,000 in improvements over the years. That would be added to your $850,000 basis for a total adjusted basis of $1 million. Let’s also assume you pay $100,000 in commissions to sell your home, netting $1.9 million. Your $1 million basis would be subtracted from the $1.9 million, leaving you with a $900,000 home sale profit. Because $250,000 of that would be exempt, you would owe long-term capital gains tax on $650,000.

Filed Under: Q&A, Real Estate Tagged With: , , ,
April 8, 2019 By

Q&A: When student loan payments overwhelm, here’s a pathway out

Dear Liz: I went to college in 2004. I did it the American way with student loans. Well, my son had a bad seizure that put him on life support for three weeks. I had to quit college to take care of him. So now I’m in hock with no degree. He is on disability but that doesn’t cover much.

The federal government is now taking my tax refund. I used to get money back that helped him and me. So now what? I still don’t make enough and never will to pay back the loans.

Answer: Because these are federal student loans, you have some options to get out of default and get a payment plan you can afford. Otherwise, the government will continue taking your refunds until the debt is paid back. (The feds can even take a chunk of people’s Social Security checks, which are protected from other creditors.)

Since you can’t pay the debt in full, the fastest way out of default would be to make three full, on-time monthly payments and then consolidate the loans into a new Direct Consolidation Loan. (It’s important to know these terms, because the private companies that service federal loans don’t always give complete or accurate information.)

Once you have a Direct Consolidation Loan, you can qualify for an income-driven repayment plan. Your payments would be 10% of your discretionary income, defined as the difference between your total income and 150% of the poverty guideline for your family size and state of residence. Your payments can be reduced to zero if your income is low enough.

Another option is to “rehabilitate” your loan, which would require you to make nine monthly loan payments within 10 consecutive months. You can’t be more than 20 days late on any payment. Your new monthly payment will be 15% of your discretionary income as defined above. You also may request a lower amount.

You can find more information about getting out of federal student loan default at the Education Department’s student aid website StudentAid.ed.gov.

Filed Under: Q&A, Student Loans Tagged With: ,