Ask Liz Weston

Get smart with your money

Liz Weston

Inheriting stocks after a parent’s death resets the cost basis

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Dear Liz: I am a beneficiary of my father’s brokerage account. Upon his death, the brokerage company closed his account and transferred all of the equities to me in a new account. How will I know the cost basis for capital gains purposes when I sell the stocks?

Answer: You will use the value of the stocks on the day of your father’s death as the new tax basis. This is known as a “step up” in basis, since typically the fair market value at death is higher than the original basis, or what your dad paid for the stocks. Any appreciation that occurred during his lifetime won’t be taxed, but you would be subject to capital gains tax on any appreciation that occurs after that date.

Which Social Security benefit? It depends.

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Dear Liz: I am 61 and retired. My husband recently died at age 61 and he was still working at the time of his death. He’s always made more money than I did. I’ve been told that I can start getting Social Security after I turn 62 and when I turn 67 I can apply for survivor benefits. Is this correct?

Answer: You can start survivor benefits as early as age 60 and retirement benefits as early as age 62. Most people should delay their applications for Social Security benefits, because an early start typically means a smaller lifetime payout. You’re one of the exceptions since you’re allowed to switch between survivor benefits and your own.

Because the survivor benefit is much larger than your own, you’ll want to maximize your payout by not taking it early. That means waiting to start until your full retirement age. You can start your own benefit at 62 and switch to survivor benefits at 67.

An early start means being subject to the earnings test until full retirement age. If you’re not working, though, that’s a moot point.

Social Security is complicated and the right claiming strategy depends on the details of an individual’s situation. Consider using one of the paid Social Security claiming strategy sites, such as Maximize My Social Security or Social Security Solutions, to find the best approach.

Does this church pastor need to confess to the IRS?

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Dear Liz: As a recent member of our church board, I just discovered our church hasn’t been paying Social Security or Medicare taxes for our pastor. I checked with our pastor and he hasn’t been making any payments either. This has been going on for six years. How do we recover?

Answer: Clergy are generally exempt from having Social Security and Medicare taxes withheld from their wages, notes Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. However, clergy typically must pay self-employment taxes, which include Social Security and Medicare, unless an exemption has been approved by the IRS.

Normally, employers and employees each pay 7.65% of the employee’s wages to cover Social Security and Medicare taxes. Self-employed people typically must pay both the employer and employee shares, or a total of 15.3%.

If your pastor has been filing taxes as a self-employed person, then he probably has been paying the appropriate Social Security and Medicare taxes. If he hasn’t, however, he may owe a substantial tax bill and should consider hiring a tax pro to help him amend his returns.

Q&A: Appliances getting old? Consider shopping now to avoid tariffs

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Dear Liz: President-elect Donald Trump’s proposed tariffs have me wondering if now is the time to purchase new kitchen appliances, something I have long delayed doing. If he follows through on his plans, I don’t know how long it would be before the new tariffs take effect.

Answer: Tariffs of up to 100% on imported products could dramatically increase the cost of many consumer goods, including appliances and cars. But how, when or even whether these tariffs will be imposed is still unclear.

Given the political uncertainties, it probably doesn’t make sense to proactively replace appliances or cars that are still in good working order. If you’re planning to update anyway, however, doing so sooner rather than later may save you some money.

Q&A: A husband is deported, leaving his American wife with questions about tax filings

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Dear Liz: I am a 56-year-old married U.S. citizen. My husband of six years was deported to the United Kingdom. Appeals to U.S. Citizenship and Immigration Services were denied. He can never return. I remain in the U.S. and will do so at least until I retire, likely at age 72. What status should I claim for federal and state taxes?

Answer: You have two options for filing taxes when you’re married: jointly and separately. Married filing jointly is often the better choice since it offers a larger standard deduction, higher phase-out limits for certain tax breaks and more favorable tax brackets, especially at higher incomes, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Filing jointly would require including both spouses’ worldwide income, however. Filing separately would allow you to report only your own income.

Q&A: Why Every Adult Needs a Financial and Healthcare Power of Attorney

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Dear Liz: Please tell your audience that if they have any bank accounts, loans, credit cards or utilities, they should legally appoint someone to make decisions for them if they should become ill or injured.

The backstory: My then-40-year-old son went to the hospital with a stomachache. He fortunately told the hospital I could make healthcare decisions for him if he became incapacitated. He then suffered cardiac arrest that resulted in anoxic brain injury. After his injury, I had to deal with such things as ending his apartment lease, canceling utilities and dealing with his car loan and bank account. I had no legal authority because he did not have a will, trust or advance directive. I subsequently learned that being a conservator would enable me to do the necessary things on my son’s behalf. The entire experience was dreadful, and I wish it on no one else.

Answer: The document that could have helped you is called a financial power of attorney and every adult should have one. Financial powers of attorney designate a trusted person to pay bills, file tax returns, close accounts and make other money decisions should the creator become incapacitated. These documents can be created online for about $40, although attorneys also offer them as part of the estate planning package when creating wills or living trusts. If your son had created one, it would have saved the thousands of dollars you probably paid to get a conservatorship.

The second document every adult needs is a healthcare power of attorney, also known as a healthcare proxy, which names someone to make medical decisions in case of incapacity. Again, these are easily created online or can be drafted as part of an estate plan, and they can spare families the agony and expense of going to court to care for a loved one.