Ask Liz Weston

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Liz Weston

Don’t let your credit die of neglect

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Certified financial planner David Rae says he used to think that “anyone who could draw breath” could get an auto loan. Then one of his millionaire clients tried to buy a car — and failed.

The 42-year-old client was turned down for a loan because he had no credit scores , says Rae, who is based in Los Angeles.

Nineteen million American adults are “unscoreable,” lacking enough recent credit history to generate credit scores, according to the Consumer Financial Protection Bureau. They either have “thin” files, with too few accounts, or “stale” ones that haven’t been updated in a while. In my latest for the Associated Press, find out how having no scores can cost you.

Monday’s need-to-know money news

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Today’s top story: How to break free from credit card inertia. Also in the news: How to travel like a minimalist and save big, paring down the price of a move to a new state, and the 401(k) fees you need to know.

How to Break Free of Credit Card Inertia
Evaluating your cards.

Travel Like a Minimalist and Save Big
Avoid the tourist traps.

Pare Down the Price of a Move to a New State
Cutting costs each step of the way.

401(k) Fees You Need to Know
Tracking the fees charged by your mutual fund manager.

Q&A: If your job reimburses you for education costs, can you still get a tax deduction?

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Dear Liz: I established a Coverdell Education Savings Account for my son about 20 years ago. My son has since graduated, and there is still about $12,000 left in that account. He has worked a few years and now is going to graduate school while still being employed. His employer will do education reimbursement.

How should we withdraw the funds to qualify for the education expense deduction come tax time?

Answer: Congress recently eliminated the tuition and fees deduction, but the American Opportunity Tax Credit and the Lifetime Learning Credit remain for 2018. For you to claim an education credit, however, your son would have to be your dependent. If your son is working full time, he’s probably not a dependent. He may be able to take a credit, but only for qualified education expenses that aren’t reimbursed by his employer or paid by a Coverdell distribution. Taxpayers aren’t allowed to double-dip — or potentially, in this case, triple-dip — on education tax benefits.

If your son incurs education expenses in excess of what his employer reimburses, then funds in the Coverdell ESA could be used to pay for those costs or reimburse your son for the additional out-of-pocket education expenses he paid in the same year as the distribution, said Mark Luscombe, principal tax analyst at Wolters Kluwer Tax & Accounting. Once the Coverdell is depleted, your son may be able to take a credit for any remaining qualified education expenses.

Q&A: Selling a home you’ve shared with tenants

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Dear Liz: I am 53 and own a home in which I live and rent out rooms. Every year I pay my taxes on the rental income and get to deduct depreciation.

How does this affect the taxes I will pay on the home when I sell it? Will I be able to claim the $250,000 exemption? I may live in this home until my death and leave it to my children. How would the rental depreciation affect their stepped-up basis and any taxes they might have to pay?

Answer: Renting rooms is similar to taking the home office deduction in the Internal Revenue Service’s eyes. In both cases, you have to recapture any depreciation, but the business use doesn’t affect your ability to take the home sale exclusion.

The home sale exclusion allows you to exempt from capital gains taxes up to $250,000 of home sale profit. (The exclusion is per owner, so a married couple potentially could exempt up to $500,000.) You’re eligible for the exclusion if you have owned and used your home as your primary residence for at least two years out of the five years before the sale. You will have to pay income taxes on the amount of depreciation you deducted over the years. That depreciation amount is added back as income on your tax return.

If the space you rented out had not been within your living area — if it were a separate apartment or retail space — then different rules would apply.

If you decide to bequeath the home at your death rather than selling it, your heirs won’t have to pay the depreciation recapture tax — or capital gains taxes on any appreciation that took place while you owned it. Instead, the home’s tax basis will be “stepped up” to its current market value.

If they sell it soon after inheriting it, they won’t owe much if any tax on the sale. If they hang on to it before selling, they’ll owe taxes only on the appreciation that took place while they owned it. If they move in and make it their primary residence, they too could qualify for the $250,000-per-person home sale exclusion once they have owned the home, and used it as their primary residence, for at least two of the five years before they sell it.

Q&A: Social Security spousal benefits

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Dear Liz: I’m remarried and don’t plan to claim a spousal benefit on my husband’s Social Security, as my benefit will be four times what his will be. My previous marriage ended in divorce at 10 years, and my ex died two years ago. How do I find out if I’m eligible to collect on my ex’s Social Security record? I am 63 and want to wait until 70 to apply for my own benefit, but I would like to retire at the end of this year.

Answer: You’ve already cleared one hurdle, which is that your previous marriage lasted 10 years. So whether you qualify for divorced survivor benefits depends on how old you were when you remarried.

Divorced people who remarry after they reach age 60, or age 50 if they’re disabled, can qualify for divorced survivor benefits. Those who remarry before that point are out of luck.

Note, please, that the remarriage rule applies only to survivor benefits. Spousal benefits are a different story. While divorced people can qualify for spousal benefits if their marriages lasted at least 10 years, the ability to get a spousal benefit ends when they remarry.

Survivor benefits are also different from spousal benefits in that you will be free to switch from a survivor benefit to your own benefit at 70. When you apply for spousal benefits, you typically have to apply for your own benefit at the same time and will get the larger of the two. You can’t switch to your own benefit later.

Friday’s need-to-know money news

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Today’s top story: Where college students can find emergency money, food and housing. Also in the news: 8 ways to get cheap movie tickets, how the new CFPB prepaid card rule affects you, and your 2018 HSA contribution limit just changed (again).

Where College Students Can Find Emergency Money, Food and Housing
You’re not alone.

8 Ways to Get Cheap Movie Tickets
More money for snacks.

CFPB Prepaid Card Rule: How It Affects You
New protections.

Your 2018 HSA Contribution Limit Just Changed (Again)
A $50 increase.