Ask Liz Weston

Get smart with your money

Liz Weston

Chasing a dream? Fix your finances first

By

Mark Howard of Basalt, Colorado, earned a hefty six-figure income during his 25-year career in financial services. His dream, though, was to teach high school — a job that paid about $40,000 a year.

When he floated the idea past his wife and business partner, Danielle Howard, her reaction was surprise and unease. He was 54, she was 44. They had two kids in college, a big house and a lifestyle based on their $250,000-plus income.

But her experience in the life planning branch of financial advice taught her to ask searching questions of clients and follow up on their answers.

In my latest for the Associated Press, why it’s important to fix your finances before chasing your dream.

Monday’s need-to-know money news

By

Today’s top story: 3 money tools to save you from yourself. Also in the news: Why paying off debt with retirement money can be dangerous, how to make money selling stuff online, and why you should think twice before giving up financial control at the altar.

3 Money Tools to Save You From Yourself
We could all use a little help.

A High-Wire Act: Paying Off Debt With Retirement Money
A dicey proposition.

How to Make Money Selling Stuff Online
Putting money in your pockets by creating room in your closet.

Think twice before giving up financial control at the altar
Create a balance instead.

Q&A: Figuring out capital gains when an inherited house is sold

By

Dear Liz: I’ve have been following your responses related to the tax exemption on home sales. I understand that up to $250,000 per person of home sale profit is exempt from capital gains taxes and that married couples are entitled to exempt up to $500,000.

My spouse and her two siblings inherited a home from their parents. My father-in-law passed away four years ago, and my mother-in-law died last year. My wife was assigned as executor of their living trust. Who is entitled to take the tax exemption of the proceeds from the sale of the house? My wife? All three siblings? All of the above and their spouses?

Answer: None of the above, but don’t despair because the house will incur little if any capital gains when it’s sold.

We’ll assume your mother-in-law inherited the house outright from her husband, since that’s usually the case. When your mother-in-law died, the house received a “step up” in tax basis to reflect its current market value. If the house was worth $2 million when she died, for example, that’s the new value for tax purposes — even if she and your father-in-law paid only $25,000 decades ago for the house. All the gain that occurred in between their purchase and her death won’t be taxed.

If your wife sells the house for $2.2 million, there potentially would be some taxable capital gain. But the costs of marketing and selling the home would be deducted from its sale price. If those costs are 6% of the sale price — which is a pretty conservative assumption — the taxable gain would be about $68,000. (Six percent of $2.2 million is $132,000. Subtract the $2 million value at death and the $132,000 of sales costs, and you’re left with $68,000.) If your wife as executor sells the house and distributes the proceeds to the beneficiaries, the estate would pay the tax. If siblings inherit the house and then sell it, they would pay any tax.

Every year, millions of dollars of potential capital gain vanish this way as people inherit appreciated property. It’s a huge benefit of the estate tax system that many people don’t understand until they’re the beneficiaries of it.

Q&A: Social Security lets you un-retire to avoid a benefit hit, but only once

By

Dear Liz: My wife recently retired at age 62 and will collect Social Security. But she has decided to return to work full time. I know she will collect less if she makes more than Social Security allows per month. If she eventually goes back to not working at all, can she go back to collecting the original amount?

Answer: Yes, but she’d be smart to reconsider her decision to start collecting Social Security early because she’s permanently reducing her benefit for little (if any) good reason.

The earnings test, which applies when people start Social Security early, takes away $1 of benefits for every $2 she earns over a certain limit, which is $16,920 in 2017. The earnings test will end when she reaches her full retirement age, which for people born in 1955 is 66 years and two months. Her check at that point would be what she originally received at 62, plus any cost of living increases.

But that original check is reduced by nearly 25% from what she would get at full retirement age, and the reduction lasts for the rest of her life. That’s a huge hit, and it should make her question the advisability of starting benefits early when so much could be taken away from her.

Fortunately, she has a little time to change her mind. Social Security allows applicants to withdraw their applications, allowing their benefit to continue growing, if they do so within 12 months of becoming entitled to benefits. People who withdraw their applications have to pay back any benefits that received in order to restart the clock.

This is a one-time do-over: Applications can be withdrawn only once in a lifetime and can’t be withdrawn after a year has passed. She can read more about this at the Social Security site, https://www.ssa.gov/planners/retire/withdrawal.html.

Social Security benefits make up half or more of most people’s retirement income. Making smart decisions is essential if you want to avoid a lifetime of regret.

At a minimum, people should use a free claiming-strategies calculator, such as the one on the AARP site, to determine when and how to begin benefits. For $40, they can use more sophisticated planners such as MaximizeMySocialSecurity.com and SocialSecuritySolutions.com.

Another good option is to consult a fee-only financial planner familiar with Social Security claiming strategies to make sure they’re not making an irrevocable mistake.

Friday’s need-to-know money news

By

Today’s top story: Why you might be down in an up market. Also in the news: 5 Warren Buffett quotes that can make you a better investor, 5 reasons why pay isn’t rising much for many, and how to get the most out of customer loyalty programs.

This May Be Why You’re Down in an Up Market
Don’t take unnecessary risks.

5 Warren Buffett Quotes Can Make You a Better Investor
Wisdom from The Oracle of Omaha.

Where’s my raise? 5 reasons pay isn’t rising much for many
Wages are stuck in the mud.

How to get the most out of customer loyalty programs
Playing the rewards game.

Free of debt – with regrets

By

Stories about how ordinary people pay off debt quickly can be amazing, inspiring — and somewhat deceptive.

These tales often mention the sacrifices debtors made but may gloss over the cost to their quality of life or the misguided choices they made. Becoming debt-free can be a worthy goal, but understanding the pitfalls can keep you from repeating others’ mistakes.

In my latest for the Associated Press, why some folks wish they hadn’t paid off their debt in such a rush.