Ask Liz Weston

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Liz Weston

This week’s money news

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This week’s top story: 2022 mortgage applicants sought larger loans, faced deeper debt. In other news: 5 roadblocks to improving credit, reframe gift traditions, and a passport renewal by mail.

2022 Mortgage Applicants Sought Larger Loans, Faced Deeper Debt
A look at 2022 mortgage application data from the Consumer Financial Protection Bureau shows some of the initial effects of these higher-and-higher rates.

Knock Down These 5 Roadblocks to Improving Credit
A new NerdWallet survey finds that half of Americans have barriers to improving their credit. Here’s how to get past them.

One Way to Reduce Holiday Stress: Reframe Gift Traditions
Consider ways to make gift-giving with family and friends a smaller and less expensive part of the holidays.

Do I Have to Renew my Passport by Mail?
Most passports can only be renewed by mail. That might be convenient for some — and stressful for others.

Taking these financial steps could help post-divorce recovery

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Jamie Lima remembers his divorce six years ago as one of the most emotionally draining and financially challenging experiences of his life. As a result, he resolved to use his professional background as a certified financial planner to help other people going through similar situations.

“I want to make sure other people don’t step on the same land mines and be an advocate for them,” says Lima, founder of the Ramona, California-based Allegiant Divorce Solutions, a financial planning company that helps people going through divorce.

While the financial aspect of divorce is often overshadowed by the emotional impact, rebuilding finances after the dissolution of a marriage can be an integral part of overall recovery. In Kimberly Palmer’s latest for the Seattle Times, learn steps to navigate the financial challenges post-divorce.

Q&A: A capital gains surprise

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Dear Liz: My son has decided to settle abroad and wants to purchase a home. I made a gift of stock valued at $17,000, which had significant gains. My broker indicated that giving him the stock would avoid capital gains on my part, and he could cash the stock in at that value, also without accruing capital gains. Our CPA is now telling him that he will, indeed, have to pay the capital gains. What’s the real scoop?

Answer: It shouldn’t be a scoop that the person who does taxes for a living gave you the correct answer.

When you gave your son the stock, you also gave him your tax basis — essentially, what you paid for the stock. Once the stock was sold, your son owed taxes on those gains.

Q&A: Their variable-rate loan is out of control. What should they do now?

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Dear Liz: We paid a lot for our house, and a lot to renovate it seven years ago. My banker recommended taking a low-interest loan against our assets at the bank instead of selling investments to pay for the renovations, which cost $900,000. The bank offered a rate of prime plus half a point. Up until a year ago, this loan cost me about $1,200 to $1,600 per month. However, those payments have now jumped to about $5,000 per month. I’m selling stocks and bonds, on which I will have to pay taxes, to cover this amount. We have enough to pay off the loan, which is what my banker has suggested doing since interest rates have gone up so much. However, my wife and I are reluctant to liquidate so much in stocks and bonds. We would incur the tax consequences and it would not leave us as liquid as we would like to be. We love our house and neighborhood, and we are locked in a mortgage rate of 2.65% for another six years, so we are reluctant to sell. Any advice?

Answer: Your options aren’t great, but you already knew that.

As you’ve learned, variable-rate loans are inherently risky and better for short-term borrowing than for financing long-term debt. Interest rates stayed so low for so long that many people lost sight of the risk that affordable payments might not stay that way.

Interest rates are unlikely to plunge any time soon, but paying off the loan by selling investments could leave you house rich and cash poor. If interest rates do ease, you could regret having incurred unnecessary taxes — plus the investments you sell can’t earn you future returns.

Trying for a cash-out mortgage is another potential solution with significant disadvantages, given current high mortgage rates. Selling your home could be the best option if you can’t afford the property but may be an overreaction if you can.

The right solution will depend on the details of your financial situation. A fiduciary financial advisor — someone dedicated to putting your best interests first — could help you make a more informed decision about what to do next.

Q&A: Spousal and divorced spousal benefits are available only while the primary worker is still alive

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Dear Liz: You recently answered a question about divorced survivor benefits. Is the survivor benefit going to be 100% of what the deceased ex-spouse was receiving at death or 100% of the ex’s benefit at full retirement age? My ex-wife is 65, the marriage lasted 34 years, it’s been two years since our divorce and she’s planning to retire at her own full retirement age.

Answer: The last part of your question indicates you’re asking about divorced spousal benefits, not divorced survivor benefits … unless you’re reaching out from beyond the grave.

Here’s a quick primer. Spousal and divorced spousal benefits are available only while you, the primary worker, are still alive. Your ex could receive up to 50% of your benefit at full retirement age, assuming that benefit is greater than her own.

The rules change once you’re dead. Should you die before your ex, she may qualify for divorced survivor benefits. Divorced survivor benefits, like regular survivor benefits, are based on what you were actually receiving or had earned at the time of your death. If you died at 69 before beginning to claim Social Security, for example, your benefit would have earned at least a couple years’ worth of delayed retirement credits. Your ex could qualify for 100% of that enhanced benefit if she applied for it at her own full retirement age.

Your ex also would have the option of starting divorced survivor benefits and then switching to her own larger benefit later, or vice versa. She also could remarry at age 60 or later and not lose her benefit. By contrast, spousal and divorced spousal benefits end with remarriage, and people typically can’t switch between those benefits and their own.

How to reduce your ‘widow’s penalty’

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After a spouse dies, the survivor often ends up paying higher taxes on less income — something known by accountants and financial planners as the “widow’s penalty,” because women typically outlive their husbands.

Couples who know what’s coming often can take steps to soften the penalty’s effect, but too many don’t think far enough ahead, says Barbara O’Neill, a certified financial planner and educator in Ocala, Florida.

“A lot of people just underestimate what the impact will be financially,” O’Neil says. In my latest for ABC News, learn how to reduce your ‘widow’s penalty.’