Ask Liz Weston

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Liz Weston

Q&A: A gift for the great-grandkids? Consider a 529 college savings plan

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Dear Liz: Recently my granddaughter gave birth to twins. I’d like to put $500 into a trust for each of them to mature when they are 18. I’m hesitant to set up an education fund in case they decide not to go on to college. I would like something that includes growth and safety, the least amount of cost and minimal tax consequences. Is there something you could recommend?

Answer: A trust would be overkill, given the relatively modest amount you have to contribute. Consider instead setting up 529 college savings plans, which provide the benefits you’re seeking, including some flexibility in how the money is spent.

The money you contribute can be invested to grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses, which include costs at vocational and technical schools as well as colleges and universities. In addition, up to $10,000 per year can be used for private school tuition for kindergarten through 12th grade. If a beneficiary doesn’t use the money in their account, the balance can be transferred to another close relative. The account owner (you) also can withdraw the money at any time. You would pay taxes on any earnings plus a relatively modest 10% penalty.

Legislation passed at the end of last year offers another option: Money that’s not needed for education can be transferred to a Roth IRA, starting in 2024. After an account has been open at least 15 years, the beneficiary can start rolling money into a Roth. The amount rolled over can’t exceed the annual contribution limit (which in 2023 is $6,500), and the lifetime limit for rollovers is $35,000.

These plans are offered by the states and operated by various investment companies. You can learn more at the College Savings Plan Network.

Q&A: Checking survivor benefit eligibility

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Dear Liz: I was widowed at 44, when my children were 10 and 12. I received Social Security benefits for myself and for them for a time. I then went back to work. I started taking Social Security at 65 even though I continued working until 70. I hear a lot about widows’ benefits and wonder whether I would be eligible. I need the funds.

Answer: Call Social Security at (800) 772-1213 and ask whether your survivor benefit, based on your husband’s work record, is greater than the benefit you’re receiving. If it is, you’ll get the larger of the two benefits, rather than both of them. If it’s not, you’ll continue to get your own benefit.

You first qualified for survivor benefits because you were caring for a deceased worker’s minor children. Your benefit probably ended when the younger child turned 16, although the children could continue receiving checks until they turned 18 or graduated from high school, whichever occurred later.

Otherwise, survivor benefits are typically available at age 60, although the amount available is reduced if you start benefits before your own full retirement age (which used to be 65 but is currently between 66 and 67). Also, benefits started before full retirement age are subject to the earnings test, which withholds $1 for every $2 earned over a certain amount ($21,240 in 2023).

When you applied for Social Security at 65, the agency may have compared the benefit you earned on your own record with the survivor benefit you were eligible for based on your late husband’s record, and given you the larger of the two. If not, ask them to make the comparison now and see if you’d be better off.

How to tackle holiday debt in January

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After years of being in debt, Rachel Kramer Bussel came to a realization: “If I don’t become proactive about it, I will be in debt for the rest of my life.” For Bussel, a freelance writer near Atlantic City, New Jersey, that meant scaling back spending and putting any available money toward the debt principal.

“Starting to see it go in the right direction helped me amp it up,” she says. “I felt like, maybe there is light at the end of the tunnel.” Bussel, whose debt came from credit cards, student loans and back taxes, finally paid off all of her debt, which at one point exceeded $100,000, in 2020.

Paying off debt is a common goal as the new year kicks off. Bills for holiday shopping and other end-of-year spending often come due in January, and this year, rising interest rates make debt increasingly expensive. According to the Federal Reserve, revolving debt, which includes credit card balances, continued to rise throughout 2022, increasing at an annual rate of 10.4% as of October, the most recent numbers available.

In Kimberly Palmer’s latest for the Associated Press, learn strategies to attack your debt in January.

Q&A: Why you need to pay attention to your credit utilization

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Dear Liz: Our credit scores are in the low 800s. We always pay all credit card balances off before the next billing period. We are presently charging a cruise for us and our daughter and her husband. We’re worried about using too much of our available credit and thus reducing our credit scores. We’re using one credit card and paying half the balance this billing period and the rest on the next billing period. I’ve never been able to calculate the “credit utilization,” but I’m sure we will exceed it for the next two months even though we will pay the amount charged in full. With this large charge, can you suggest anything else we can do?

Answer: Your credit utilization is simply the amount of available credit that you’re using. If your card has a $10,000 limit and you make $5,000 in charges, your credit utilization ratio is 50%. (If you’re not sure what your credit limit is, you can check your account online or call the number on the back of your card and ask.)

In general, the less of your available credit you use the better.

The balance that matters for credit scoring purposes is the balance that’s reported to the credit bureaus — and that’s typically what you owe as of your statement closing date.

Making a payment right before the statement closes can help reduce your credit utilization. Some people make payments every week, or even more often, to keep their utilization in the single digits.

If you don’t plan to apply for a new credit card or loan, however, you probably don’t need to worry about a temporary ding to your credit scores because they’re already so high. Your scores will probably still be quite good and will rebound once you pay off the balance.

This week’s money news

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This week’s top story: Smart Money podcast on investing in 2023. In other news: Small-business trends 2023, privacy hacks that may hurt your credit, and how to avoid hotel resort fees.

Smart Money Podcast: Your Money in 2023: Investing in the Stock Market
This week’s episode is all about investing in 2023.

Small-Business Trends: 6 Predictions for 2023
It’s difficult to predict what 2023 holds, but business owners can use innovative strategies to combat emerging challenges.

Privacy Hacks May Hurt Your Credit + You Won! Can You Hide?
Money News & Moves: Security fails routinely expose your personal financial info. And you can’t even buy privacy.

How to Avoid Hotel Resort Fees (and Which Brands Are the Worst)
NerdWallet analyzed the major hotel brands to find out which ones have the worst resort fees.

Q&A: Estate taxes on house bequests

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Dear Liz: You recently wrote about the capital gains tax implications when someone sells a house they’ve been given, versus one they’ve inherited. Would you elaborate on the estate ramifications for the donor if that person has a large estate? Would their estate pay tax on the gift?

Answer: Few people have to worry about either gift or estate taxes, for reasons that will become obvious in a moment. But large gifts can potentially reduce the amount a wealthy donor can pass on to heirs tax free after death.

That’s because the gift and estate tax systems are combined. Gifts over the annual exclusion amount — which in 2023 is $17,000 per recipient — reduce the donor’s lifetime gift and estate tax exemption, which in 2023 is $12,920,000.

Let’s say a donor gives a $1-million house to a friend. The amount in excess of the $17,000 annual limit, or $983,000, is deducted from the donor’s lifetime limit. If the donor died in 2023, the amount of their estate in excess of $11,937,00 would be subject to estate taxes. (Donors only owe gift taxes after they give away so much that they exhaust that lifetime limit.)

Receiving assets as a gift also means the recipient may face more taxes than if they had inherited the property.

The previous column mentioned that when someone inherits a home, the house’s tax basis is “stepped up” to the current market value. That means the appreciation that occurred during the previous owner’s lifetime isn’t subject to tax.

If someone is given a house by a still-living donor, different rules apply. There’s no step up in value. The recipient gets the donor’s tax basis, which is typically what the donor paid for the home, plus any qualifying improvements.

When the house is sold, that basis is deducted from the proceeds to determine potentially taxable profit. The recipient could face capital gains taxes on the appreciation that happened since the original owner bought the house.

On the other hand, giving away assets during life is one way to control the size of a potentially taxable estate, says Los Angeles estate planning attorney Burton Mitchell. Once the house is given away, for example, its future appreciation won’t increase the donor’s estate.

Anyone with an estate large enough to worry about these taxes should, of course, consult an estate planning attorney about the best strategies for their situation.