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Liz Weston

How to use a tax refund to fight inflation

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If inflation has eaten away at your budget the way waves erode a beach, then your tax refund might just provide a much-needed protective barrier.

As of March, prices are up 6% over the past 12 months, according to the most recent consumer price index. At the same time, just over half of filers (55%) are expecting tax refunds for the 2022 tax year, with an average expected refund of $2,205, according to the 2023 Nerdwallet Tax Report. Financial experts say consumers can use that windfall — which is really just a delayed paycheck that you already earned — to help offset the strain of those higher prices.

“Tax refunds are going to arrive at just the right time for many consumers this spring,” says Drew Wessell, a certified financial planner at Fiduciary Financial Advisors in Grand Rapids, Michigan. In Kimberly Palmer’s latest for the Associated Press, learn how to use a tax refund to fight inflation.

This week’s money news

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This week’s top story: Smart Money podcast on banking stability, and traditional vs. online banks. In other news: how bank failures show us what not to do with our own finances, how doing the bare minimum with debt is costing you, and if being a landlord worth or not.

Smart Money Podcast: Is Banking Stable, and Traditional vs. Online Banks
This week’s episode starts with a recap of the banking crisis that started with Silicon Valley Bank.

Bank Failures Show Us What Not to Do With Our Own Finances
Money News & Moves: Remembering important money-managing lessons that some bank execs apparently forgot.

How Doing the Bare Minimum With Debt Is Costing You
Making set monthly payments is a start, but paying a bit more or seeking a lower interest rate will save you a lot.

Is Being a Landlord Worth It?
Renting out a property can be tempting, but it could be more trouble than it’s worth if you don’t have a safety net.

Q&A: Grandma needs tax help

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Dear Liz: My grandma is 78, divorced, and has not filed taxes in the last decade. I was wondering what she should do because she is head of the household and taking care of three adopted kids and needs help.

Answer: Please help connect your grandmother with AARP Foundation Tax-Aide, which provides free virtual and in-person tax help. You may be able to help her make an appointment and gather the documents she’ll need to file those missing tax returns.

Your obviously busy grandma may have procrastinated on filing her taxes because she worried about a tax bill.

But depending on her income and circumstances, she may have been eligible for refundable credits or other tax breaks that could have put money back in her pocket. (The tax law provides a three-year window to claim a refund, so she would already have lost out on refunds from the earlier years.)

If she does owe taxes and penalties, the IRS has payment plans that could help. A Tax-Aide volunteer will explain her options for paying any overdue bills.

Q&A: Tax pitfalls of a house gift

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Dear Liz: I have a friend whose mom gave him and his sibling her house a few months before she died. They sold it right away. He got a 1099-S tax form and is confused about what the capital gains are. Technically there were none because they sold it right after she died.

Answer: Ouch. If your friend and his sibling had inherited the home after the mother died, you would be right — there would be little or no capital gains, because the house would receive a new value for tax purposes on the day the mother died. That “step up” to the current market value would mean no taxes would be owed on all the appreciation that occurred during the mother’s lifetime.

But that favorable tax break happens only when property is transferred after death. Instead, the mother gave the house to her children during her lifetime. That means they got her tax basis as well — essentially what she paid for the house, plus any qualifying home improvements. They will owe capital gains tax on the difference between that basis and the net amount they realized from the sale (the sale proceeds minus any selling costs).

It’s unfortunate the mother didn’t consult a tax pro before transferring the home. Urge your friend to do so now because there may be ways to reduce (but not eliminate) the tax bill that resulted.

Q&A: Bank failures spotlight brokerages’ SIPC insurance: How it works

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Dear Liz: In light of the recent bank failures, I am wondering about the safety of investments with a brokerage firm. If the brokerage firm that I am using fails, do I stand to lose money even though I am invested in specific stocks or bonds? Does it make a difference if I have money in one of their branded money market funds?

Answer: Your brokerage probably is a member of the nonprofit Securities Investor Protection Corp., which protects against the loss of cash and securities when a covered brokerage fails. Accounts are insured up to $500,000 per customer, including a $250,000 limit for cash.

Covered securities include stocks, bonds, Treasurys, certificates of deposit, mutual funds and money market mutual funds. (Money market accounts and certificates of deposit are considered investments rather than cash under SIPC rules.)

The “per customer” limit is based on how the accounts are owned or titled. If you have a retirement account and a regular brokerage account, for example, separate $500,000 limits would apply to each.

SIPC coverage kicks in if a brokerage fails and securities or cash are missing from your account. You also have protection in case of unauthorized trading or theft from your accounts. SIPC insurance does not protect you against stock market drops or other declines in the value of your investments.

Should you rent in retirement?

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Some people rent in retirement because they don’t have much choice; they can’t afford to own homes. But financial planners say renting can make more sense than owning in some circumstances, even for retirees who can afford the costs of homeownership.

Renting offers flexibility as well as freedom from all the chores and expenses of maintaining a home. Renting also may provide built-in communities for socializing, as well as accessible housing features such as one-floor living, which can help people age in place. People who are “house rich and cash poor” can sell their homes and use the equity to fund a more comfortable lifestyle.

In my latest for the Associated Press, learn how rent in retirement can be a smarter decision.