Liz Weston

Q&A: Taxes on a deceased spouse’s assets

February 6, 2023 By Liz Weston

Dear Liz: My dear friend’s husband just passed away and she is immediately selling off all his antiques through an auctioneer. Sales should net well over $100,000 this calendar year. Is there any way to offset the tax hit she will take on this? This will be on top of selling the house in the same calendar year.

Answer: Previous columns have discussed the favorable “step up” in tax basis that happens when someone dies.

Their assets, including at least half of a jointly-owned home, typically get updated to the current market value for tax purposes. Appreciation that occurred during the deceased’s lifetime is never taxed. In community property states, both halves of jointly-owned assets usually get this step up.

The auction shouldn’t generate much if any tax bill unless the antiques jump significantly in value between the date of his death and the date of the sale.

The same is true of the home sale if the friend lives in a community property state. If not, she may have potentially taxable appreciation on her half of the property. If the sale occurs within two years after the year her husband died, though, she can exclude up to $500,000 of home sale profits from her income. Otherwise she can exclude up to $250,000.

Your friend should consult a qualified tax pro who can review her specific situation and offer individualized advice.

Q&A: What’s the best way to save for education? A 529 plan or I bonds?

February 6, 2023 By Liz Weston

Dear Liz: Please write a comparison of 529 college savings plans versus using I bonds for education. I had given baby gifts of 529 funds to grandkids before they had their first birthdays. But due to market volatility, this year I matched those with I bond funding for the kids. The oldest is now 6, so there is time to get past penalty issues for withdrawals should they use these for education, as I hope they will.

Answer: As mentioned in previous columns, 529 college savings plans are a flexible, tax-advantaged way to save for education costs.

Money can be used tax free for private kindergarten through 12th grade tuition as well as qualifying college expenses. Plus, up to $35,000 of leftover funds can be rolled over into a Roth IRA.

Accounts owned by parents have minimal impact on financial aid, and accounts owned by grandparents aren’t included in federal financial aid calculations at all.

College savings plans typically offer an array of investment options, including age-weighted funds that get more conservative over time. The ability to invest the money means you have a good shot at generating inflation-beating returns over time, but you also have to deal with some ups and downs in the markets.

I bonds — technically, I Series Savings Bonds — have advantages as well.

These are government-issued bonds, so you can’t lose your principal, and they are designed to help investors keep up with inflation. I bonds earn a fixed rate for the 30-year life of the bond, which is currently 0.4%, plus a semiannual variable rate pegged to inflation (currently 3.24%).

The composite rate formula for I bonds issued from November 2022 through April 2023 is 6.89%. In the previous 6 month period, bonds paid 9.62%.

The interest is added every six months to the bond’s value, rather than paid out, so bond owners can defer federal taxes until the bond is cashed in. (I bonds are exempt from state and local taxation.) And the interest can be tax free if the bond proceeds are used to pay for certain higher education costs.

Getting that tax-free treatment is somewhat complicated, however.

First, the bonds would need to be owned by the parents rather than you or the grandkids. Qualifying college expenses must have been incurred by the bond’s owner, the owner’s spouse or a dependent listed on the owner’s federal tax return.

There’s an age restriction too: The bond owner must have been at least 24 before the bonds were issued. The ability to get the exclusion ends if modified adjusted gross income is above certain limits (in 2022, it was $100,800 for singles or $158,650 for married couples filing jointly).

I bonds have other restrictions. No withdrawals are allowed in the first year of ownership. Any withdrawals made within the first five years trigger a loss of three months’ worth of interest income.

People can buy $10,000 of electronic I bonds each year, plus they can use their tax refunds to purchase an additional $5,000 of paper I bonds.

I bonds are certainly a reasonable alternative for college savings, but the various restrictions on their purchase and use may make 529 college savings plans a better option for many families.

This week’s money news

January 30, 2023 By Liz Weston

This week’s top story: Smart Money podcast on no-spend month 2.0, and recovering from credit damage. In other news: February mortgage rates on the downslope by end of month, having a conversation about fraud with older adults, and how to save your job from laying off.

Smart Money Podcast: No-Spend Month 2.0, and Recovering From Credit Damage
This week’s episode starts with a conversation about how to do a no-spend month that will work for you.

February Mortgage Rates on the Downslope by End of Month
With inflation in retreat, mortgage rates could follow downward.

Have a Conversation (Not a Lecture) About Fraud With Older Adults
Chatting with older adults about fraud and scams could help everybody in the conversation avoid becoming a victim.

Industries Most Likely to See Layoffs + How to Save Your Job
Money News & Moves: As layoffs escalate, these are the jobs most at risk — and how to protect yours.

How to safely use payment apps

January 30, 2023 By Liz Weston

As a frequent PayPal user, Kim Palmer wasn’t surprised to see a payment request on the app pop up. But when she read it, she knew something was wrong.

In Kimberly Palmer’s latest for the Associated Press, learn how to safely use payment apps.

Q&A: Are you trying for a perfect credit score? Maybe you don’t need to

January 30, 2023 By Liz Weston

Dear Liz: My credit score fluctuates between 799 and 815. It used to be 850. I always pay my bills in full and on time, and keep the credit utilization low. The only comment I can find about why my credit score isn’t higher is that I lack a loan. I don’t owe any money and see no need to get a loan, so is there anything I can do to get the score back closer to 850?

Answer: Possibly, but there’s really no point in having a “perfect” credit score.

Most credit score formulas use a 300-to-850 scale. By the time your scores are in the mid-700 range, you’re typically getting the best rates and terms from lenders. Also, scores change all the time and vary according to the formula used. Even if you could achieve an 850 with one type of score, you might not achieve it with another score or keep that high number for long.

You typically need an installment loan such as a mortgage or car loan to get scores closer to 850. Borrowing money just to improve scores can make sense if you’re just starting out or trying to fix battered credit, but not in your situation.

If you’re determined to get higher scores, consider using even less of your available credit. Top scorers typically use less than 10% of the credit limits on their cards. The balance that matters for credit scoring calculations is typically your statement balance, so one way to reduce utilization can be making a payment right before the statement closes. Just be sure to pay off any remaining balance before the due date so that you don’t incur late fees.