Ask Liz Weston

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Liz Weston

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.

This week’s money news

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This week’s top story: Smart Money podcast on CDs and managing a life-changing windfall. In other news: How to minimize the impact to your business from a bank failure, how Silicon Valley Bank failed, and the hurdles on the road to Medicare coverage of cannabis.

Smart Money Podcast: Are CDs Worth It, and Managing a Life-Changing Windfall
This week’s episode starts with a discussion about certificates of deposit, or CDs.

Spooked by Bank Failures? Minimize the Impact to Your Business
Keep an emergency fund at a separate business bank to help insulate your company from a bank failure.

How Silicon Valley Bank Failed (and Why That Probably Won’t Happen to Your Bank)
Silicon Valley Bank failed after a series of events that aren’t likely to happen at your bank.

When Will Medicare Cover Medical Marijuana?
From regulatory to more practical issues, here are the hurdles on the road to Medicare coverage of cannabis.

Q&A: How an unexpected credit score drop could signal a serious problem

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Dear Liz: I pay off each of my credit card purchases online, usually within a few days. My monthly statement balance is usually $0 even though I use the card frequently. The card is my only open credit account. I saw my credit score recently and it has dipped below 650. It used to be over 800 several years ago. Is my diligence hurting my score? Should I wait to pay off my card until the statement posts? Is there another way to improve my credit?

Answer: A drop that drastic may indicate a more serious problem, such as a late payment or a collection account. Please check your credit reports at all three credit bureaus at AnnualCreditReport.com. (Enter the exact name in your browser as there are many look-alike sites that will try to charge you for what should be free access to your reports. If you’re asked for a credit card number, you’re on the wrong site.) Unexpected credit score drops can be an indication of fraud, so do this as soon as possible.

If you don’t see anything suspicious, then you probably can blame your habit of leaving a zero balance and having only one card. You don’t have to carry credit card debt to have good scores, but a small balance on the statement closing date helps indicate to credit scoring formulas that you are actively using your account. You can and should pay the balance off in full before the due date to avoid interest charges. Adding another credit account or two should further strengthen your scores.

You didn’t mention which score you saw (you have many) or where you got it, but consider monitoring at least one of your scores so you can gauge your progress. Banks and credit card companies often offer free scores. If yours don’t, consider signing up for another service that offers free scores. Discover, for example, offers free FICO scores to everyone, not just its own customers.