Ask Liz Weston

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Liz Weston

Q&A: Surviving spouse’s home gains

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Dear Liz: If a surviving spouse is selling the couple’s longtime home, are there any special provisions on the long-term capital gains?

Answer: When one spouse dies, their half of the home gets a new value for tax purposes. The value is “stepped up” to the current market value, so that the appreciation that happened on that half of the property is no longer taxable. In community property states, both halves of the property get this step up.

Let’s say a couple bought a home for $100,000 and that it was worth $250,000 when the first spouse died. In most states, the tax basis — what’s subtracted from the net sales price to determine potentially taxable capital gains — would rise from the original $100,000 to $175,000. The surviving spouse’s basis would remain at $50,000 while the deceased’s half would be stepped up to $125,000 (one half of the current $250,000 value). If the home was sold for $250,000, there would be $75,000 of potentially taxable capital gain.

In community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — the home’s basis would get a double step-up to $250,000. If the home was sold for $250,000, there would be no potentially taxable capital gain.

Even if there is a gain from the sale, a single person can exclude up to $250,000 of home sale capital gains from their income as long as they owned and lived in the home at least two of the previous five years. Couples can exclude up to $500,000. However, widows and widowers who sell their homes within two years of their spouse’s death can take the full $500,000 exclusion.

How to create your retirement glide path

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In investing terms, a “glide path ” describes how a mix of investments changes over time. Typically, the mix gets more conservative — with fewer stocks and more bonds, for example — as the investor approaches a goal such as retirement.

You also can create a glide path into retirement by making gradual changes in your working and personal life in the months or years before you plan to quit work. Retirement can be a jarring transition, especially if you haven’t set up ways to replace the structure, sense of purpose and socializing opportunities that work can bring, says financial coach Saundra Davis, executive director of Sage Financial Solutions, a nonprofit financial education and planning organization in San Francisco.

“People are excited to leave (work), but then once they leave, they feel that pressure of ‘How do I define myself?’” Davis says. “‘Am I important now that I’m no longer in the workforce?’”

In my latest for the Associated Press, learn how to create your retirement glide path.

This week’s money news

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This week’s top story: Smart Money podcast on data breaches, and catching up on retirement savings. In other news: How airline elite status saved the day when airline delays and cancellations strike, which airline elite status should you go for in 2023, and how pay transparency may affect your job search or next raise.

Smart Money Podcast: Data Breaches, and Catching Up on Retirement Savings
This week’s episode starts with a primer on what to do if your data is breached.

I Flew During the FAA Fiasco — and Elite Status Got Me Home
Happily for this Nerd, airline ultra-elites get preferential treatment when delays and cancellations strike.

Which Airline Elite Status Should You Go For in 2023?
Do the math and consider personal preferences when choosing an airline elite status program in 2023.

How Pay Transparency May Affect Your Job Search or Next Raise
As states and cities add rules about disclosing salaries, job seekers and workers can put the data to use.

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.