Ask Liz Weston

Get smart with your money

Q&A

Q&A: Working after retirement

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Dear Liz: My profession was one of the hardest hit by the Great Recession. I retired by default when I turned 62 in 2012. My Social Security payment was reduced because I started it early. I’ve found it necessary to return to the workforce part time to move beyond just surviving and have some discretionary funds. What does my employment mean for future Social Security payments?

Answer: You’re past your “full retirement age” of 66, so you no longer face the earnings test that can reduce your Social Security benefit by $1 for every $2 you earn over a certain limit ($17,640 in 2019).

Sometimes returning to work — or continuing to work after you start receiving Social Security — can increase your benefit if you had some low- or no-wage years in your work history. Social Security uses your 35 highest-earning years to calculate your checks. The amounts are adjusted to reflect changes in average wages, which is somewhat similar to an inflation adjustment. If you should earn more this year than you did in one of those previous years, your current earnings would replace that year’s earnings in the calculation and could increase your check.

Another way to boost your benefit if you’ve reached full retirement age but are not yet 70 is to suspend it. That means going without checks for a while, but your benefit earns delayed retirement credits that can increase the amount by 2/3 of 1% each month, or 8% a year. It may not be practical for you to do this: You probably need the money, and you could be too close to 70 to get much benefit. But perhaps that’s not the case for someone else reading this.

Q&A: Investing books for beginners

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Dear Liz: What are the best books for a beginning adult investor?

Answer: “The Little Book of Common Sense Investing,” by the late John Bogle, is a terrific explanation of why low-cost index funds are the best choice for most people (a sentiment shared by legendary investor Warren Buffett, who also endorsed the book). If you want to venture beyond index funds, or even if you don’t, “Investing for Dummies” by Eric Tyson, “Investing 101” by Kathy Kristof and “Broke Millennial Takes on Investing” by Erin Lowry are other good reads.

Q&A: Estate tax versus inheritance tax

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Dear Liz: In a recent column, you wrote that “only six states … have inheritance taxes.” My state of Oregon is not listed. Oregon certainly has an estate tax (one of the highest in the U.S.) and Washington also has one.

Answer: Many people confuse estate and inheritance taxes, but they’re not the same thing.

As the name implies, estate taxes are taxes levied on the dead person’s estate. The federal government, 12 states (Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington) and the District of Columbia have estate taxes.

Only the six states mentioned in the previous column — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — have an inheritance tax, which is levied on the person who inherits. New Jersey had an estate tax, but that was repealed in 2018, leaving Maryland as the only state with both types of tax.

Q&A: How to boost your credit score before you buy a house

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Dear Liz: I am trying to purchase my first home. I have a 20% down payment for the price range that I am looking for. The issue I am running into is that I have relatively new credit and my credit score is not great at all. I had to go to the emergency room two years back with no insurance and have medical expenses that went into collections. I am now in a financial spot to pay them off. These are the only negatives on my credit report that are unresolved. Will paying these off get my credit to the point that I can buy a home? I am lost as to how to get my score where it needs to be.

Answer: Unfortunately, paying collection accounts typically doesn’t help your credit scores, especially the scores used by most mortgage lenders.

Since you’re new to credit, you may not realize that you don’t have just one credit score. You have many. The two major types are FICO and VantageScore. The latest versions of each (FICO 9 and VantageScore 3.0 and 4.0), ignore paid collections. In addition, FICO 9 and VantageScore 4.0 count unpaid medical collections less heavily against you than other unpaid debts.

But mortgage lenders typically use much older versions of the FICO score, which count all collections against you even if they’re paid.

That said, it would be tough to get a mortgage with unpaid collections on your credit report. Since you have the cash, you may be able to negotiate discounts so that you can resolve these debts at a somewhat lower cost. (Collectors typically would much rather get a lump-sum settlement than wait to be paid over time.)

You’ll also want to get some positive information reported to the credit bureaus to help offset the negative information. The fastest way to do that would be to persuade someone you know who has good credit to add you as an authorized user to one of his or her credit cards. This person doesn’t have to give you the card or any access to the account. Typically, the account history will be “imported” to your credit reports, which can help your scores as long as the person continues to use the card responsibly.

Another way to add positive information is with a credit-builder loan, offered by many credit unions and Self Lender, an online loan site. Usually, credit-builder loans put the money you borrow into a savings account or certificate of deposit that you can claim after you’ve made 12 on-time payments. This helps you build savings at the same time you’re building your credit.

Secured credit cards also can help. With a secured card, you make a deposit with the issuing bank of $200 or more. You get a credit limit that’s typically equal to that deposit. Making small charges on the account and paying it off in full every month can help you build credit without paying interest. You’ll want a card that reports to all three credit bureaus, because mortgage lenders typically pull FICO scores from all three bureaus and use the middle of the three scores to determine your rate and terms.

Q&A: Selling an inherited house to a relative will affect tax treatment

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Dear Liz: My mother recently died, leaving a house to my three siblings and me. We had the house appraised in February. My sister is buying the rest of us out. We decided to give our sister a break and sold her the house below the appraised amount. As the “selling price” (which will be a public record) will be below the appraisal, can I take my “loss” on my taxes this year? I gave her a $25,000 reduction, so I assume I can take $3,000 a year for eight years. Is this true?

Answer: Probably not.

The sale to a family member probably dooms any chance of taking a capital loss, said Mark Luscombe, principal analyst for tax and accounting at Wolters Kluwer.

“The law is not entirely clear on this topic with the IRS perhaps taking a more severe stand than the Tax Court, but both seem to frown on any use of the real estate for personal purposes after the death of the parent,” Luscombe said.

For a capital loss, the IRS appears to require that the inherited property be sold in an arm’s length transaction to an unrelated person, Luscombe said. The IRS also requires that you and your siblings did not use the property for personal purposes and did not intend to convert the property to personal use before the sale.

Even the Tax Court cases appear to at least require a conversion to an income-producing purpose before the sale and no personal use of the property after the death of the parent.

“The reader may find a court willing to say that personal use by a sibling is not personal use by the reader, and, from the reader’s perspective, it was converted to investment property,” Luscombe said. “However, since this was a sale to a sibling and not an unrelated person, I think that the IRS would disagree with that position.”

Q&A: Finding a financial planner

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Dear Liz: Your column on delaying Social Security suggests using a certified financial planner on an hourly basis to review one’s retirement plans. I have struggled to find one who charges this way. They almost all want to control your money for a fee. The one I found after some effort charges $500 to $600 an hour. Please make some recommendations. I don’t mind if the CFP is not local. I just want someone who is certified, reputable, with a reasonable hourly fee.

Answer: There are a growing number of options for people who want “advice only” financial planning from a fee-only, fiduciary advisor:

XY Planning Network is a network of planners who offer flat monthly fees in addition to any other options, including hourly or assets-under-management fees. Monthly fees are typically $100 to $200, with some planners requiring an initial or setup fee of $1,000 to $2,000.

Garrett Planning Network represents planners willing to charge by the hour, although many also manage assets for a fee. Members are either certified financial planners, on track to get the designation or certified public accountants who have the personal financial specialist credential, which is similar to the CFP. Hourly fees typically range from $150 to $300, with a consultation on one topic such as Social Security-claiming strategies or a portfolio typically taking two or three hours. A comprehensive financial plan may require 20 hours or more.

Advice-Only Financial is a service started by financial blogger Harry Sit to connect people with fee-only advisors who just charge for advice and don’t accept asset management fees. Sit charges $200 to help people find fiduciary CFPs who are either local or willing to work remotely. The planners typically charge $100 to $400 an hour.

Another option for those who don’t have complex needs would be an accredited financial counselor or financial fitness coach. Those in private practice typically charge $100 to $150 an hour, although many work on a sliding scale, said Rebecca Wiggins, executive director of the Assn. for Financial Counseling & Planning Education.