Ask Liz Weston

Get smart with your money

Q&A

Q&A: There’s a new option for leftover funds from a 529 college savings plan — your kid’s retirement

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Dear Liz: We put four kids through college using 529 college savings. All four are out of college with good jobs and we have about $50,000 left over. Would you suggest just letting it build for the grandkids’ college in 20 to 30 years? The amount should grow considerably in that time and may pay for all the grandkids’ college expenses as well.

Answer: You have a number of options with leftover 529 funds, including eventually changing the beneficiaries to your future grandkids. Since none have been born yet, and may not be for a while, you can just leave the accounts alone to grow for now.

In addition to paying qualified college education expenses, up to $10,000 per year of 529 funds can be used for private school tuition for kindergarten through 12th grade. In addition, up to $10,000 per beneficiary can be used to repay student loans.

If you do decide to earmark funds for the grandkids, you may want to think about the best way to divide the money. You may not know for a while how many grandkids you’ll have. It’s entirely possible for the first grandchild to reach college age before the last one even comes along.

Another option that’s new this year is to use the leftover 529 money to fund Roth IRAs for your children, the original beneficiaries. If the account has been open at least 15 years, each year you can roll over an amount equal to the contribution limit, which for 2024 is $7,000. (The lifetime rollover limit for each beneficiary is $35,000.) This assumes the beneficiary has earned income at least equal to the rollover amount.

Q&A: Protecting a daughter’s inheritance

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Dear Liz: We need help knowing what to do regarding leaving our home and money to my unmarried daughter. She has had a boyfriend for over 15 years. How can we protect her inheritance so he can’t claim half?

Answer: Inheritances are considered separate property. So her inheritance could be considered hers alone even if your daughter marries this guy and lives in a community property state where other income and assets accumulated during the marriage would be considered joint property.

She might have to be careful not to commingle funds, however. A partner who contributes toward a mortgage on a house might have a claim on the property, for example.

Please talk to an estate planning attorney who can assess the situation and give you — and your daughter — personalized advice.

Q&A: With tax day coming, here’s what to know about the difference between an enrolled agent and a CPA

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Dear Liz: What is the difference between using an enrolled agent and a certified public accountant to file income taxes? I have used a CPA in the past to file my federal and state income taxes but I need to find a new person for this job. My financial situation is fairly simple: single, no dependents and no real estate. Is an EA qualified to file income taxes? Do they look for possible tax credits? What happens if there is an audit?

Answer: Enrolled agents specialize in taxes. They can prepare returns, provide tax advice and represent you in an audit. (In fact, many enrolled agents used to work for the IRS, giving them intimate knowledge of the agency’s policies and practices.)

CPAs have broader education requirements and don’t necessarily specialize in taxes. They may be auditors, financial planners or business consultants, for example.

If you have complex financial or tax needs, a CPA could be a good fit. Otherwise, an EA could fill the bill and may be more economical. You can get referrals from the National Assn. of Enrolled Agents.

Q&A: How to pay taxes electronically

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Dear Liz: You recently wrote about check theft and the fraud possibilities when paying with checks through the mail. The largest checks that I send are to the IRS and California’s Franchise Tax Board. Is there a way to send in tax payments electronically rather than by check?

Answer: Absolutely, and tax authorities typically encourage you to use these electronic payment methods.

The IRS has a number of options. Its Direct Pay service allows you to schedule payments from your bank account at no cost. You also can pay using a credit card, debit card or digital wallet service such as PayPal, although these methods incur a processing fee. California’s FTB also has electronic options. (Electronic payment options for other states can be found by searching for the state tax agency’s name and the word “payment.”)

Q&A: More reasons to ditch paper checks

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Dear Liz: Personal checks are not stolen while in transit; they’re stolen from mailboxes which are, for the most part, unprotected and not covered by security cameras. So, if you want your check to go through the mail, walk it into the post office. More than once I’ve found that previous mailers had just slipped their letters into the chute of the drive-up mailbox and driven off. In their ignorance or naivete they left their letters for the thieves, but I shoved their letters downward into the chute. One of my neighbors whined that someone altered a check that she had made out to “AT&T.” She left a lot of room on the payee line and that’s something one never wants to do.

Answer: Checks are not just stolen from unprotected mailboxes. Thieves have attacked mail carriers for keys to secure mailboxes. Checks also can be stolen in transit and from the recipients’ mailrooms. Even people who have mailed their payments at a post office have reported being the victims of check theft.

There are some ways to reduce your risk, but that doesn’t change the fact that writing checks is a risky habit.

Take a moment to look at your checks. Each one is printed with your name, account number and bank routing number. That’s all the information a thief needs to create new checks and make fraudulent payments.

Also, check washers can remove all the writing from your checks except for the signature, so just filling out the payee line won’t prevent fraud. (If you must write a check, consider using a gel pen, because the gel is generally harder to remove with solvents than ballpoint ink.)

Electronic payments, by contrast, offer a secure way to pay that’s faster and easier to track than a check through the mail. Electronic payment options are nearly ubiquitous now, so it’s a good time to break the bad habit of writing checks.

Q&A: What to know about capital gains tax on a house sale

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Dear Liz: My husband died in November 2022. I was told that if I sell the house within two years of his death, I can benefit from two capital gains exclusions, his and mine, each for $250,000. The house was appraised at $912,000 based on his date of death. I don’t imagine it would sell for much more than that now. Can you tell me approximately what I would owe in capital gains? My tax rate is 24%.

Answer: That’s a great question to ask a tax pro, since there are a number of variables involved.

If you live in a community property state such as California, then both halves of the property got a favorable step-up in tax basis when your husband died. That means the house’s new tax basis would be $912,000.

If you don’t live in a community property state, then only half of the house got the step up at his death (to $456,000, or half of $912,000). The other half — yours — retains its original tax basis. If the original purchase price of the home was $300,000, for example, your basis would be $150,000. The home’s total basis would be $606,000 (which is $456,000 plus $150,000). If you sold the house for $912,000, your capital gain could be $306,000, which would be well below the $500,000 exemption you could take if you sell the house within two years of the death. If you sell after the two-year mark, the gain above your single $250,000 exemption would be taxable.

The rate you would pay depends on your taxable income and what state you live in.

For example, a single person with taxable income of between $47,026 and $518,900 in 2023 would pay a 15% federal capital gains rate, plus whatever rate their state imposes. (California doesn’t have a separate capital gains tax system, so any taxable gain would be subject to the state’s regular income tax.)

These numbers are just to give you an idea of how capital gains taxes work. Your mileage may vary. If you renovated the kitchen or did any other significant improvements on the home, those costs could be added to your tax basis to reduce any potentially taxable gain. Also, selling costs will reduce what you actually pocket from the sale and your potentially taxable gain. For more information, see IRS Publication 523, Selling Your Home.

Taxes shouldn’t be your only consideration, of course. Relocating can be disruptive and expensive. Getting the house sold before the two-year mark makes sense if you were planning to move anyway, but don’t let fear of taxes scare you out of a home that otherwise suits you.