Ask Liz Weston

Get smart with your money

Q&A

Q&A: How capital gains boost Medicare premiums

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Dear Liz: We are retired and living mainly on a pension, which covers our month-to-month needs. We own our house outright and are considering downsizing. When we do that, will the capital gain cause our Medicare premiums to go up two years later? If so, will it automatically go down again after one year?

Answer: A big-enough capital gain can trigger Medicare’s income-related adjustment amount, which are surcharges on your Part B and Part D premiums. As you note, there’s a two-year delay between the higher income on your tax returns and higher premiums.

If you’ve had a life-changing event — marriage, divorce, a spouse’s death or loss of income, for example — you can appeal the increase by filing form SSA-44. Otherwise, consider saving some of the home sale profits to cover your higher premiums for that one-year period.

Q&A: Property transfers trigger tax problem

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Dear Liz: I’m considering giving property (a condo) to my child through a quitclaim deed while I am still living. If she continues to live in the condo for two years after gaining possession, doesn’t she get a $250,000 capital gains exemption when she sells the property?

Answer: Yes, if she owns and lives in the home for at least two of the previous five years, she can exclude up to $250,000 of home sale profits from her income. However, her taxable gain would be based on your tax basis in the property: basically what you paid for the home, plus any qualifying improvements. Only if she inherits the home would the tax basis be updated to reflect its fair market value on the date of your death. Although taxes should never be the sole consideration for property transfers, the favorable step-up in basis may be a powerful incentive to hold off. Consider discussing your options with a tax pro.

Q&A: Can 529 college savings plan fund be used to study abroad?

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Dear Liz: Can my daughter use her 529 funds for summer study abroad in Costa Rica? She will be taking two Spanish classes for credit through her university. She has a minor in Spanish. Could she use the 529 for tuition, living expenses and airfare? What if it is all part of a package deal paid to her university?

Answer: Yes, tax-free withdrawals from 529 college savings plans are allowed for study abroad as long as the classes are accepted for credit by the sponsoring university and the sponsoring university qualifies for federal financial aid (the vast majority of U.S. institutions do).

Qualifying expenses can include tuition, books and supplies, plus room and board if she’s enrolled at least half time. Other living expenses and transportation costs, including airfare, aren’t considered qualifying expenses.

Q&A: Update trusts after life changes

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Dear Liz: My wife and I have a trust created in California to distribute our assets to our children after our deaths. In 2017, we moved to Texas and had the trust updated by a Texas attorney to reflect some changes and any differences between Texas and California rules. We moved back to California in 2020. Do we need to update our trust documents again because of the relocation? Do we need to do it any time we move? The terms in the document are generally fine. I just don’t know if the change in residency requires an update to the document.

Answer: Your last move required updates. Why wouldn’t this one?

Any major life change, including a move to another state, should prompt a review of your estate documents. Such a review is a good idea anyway every five years or so, even if you think nothing has changed in your personal circumstances. Laws can change, or you may have different ideas about who your beneficiaries should be, or whom you want to make decisions for you should you become incapacitated.

People often think (or hope) estate planning can be a one-time process. But life and the law aren’t static, so estate plans need to evolve too.

Q&A: Finding a fiduciary advisor

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Dear Liz: I am having difficulty finding a fiduciary, fee-only financial advisor. I have inherited considerable investments from my parents’ trust and now that their house is sold, there will be a payout in excess of $1 million. I believe that my parents’ money manager has done an excellent job of investing and managing their money, so I want to stay with him. My IRA is with another money manager. Without any personal recommendations, I do not know how to go about selecting a financial advisor from a list of advisors on the internet. Interviewing and selecting one based on likability makes me uneasy.

Answer: If anything makes you uneasy, it should be that an advisor isn’t required to look after your best interests.

A fiduciary is someone who is committed to putting their clients’ interests ahead of their own. Most financial professionals are not fiduciaries and are typically held to a lower “suitability” standard. That means they’re allowed to recommend investments that are more expensive or that perform worse than available alternatives, simply because the recommended investments pay the advisor more.

You can start your search for fiduciary, fee-only advisors by getting referrals from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the XY Planning Network or the Garrett Planning Network. LetsMakeAPlan.org has a list of questions to ask.

Q&A: How to reduce the tax penalty from an IRA distribution goof

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Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty. You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account. Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t. Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said. You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.