Ask Liz Weston

Get smart with your money

Q&A

Q&A: Why you need to pay attention to your credit utilization

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Dear Liz: Our credit scores are in the low 800s. We always pay all credit card balances off before the next billing period. We are presently charging a cruise for us and our daughter and her husband. We’re worried about using too much of our available credit and thus reducing our credit scores. We’re using one credit card and paying half the balance this billing period and the rest on the next billing period. I’ve never been able to calculate the “credit utilization,” but I’m sure we will exceed it for the next two months even though we will pay the amount charged in full. With this large charge, can you suggest anything else we can do?

Answer: Your credit utilization is simply the amount of available credit that you’re using. If your card has a $10,000 limit and you make $5,000 in charges, your credit utilization ratio is 50%. (If you’re not sure what your credit limit is, you can check your account online or call the number on the back of your card and ask.)

In general, the less of your available credit you use the better.

The balance that matters for credit scoring purposes is the balance that’s reported to the credit bureaus — and that’s typically what you owe as of your statement closing date.

Making a payment right before the statement closes can help reduce your credit utilization. Some people make payments every week, or even more often, to keep their utilization in the single digits.

If you don’t plan to apply for a new credit card or loan, however, you probably don’t need to worry about a temporary ding to your credit scores because they’re already so high. Your scores will probably still be quite good and will rebound once you pay off the balance.

Q&A: Estate taxes on house bequests

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Dear Liz: You recently wrote about the capital gains tax implications when someone sells a house they’ve been given, versus one they’ve inherited. Would you elaborate on the estate ramifications for the donor if that person has a large estate? Would their estate pay tax on the gift?

Answer: Few people have to worry about either gift or estate taxes, for reasons that will become obvious in a moment. But large gifts can potentially reduce the amount a wealthy donor can pass on to heirs tax free after death.

That’s because the gift and estate tax systems are combined. Gifts over the annual exclusion amount — which in 2023 is $17,000 per recipient — reduce the donor’s lifetime gift and estate tax exemption, which in 2023 is $12,920,000.

Let’s say a donor gives a $1-million house to a friend. The amount in excess of the $17,000 annual limit, or $983,000, is deducted from the donor’s lifetime limit. If the donor died in 2023, the amount of their estate in excess of $11,937,00 would be subject to estate taxes. (Donors only owe gift taxes after they give away so much that they exhaust that lifetime limit.)

Receiving assets as a gift also means the recipient may face more taxes than if they had inherited the property.

The previous column mentioned that when someone inherits a home, the house’s tax basis is “stepped up” to the current market value. That means the appreciation that occurred during the previous owner’s lifetime isn’t subject to tax.

If someone is given a house by a still-living donor, different rules apply. There’s no step up in value. The recipient gets the donor’s tax basis, which is typically what the donor paid for the home, plus any qualifying improvements.

When the house is sold, that basis is deducted from the proceeds to determine potentially taxable profit. The recipient could face capital gains taxes on the appreciation that happened since the original owner bought the house.

On the other hand, giving away assets during life is one way to control the size of a potentially taxable estate, says Los Angeles estate planning attorney Burton Mitchell. Once the house is given away, for example, its future appreciation won’t increase the donor’s estate.

Anyone with an estate large enough to worry about these taxes should, of course, consult an estate planning attorney about the best strategies for their situation.

Q&A: Divorce survivors benefits and remarriage

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Dear Liz: I am a divorced man receiving Social Security survivors benefits based on the earnings record of my ex, who has died. I am 63. Can I get married and continue to receive benefits?

Answer: Yes. People receiving survivors benefits can remarry at age 60 or later without losing their benefits.

Survivors benefits are based on the earnings record of a spouse or ex-spouse who has died. That’s different from spousal benefits and divorced spousal benefits, which are based on the earnings record of someone who is still alive. People receiving divorced spousal benefits can’t remarry without losing those benefits.

Q&A: Old uncashed insurance policies

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Dear Liz: What advice can you provide to people when they stumble on old life insurance policies that may never have been cashed in?

Answer: My siblings and I have personal experience with this after coming across two policies in our late father’s papers. We learned one policy had indeed been cashed in, but the second — purchased in the 1930s, with a face value of $5,000 — was still in effect.

You typically can use a search engine to determine if the insurer is still in business or if it has changed its name or merged with another company. (Not surprisingly, the insurer that issued the 1930s policy had been involved in several mergers in the intervening decades, but it took just seconds for us to find the current incarnation.) If you’re having trouble tracking down the company, contact the insurance regulator in the state where the insurer was originally located.

Once you have the current insurer name and contact information, you can call and ask if the policy is still in force. If the policy has value, the insurer can instruct you how to make a claim.

Q&A: How a Roth IRA rollover can cause unforeseen problems

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Dear Liz: I have been contributing to my young adult children’s Roth IRA accounts for the past few years to get them started on retirement savings. My oldest just left her first job to go back to graduate school. Since her income will be low this year, I advised her to roll her defined contribution plan with her former employer into her Roth IRA to consolidate her retirement savings. Will this conversion affect the maximum amount that I can contribute to her Roth beyond the usual rules on maximum contributions?

Answer: A conversion could do more than affect her ability to contribute to a Roth. It also could inflate her tax bill, reduce her eligibility for financial aid and affect any health insurance subsidies she’s receiving. A conversion could still be a smart move because Roth IRAs offer tax-free withdrawals in retirement, but she should understand all the implications before following your advice.

The amount your daughter converts from her 401(k) or other defined contribution plan would be considered a taxable distribution and treated as income. That could affect her eligibility for tax breaks, such as education tax credits and Affordable Care Act subsidies, as well as her ability to contribute to a Roth. (In 2023, the ability for an individual to contribute to a Roth phases out between modified adjusted gross incomes of $138,000 to $153,000.)

Also, to be eligible to make a contribution, she must have earned income at least equal to the amount she (or you) plan to contribute. Retirement plan distributions aren’t considered earned income so she would need wages, salary, tips, bonuses, commissions or self-employment income to qualify.

The conversion could affect her financial aid in future years. Federal aid calculations are based on tax returns from two years prior, so her 2023 tax return could affect her aid if she’s still in school during the 2025-26 academic year.

Also, she needs to figure out how she would pay the tax bill on the conversion. Converting a regular retirement account to a Roth can make sense if someone expects to be in a higher tax bracket later, but the math starts to fall apart if the retirement account itself has to be raided to pay the tax.

Your daughter should consult a tax pro who can review her situation and provide personalized advice.

Q&A: How to give away your house

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Dear Liz: I want to make sure a close friend of mine gets my house after I pass away. Which is better tax-wise for this friend, adding her to my deed or leaving the house to her in my will? My fear of leaving it to her in my will is that a family member may try to contest the will. While I will leave my family member money in my will, I want to make sure that the house goes to my friend.

Answer: If you add your friend to the deed, you’re making a gift of the home to her during your lifetime. That means if she ever sells the house, she could owe taxes on the appreciation that happened since you purchased the home. If you bequeath the home to her, on the other hand, the gains that occur during your lifetime won’t be taxed. You can leave her the home via a will, a living trust or, in many states, a transfer-on-death deed. (You can read more about this option in the next section.)

If you’re concerned about someone fighting your decision, please get appropriate legal advice. Estate planning can get complicated, and most people would benefit from an attorney’s help, but that’s especially true if you have contentious relatives.