Ask Liz Weston

Get smart with your money

Q&A

Q&A: Claiming divorced spousal benefits

By

Dear Liz: My son is 59, and his ex-wife died approximately 12 years ago. She was a nurse and paid more into Social Security than he has. Is he entitled to her Social Security benefits as indicated in your article? How does he file and get more information? Must he wait until he is 62?

Answer: If their marriage lasted at least 10 years, he could begin divorced survivor benefits as early as age 60, or age 50 if he is disabled. (He can remarry at age 60 or later and still receive survivor benefits.)

Benefits are reduced if he applies before his full retirement age, which will be 67. Also, starting before full retirement age means the benefits are subject to the earnings test that withholds $1 in benefits for every $2 earned over a certain amount, which in 2023 will be $21,240.

If he earns too much to make starting early worthwhile, he could apply for divorced survivor benefits at age 67, when the earnings test goes away. His own retirement benefit could continue to grow until age 70, and he could switch at that point if his own benefit is larger.

But he’d be smart to consult a financial planner or use a Social Security strategy site, such as Maximize My Social Security or Social Security Solutions, to craft the best approach.

He can call Social Security’s toll free number at (800) 772-1213 for more information.

Q&A: Mom gave them her house before she died. Why that’s bad

By

Dear Liz: My mother gave her house to my brother and me in 2011 by quitclaim deed. My brother lived in the house with her until she passed in 2018, and he continues to live there. He wants to buy my half of the home, and I am wondering what my taxes may be because I am not purchasing another home with my proceeds. Since this was a gift, do these things apply? The home is valued at $500,000 so my half is worth $250,000.

Answer: Your tax bill will be based on what your mother paid for the home originally, plus any qualifying home improvements she made over the years. That is what’s known as the home’s tax basis, and it will be subtracted from the sale proceeds to determine your potentially taxable capital gain.

Let’s say your mother originally paid $100,000 for the house and remodeled the kitchen for $50,000, for a total basis of $150,000. When she gave you and your brother the house, you each received half of that basis, or $75,000. If your brother pays you $250,000, you would subtract $75,000 from those proceeds for a capital gain of $175,000.

The federal tax rate on capital gains ranges from 0% to 20% based on income, but most people pay 15%. If your state and city assess capital gains or other taxes, you’d owe those as well.

You don’t qualify for the home sale exclusion that allows many home sellers to avoid taxation on home sale profits up to $250,000. To get the exclusion, you must own and live in the home at least two of the previous five years.

It doesn’t matter that you don’t plan to buy another home; the tax law that allowed people to roll home sale profits into another home went away decades ago.

Your tax bill might have been substantially reduced if your mother had bequeathed the home to you and your brother, rather than giving it before her death. If she’d left it to you in a will or living trust, at her death the tax basis would have been “stepped up” to the home’s current fair market value.

If the home was worth $450,000 at her death, for example, you and your brother would have a tax basis of $225,000 each. If he paid you $250,000, your taxable gain would have been just $25,000.

You might be able to spread out the tax bill if your brother is willing to pay you over time rather than buy you out all at once, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That would be one of several issues you should discuss with a tax pro before proceeding. A big capital gain can affect other aspects of your taxes and may require you to make estimated quarterly payments to avoid penalties for underpayment. A tax pro can advise you about what to expect and how to pay what you owe.

Q&A: Multiple payments may help credit scores

By

Dear Liz: You recently wrote that using more than a small percentage of your credit cards’ available limit can hurt your credit scores, even if you pay your balances in full. I pay my credit cards in full each month and I also make several payments (via my bank’s online payment service) during the month. Do these multiple payments hurt or help my credit score?

Answer: They probably help. 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 on your statement closing date. Making multiple payments before the statement closing date should lower that balance. Just remember to make a payment between the statement closing date and before the due date to avoid late fees.

Q&A: When an online shopping money-saving scheme is tax evasion

By

Dear Liz: My father lives in Washington state. He often purchases higher-priced items online, has them shipped to relatives living in Oregon and picks them up later. That way he doesn’t have to pay sales tax. Is this a form of tax evasion? Does he need to pay a “use tax”? Could he (and the Oregon relatives) possibly be in any kind of legal danger? He claims it’s perfectly fine to do this because Washingtonians “do it all the time” by driving down to Oregon to do their shopping.

Answer: Yes, people do this “all the time” but it’s still a form of tax evasion.

Washington and other states with sales taxes typically have laws requiring people to pay a use tax when they bring home goods purchased in another state that either doesn’t charge sales tax or charges less. People may also owe use taxes when they purchase something from an individual who doesn’t collect sales tax. An example might be furniture purchased from a Craigslist ad.

But these laws can be difficult to enforce. While businesses can be subject to sales and use tax audits, individual taxpayers are unlikely to face the same scrutiny.

Q&A: Divorce complicates retirement benefits

By

Dear Liz: I was told by Social Security that because I remarried at 60, I could still collect half of my ex’s benefits once he died. He has just died, and half of his benefit is greater than my own retirement benefit. My current husband has not started benefits. If I collect half of my ex’s benefit but want to later switch to collecting benefits on my current husband’s record (once he starts to collect) or to survivor benefits should he die before I do, can I do that?

Answer: The short answer is yes, although you’ve confused divorced spousal benefits with divorced survivor benefits.

While your ex was alive, you might have been eligible for a divorced spousal benefit if you had remained unmarried. That benefit would have been up to 50% of your ex’s primary insurance amount (the amount he would receive at his full retirement age).

The rules changed once your ex died. As a divorced survivor who remarried after age 60, you are entitled to up to 100% of what your ex was receiving. The survivor benefit will be reduced if you haven’t yet reached your full retirement age (which is currently between age 66 and 67).

Survivor benefits also offer more flexibility to switch later than other types of benefits. If you choose to begin receiving a surviving divorced spouse’s benefit now, you can switch to your own benefit at any point through age 70, if your benefit is higher, says William Meyer, founder of the Social Security Solutions claiming strategies site. You also can switch to receiving spousal benefits from your current spouse’s record once he starts collecting, if that benefit is greater than what you’re receiving from your former spouse’s record.

Figuring out the right way to claim can be tricky, so consider consulting an advisor or using claiming strategy software to determine what’s best in your situation.

Q&A: Here are credit score quirks to know about before you apply for a loan

By

Dear Liz: I have been reading your Money Talk column for years and it seems that about a third of the questions pertain to credit scores. Why are people fixated on their FICO result?

I was unaware of my score until recently, when my bank accounts started showing my score when I am online. I am 65 and have had credit cards since college over 45 years ago. I pay my bill in full each month. I have never been late with a mortgage payment or any other bill. When I have gone to buy real property or an automobile, I have never been turned down.

In other words, I have used credit successfully for decades by behaving responsibly without knowing my score. Are people interested in their FICO mostly to be used as a status symbol or way to brag?

Answer: Some are, but most understand that credit scores are hugely influential in our financial lives. Scores help determine whether we can get credit and the interest rates we pay, but also whether we’re able to rent an apartment, get affordable auto and homeowners insurance (in most states) and qualify for a cellphone carrier’s best deals.

Credit scores do reward responsible behavior, but have some quirks that are worth knowing about. Using more than a small percentage of your credit cards’ available limit, for example, can hurt your scores, even if you pay your balances in full. And closing credit accounts might seem like the responsible way to deal with a card you no longer use, but that can hurt your scores as well.

Also, you should know that you don’t have a single credit score; you have many, and they will differ based on which credit bureau and credit scoring formula was used.

FICO is the leading credit scoring formula, but there are many generations of the FICO score currently in use, from the older versions that have long been used in mortgage lending to the most commonly used version (FICO 8), to the most recent version (FICO 10). Auto lenders and credit card issuers use versions of the FICO that are adapted for their industries.

FICO’s main rival is VantageScore, which also has different generations in use.

On top of that, credit scores change constantly, based on the ever-changing information in your credit reports.

Your bank is making it easy for you to monitor one of your scores, which can give you a general idea of how lenders might view you as a borrower. Just don’t be surprised if the score your bank shows you doesn’t match what a lender uses the next time you buy a car or refinance your mortgage.