Ask Liz Weston

Get smart with your money

Q&A

Q&A: Your earthquake kit should include cash. But how much?

By

Dear Liz: In these uncertain times, I decided I need to have cash on hand. I withdrew $500 in small bills from the bank and put it in a fireproof pouch. Is there a recommended amount of cash one should have available for emergencies?

Answer: The appropriate amount depends on how much you spend and how paranoid you are.

Many financial planners recommend storing a few hundred dollars somewhere safe in your home in case a widespread electrical outage — after an earthquake, for instance — affects ATMs and point-of-sale devices. The idea is that you’ll want enough cash to cover spending for a few days until the power comes back on. Smaller denominations are better than larger ones because you may have trouble finding anyone to give change for $50 or $100 bills.

Emergency preparedness sites tend to recommend storing even larger amounts — $1,000 to $3,000, or whatever you would need — in case access to ATMs and credit cards was affected for a few weeks.

Obviously, storing cash has its perils. The money could be lost, stolen or destroyed in a disaster. You’ll have to weigh those risks against the possibility of needing the cash, and make your own call.

Q&A: Guard your Social Security number

By

Dear Liz: You recently stated Social Security numbers were never intended to be used as a universal identifier. I’ve found that every place asking for my number has other means of identification and will ask for my mother’s maiden name or my place of birth when I tell them I don’t use my Social Security number for identification purposes. This also works for financial institutions that have a legitimate claim for having it.

Answer: To clarify, you probably had to disclose your Social Security number when you applied for accounts at your financial institutions. You also typically need to disclose it when you apply for credit, employment or government benefits.

But you don’t necessarily have to cough it up on demand to verify your identity or to do business with the many, many other companies and organizations that ask you for it without good reason to do so.

Q&A: Bypass the bypass trust

By

Dear Liz: You mentioned in a recent column that people should check estate plans created before 2010 because they might contain bypass trusts that are no longer needed. The classic AB Trust, although not necessary now for the estate tax exemption for most people, still can be useful if one spouse wants to ensure her half of the estate goes as she desires if she is the first to die.

Answer: Possibly, but people should make the decision proactively by having their estate plan reviewed and discussing their options with an experienced attorney, since these trusts have some significant disadvantages.

Bypass, or AB, trusts were a routine part of estate planning even for middle-income couples when the estate tax exemption limit was just $675,000. When the first spouse died, a portion of the couple’s assets went into an irrevocable trust that would avoid estate taxes when the surviving spouse died. Because the trust was irrevocable, the surviving spouse couldn’t change its terms and had limited access to the assets.

Also, assets in the irrevocable trust don’t get a step up in tax basis when the survivor dies. That means the ultimate beneficiaries could wind up paying higher capital gains rates when they sell the assets. When the estate tax exemption limit was low, couples were gambling that the estate tax savings would outweigh the future capital gains cost.

Today, far fewer families have to worry about estate taxes. The exemption limit for 2022 is over $12 million per person and over $24 million per couple. Even after the current limit sunsets in 2025, individuals would be able to exempt over $6 million and couples over $12 million from estate taxes. Estate tax exemptions are also now “portable,” which accomplishes much of what the AB trust was designed to do in ensuring the exemption of the first to die wasn’t “wasted.” Now the amount of the exemption limit that isn’t used by the first spouse to die can be transferred to the survivor’s estate.

Bypass trusts are still routinely used for wealthier people and those who live in states with low estate tax exemption limits, but for many people this estate planning tool has outlived its usefulness.

Q&A: Reporting caregivers’ pay to the IRS

By

Dear Liz: We have a gardener, pool man and caregivers. We pay the gardener, pool man and some of the caregivers directly, while we pay an agency for the other caregivers. Do we have an obligation to report payments to the IRS?

Answer: As an individual taxpayer, you typically don’t have to report payments to businesses. Your gardener and pool cleaner probably either are self-employed or work for a company that takes care of reporting requirements for its workers. Likewise, the caregiving agency should handle reporting requirements for its employees.

The caregivers you pay directly, however, are generally considered your household employees. That means you may be responsible for reporting their wages to the IRS and paying their employment taxes. That responsibility kicks in if a caregiver receives at least $1,000 in any calendar quarter or at least $2,400 per calendar year for 2022 (or $2,300 per calendar year for 2021), says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. IRS Publication 926, Household Employer’s Tax Guide, has details.

Q&A: Taxes on trust’s income

By

Dear Liz: My father passed away last year leaving an estate that will make us comfortable through the foreseeable future. His holdings are mostly securities that are traded either on the NYSE or the Nasdaq. From our investments, we currently have non-earned income of between $75,000 and $100,000 annually without any other income. After estate taxes are paid for my father’s estate, the annual yield (mostly dividends) will be in the $225,000 to $250,000 range. My question for you is should we keep my father’s holdings within his trust and let the trust pay the taxes on the income, or should we take the income and pay the taxes ourselves?

Answer: Tax rates on trusts are notoriously high. If you have a choice, you probably would want to pay the taxes yourself rather than letting the trust do so. The question is whether you have a choice, and that will be determined by the wording of your father’s trust, Los Angeles estate planning attorney Burton Mitchell says.

Speaking of estate planning attorneys, you need to hire one, along with a tax pro and a fee-only financial planner, so you can get solid, personalized advice on questions like this. You already had substantial income, and you just inherited an estate worth multiple millions, so you’re long past the point when doing it yourself makes sense.

Q&A: How to protect your identity beyond a credit freeze

By

Dear Liz: I volunteer for an organization that does background checks every two years. A recent check found my name and Social Security number was used in Texas from 2019 to 2021. I have never been to Texas. What can I do to find out how this happened, and how to protect my Social Security number? I have already frozen my account with the three main credit bureaus.

Answer: You may never know exactly how this happened, but you can make an educated guess.

Most Americans’ Social Security numbers have been exposed in one database breach or another, including the massive Equifax breach in 2017 that exposed the personal information of nearly 150 million people. As a result, Social Security numbers are sold by criminals on the dark web for just a few dollars.

Because Social Security numbers have become all-purpose identifiers — something they were never intended to be, by the way — criminals can use a purloined number to get jobs, steal your tax refunds, receive medical care and apply for credit, among other misuses. They also could pretend to be you if they’re ever arrested, something known as criminal identity theft.

Freezing your credit reports will help prevent someone from opening new credit accounts. Credit freezes typically won’t help with the many other types of identity theft, however.

If you haven’t already done so, create a personal account on Social Security’s site to check your earnings record. If what you see doesn’t match your own records, contact the Social Security Administration by calling (800) 772-1213. If someone used your Social Security number to work or get your text refund, contact the IRS at irs.gov/identity-theft-central or by calling (800) 908-4490.

You also can report the fraud to the Federal Trade Commission at IdentityTheft.gov, a site that will create a recovery plan to help you navigate the next steps.