Q&A

Q&A: A husband is deported, leaving his American wife with questions about tax filings

November 18, 2024 By Liz Weston Leave a Comment

Dear Liz: I am a 56-year-old married U.S. citizen. My husband of six years was deported to the United Kingdom. Appeals to U.S. Citizenship and Immigration Services were denied. He can never return. I remain in the U.S. and will do so at least until I retire, likely at age 72. What status should I claim for federal and state taxes?

Answer: You have two options for filing taxes when you’re married: jointly and separately. Married filing jointly is often the better choice since it offers a larger standard deduction, higher phase-out limits for certain tax breaks and more favorable tax brackets, especially at higher incomes, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Filing jointly would require including both spouses’ worldwide income, however. Filing separately would allow you to report only your own income.

Q&A: Why Every Adult Needs a Financial and Healthcare Power of Attorney

November 18, 2024 By Liz Weston Leave a Comment

Dear Liz: Please tell your audience that if they have any bank accounts, loans, credit cards or utilities, they should legally appoint someone to make decisions for them if they should become ill or injured.

The backstory: My then-40-year-old son went to the hospital with a stomachache. He fortunately told the hospital I could make healthcare decisions for him if he became incapacitated. He then suffered cardiac arrest that resulted in anoxic brain injury. After his injury, I had to deal with such things as ending his apartment lease, canceling utilities and dealing with his car loan and bank account. I had no legal authority because he did not have a will, trust or advance directive. I subsequently learned that being a conservator would enable me to do the necessary things on my son’s behalf. The entire experience was dreadful, and I wish it on no one else.

Answer: The document that could have helped you is called a financial power of attorney and every adult should have one. Financial powers of attorney designate a trusted person to pay bills, file tax returns, close accounts and make other money decisions should the creator become incapacitated. These documents can be created online for about $40, although attorneys also offer them as part of the estate planning package when creating wills or living trusts. If your son had created one, it would have saved the thousands of dollars you probably paid to get a conservatorship.

The second document every adult needs is a healthcare power of attorney, also known as a healthcare proxy, which names someone to make medical decisions in case of incapacity. Again, these are easily created online or can be drafted as part of an estate plan, and they can spare families the agony and expense of going to court to care for a loved one.

Q&A: How to Choose a Trusted Financial Advisor for Long-Term Care Insurance and Asset Protection

November 18, 2024 By Liz Weston Leave a Comment

Dear Liz: My 68-year-old husband has Alzheimer’s disease. I thought we were responsible, having a nice nest egg of over $2 million, a house that is paid off and no debts. However, I am now terrified that it will all be depleted because of long-term care costs. Per your advice, I consulted a fee-only financial planner to get his opinion about long-term-care insurance for myself (my husband no longer qualifies). Turns out he will be the one to get the policy for me, should I decide to go forward. I feel uncomfortable that the financial advisor has an obvious stake with this long-term-care policy and therefore might be biased with his advice.

Answer: Understandably. If the advisor would earn a commission from this policy, as your question implies, then he is not a fee-only financial planner. Fee-only planners receive payment only from their clients, not from commissions or other arrangements that could bias their advice.

Long-term-care insurance is expensive, and you’d be smart to take any policy you were considering buying to a fee-only planner committed to putting your best interests first. Most advisors don’t have to uphold this type of fiduciary standard.

You can get referrals to fee-only planners from the Garrett Planning Network, which represents advisors who charge by the hour; the XY Planning Network and the Alliance of Comprehensive Planners, which represents those who charge retainers; and the National Assn. of Personal Financial Advisors, which includes planners who charge a percentage of the assets they manage.

Also consider talking to an elder law attorney, who can advise you about possible ways to protect your assets from depletion. You can get referrals from the National Academy of Elder Law Attorneys.

Q&A: Rolling over a 401(k) account after starting a new job — at age 73

November 11, 2024 By Liz Weston Leave a Comment

Dear Liz: My wife, who turned 73 this year, worked for a company until Aug. 31. She started a new job with another company the following day. She plans to roll the 401(k) from the previous company into the 401(k) of the new company. Would she need to withdraw her required minimum distribution from the old 401(k), even though the money would be in the 401(k) of her current employer?

Answer: The answer to this question gets a little tricky, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

If she had changed jobs last year, the year before she turned 73, she could have rolled her old 401(k) account into her new employer’s plan and postponed the need to take a required minimum distribution as long as she continued to work for the new employer.

However, since she turned 73 this year and is no longer working for her old employer, she must take an RMD from the old 401(k) plan. RMDs can’t be rolled over from one 401(k) to another, so she’s required to take her RMD from the old account before moving the rest of the money to the new plan, Luscombe says.

RMDs typically must be taken by Dec. 31. A first RMD can be delayed until April 1 of the year following the year someone turns 73. People who delay, though, wind up having to take a second RMD the same year. If your wife wanted to delay her RMD, she would have to take both withdrawals before she could rollover to the new plan.

To avoid that, your wife would need to take her first RMD from the old plan before Dec. 31 and then roll over the rest. She would not be required to make additional withdrawals as long as she keeps working for the new company, Luscombe says.

If she didn’t take the RMD before rolling over her account, she would be considered to have made an “excess contribution” to the new 401(k), which could be subject to penalties, Luscombe says. She could avoid the penalties by withdrawing the RMD amount, along with any earnings or losses associated with the excess contribution, by Oct. 15 of the year after the rollover, Luscombe says. A tax pro can help with those calculations.

Q&A: Homeownership can be a joy. It’s also full of complicated financial decisions

November 4, 2024 By Liz Weston Leave a Comment

Dear Liz: We replaced our original, fire-vulnerable cedar shake roof with 40-year asphalt shingles 17 years ago. I know that home improvements are added to the basis for capital gains calculation when selling the home. But when we get ready to sell the home in a few years, should the actual cost on the project be used? Or, since it was several years ago, should we calculate what a “present value” of the 2007 dollar amount would be? For that matter, should the purchase price of the home be updated to a present value?

Answer: You don’t have to discount the costs of home improvements, but you also don’t get to boost your tax basis to reflect your home’s appreciation.

To review: Your tax basis is the amount you paid for your home, plus the cost of qualifying capital improvements — projects that added to the value of your home, extended its useful life or adapted it to new uses. The tax basis is subtracted from home sale proceeds to determine the potentially taxable capital gain. If you’ve lived and owned a home for at least two of the five years before the sale, you can exempt $250,000 of home sale profits per owner.

Keeping good records of your improvements has become increasingly important over the years, because that exemption amount hasn’t been updated since it was established in 1997. Back then, the median home sale price was less than $150,000 and most home sellers didn’t have to worry about capital gains taxes. Today, the median sales price nationally is over $400,000 and there are hundreds of cities where the typical home is worth $1 million or more, according to real estate site Zillow. That means more sellers are facing capital gains that could be reduced if they have the paperwork to prove they made qualifying improvements.

You can’t include the cost of maintenance or repairs, such as painting, patching or replacing broken hardware. If the repair is part of a bigger project, though, it may qualify as a capital improvement. Replacing a broken window pane is considered a repair, for example, but replacing the whole window is a capital improvement.

You also can’t include in your cost basis any improvement that was subsequently removed or redone. If you’d replaced your roof previously, for example, you couldn’t include that earlier expense when calculating your basis.