Q&A

Q&A: When to report an unresponsive accountant

July 6, 2026 By Liz Weston Leave a Comment

Dear Liz: In a previous column, you answered a question from someone dealing with an unexpected bank levy by a state tax agency. The accountant who prepared the tax returns wasn’t responding to emails or calls. If an accountant ignores a client, then a complaint should be filed with the state’s board of accounting. If the accountant is licensed, the state board will likely follow up.

Answer: That’s a good suggestion. As mentioned in the previous column, many tax pros struggle to keep up with client communications during the busy tax season and may back-burner questions they don’t see as urgent. But if the ignored client still hasn’t heard back from their tax pro at this point, making a complaint to the board of accounting could be a reasonable response.

Q&A: How the kiddie tax can derail your inheritance tax strategy

July 6, 2026 By Liz Weston Leave a Comment

Dear Liz: I’m about 50 and have two early elementary school children. I make really good money and with the combination of all taxes the last dollar I make is taxed at about 50%.

I stand to inherit about $5 million from my parents. The problem is that about $3 million of that is in retirement funds. If those funds go to me, over the next 10 years I will have to take them as income and will lose half to taxes. I’m considering asking my mother to leave $1 million to each grandchild so that they can take it as income at a much lower tax rate, possibly saving $300,000 per kid. The problem is I am not sure I want my kids to have access to a million dollars the second they turn 18.

Is there any way I can avoid either giving them a ton of money when my parents die or me paying a ton in income taxes? Both kids already have 529s that will be filled in three to five years, so that is already out.

Answer: Not only is giving a million bucks to a teenager a bad idea, but the tax savings you’re hoping for may not materialize thanks to the kiddie tax.

Basically, unearned income above $2,700 a year is taxed at the parents’ rate, not the child’s, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Unearned income includes interest, dividends, capital gains and taxable distributions from retirement accounts.

The kiddie tax can apply to offspring up to the age of 23 depending on their circumstances.

Minors who inherit a retirement account from a parent are required to take small distributions based on their own life expectancies until they turn 21. After that, they typically have to drain the accounts within 10 years. The 10-year clock starts immediately, however, when minors inherit a retirement account from anyone who is not a parent.

Another issue is that your parents’ retirement accounts don’t get the valuable step-up in tax basis at death that their taxable accounts would get, says Jennifer Sawday, an estate planning attorney in Long Beach. The step-up insures that no capital gains taxes are owed on the appreciation that occurs during the original owners’ lifetime. If your parents want to maximize the inheritance they leave, it would make sense to preserve those taxable assets as much as possible and spend down the retirement accounts, Sawday says. Another option is converting some of their retirement money to Roth IRAs, especially if their tax bracket is lower than yours and they’re willing to pay the taxes on the conversions. You’d still have to empty the Roths within 10 years of their deaths, but the withdrawals would be tax free.

Properly drafted trusts are another option to consider if your parents want to skip you and get money directly to their grandkids, Sawday says. Trusts allow distributions at specified ages (such as 25, 30 or even later). But trusts have complex rules and can have high tax rates. Your parents need to consult an experienced estate planning attorney as well as a tax pro before taking any of these actions.

Q&A: Is it better to take Social Security earlier and invest it?

June 29, 2026 By Liz Weston Leave a Comment

Dear Liz: I’m 64 and retired. My wife is 54 and still working. Half the people I talk to say take Social Security and just invest it, as you’ll make more than waiting until you get older. Others say that the tax hit isn’t worth it because my wife still works. I’ve talked to a couple financial people, and still get mixed answers. What is your opinion?

Answer: Social Security can be surprisingly complicated and many people don’t understand the nuances that should guide claiming decisions. In other words, half the people you’re talking to likely don’t know what they’re talking about.

Let’s start with a few basics, starting with the “tax hit.” If you have income other than Social Security, up to 85% of your benefit may be subject to tax. That doesn’t mean 85% of your benefit is taxed away. It means up to 85% is included in your taxable income, and subject to your tax bracket. In 2026, federal tax brackets range from 10% to 37%.

The earnings test can have a dramatic impact if you start Social Security before your full retirement age. The earnings test reduces your benefit by $1 for every $2 you earn over a certain limit ($24,480 in 2026). If you’re retired and not earning money, though, the earnings test doesn’t apply regardless of what your spouse might earn.

What starting early does do is permanently reduce your benefit. If you’re the higher earner, it also reduces the survivor benefit that one of you will get when the other dies. At that point, the smaller of a couple’s two checks goes away and the survivor has to make do with a single benefit.

If you delay, on the other hand, your benefit gets larger. After full retirement age, delayed retirement credits add 8% each year until your benefit maxes out at age 70. This guaranteed return is about twice what you’d currently get from any other low-risk investment, such as one-year Treasuries. You might earn more in the stock market, but you also could suffer losses.

Copious research shows that most people are better off delaying. You can start by reading “How Much Lifetime Social Security Benefits Are Americans Leaving On the Table?” by David Altig, Laurence J. Kotlikoff & Victor Yifan Ye for the National Bureau of Economic Research at https://www.nber.org/papers/w30675.

Q&A: Living in your rental? The tax benefits aren’t so clear cut

June 29, 2026 By Liz Weston Leave a Comment

Dear Liz: My husband and I have owned a rental property for 20 years. We’ve never lived in it. Now, we want to get out of the landlord business. We know we’ll have to recapture depreciation, but we always thought we could live in the property for a couple of years to save some on the capital gains taxes. Our accountant has told us that this is no longer true and we cannot save much by living in our rental. Federal and state taxes will take most of our profit. Is this true?

Answer: Congress dramatically shrank the loophole that once allowed people to reduce or eliminate capital gains on rental and vacation properties.

When selling a primary residence, homeowners can shelter up to $250,000 of home sale proceeds, or $500,000 for married couples, from capital gains tax if they’ve owned and lived in the home at least two of the previous five years. Those rules were established in the Taxpayer Relief Act of 1997.

Before the Housing Assistance Tax Act of 2008, landlords could move into their rentals for a couple of years, sell the properties and then invoke the home sale exclusion as if the property had been their primary residence all along.

Today most if not all of the gain on your property is considered “non-qualified use.” Only the appreciation you experienced before 2009, and after you move in, would qualify for the exemption.

The benefits of moving into a rental for a couple of years can vary greatly, depending on the specifics of your situation. Your tax pro can walk you through the math and advise you about some of your other tax-saving options, such as a 1031 exchange for another rental property or holding the real estate until death, when your heirs would benefit from a valuable step-up in basis. If you’re done with being a landlord, though, the cleanest solution might be to simply sell and pay the tax.

Q&A: Don’t leave your finances on automatic

June 22, 2026 By Liz Weston Leave a Comment

Dear Liz: During the 2024 open enrollment period for Medicare, your column mentioned that Part D enrollees’ out-of-pocket payments in 2025 would be limited to $2,000, but only for covered prescriptions. That spurred me to be sure my prescription drug plan covered the one brand name drug I take. It didn’t and I found the only plan in my area that does just in time before the open enrollment period ended.

More recently, I learned from your column that I can pay Medicare premiums from my health savings account. Like many HSA participants, I have been letting my contributions accumulate for later-in-life medical expenses. But now that my husband and I are investigating moving into a continuing care retirement community, it helps to know that we have the option of paying Medicare premiums this way and have more money left over each month after we pay the monthly fee.

Answer: Thanks for sharing those experiences!

It can be easy to leave our finances on automatic, but there are at least two areas where it’s important to shop every year: health insurance and auto insurance. Health insurers constantly change their formularies, or list of covered drugs, as well as what tier a drug might be assigned to. A prescription you get cheaply this year could be more expensive next year or not covered at all. Auto insurers, meanwhile, tend to raise rates on loyal customers because they know many people will stay put out of inertia.

It’s also important to have a plan to eventually spend HSA funds before you die. A spouse can inherit an HSA and retain its tax advantages, but the account becomes taxable if anyone else inherits it.

Q&A: Will Taking Social Security at 62 Affect Your Spousal or Survivor Benefit?

June 22, 2026 By Liz Weston Leave a Comment

Dear Liz: I am a teacher, retiring this June. I have my teacher’s pension and will receive a small Social Security benefit as well. I am married and my husband’s Social Security benefits are far greater than mine. Should I start drawing on my Social Security benefits next year when I turn 62, assuming when my husband starts drawing on his when he turns 70 in seven years I will then get a higher benefit? Is there any downside to taking my Social Security benefits for seven years while I wait for him to start taking his?

Answer: Your early start would reduce the future spousal benefit you’ll be eligible for when your husband applies at age 70, says Mary Beth Franklin, a former Investment News columnist and author of “Maximizing Social Security Benefits.” The early start would not, however, reduce your future survivor benefit should your husband die first.

Spousal and survivor benefits are both based on your husband’s work record, but they’re calculated using different rules.

Spousal benefits can be up to 50% of your husband’s benefit at his full retirement age. If you’re already receiving your own benefit, the spousal “top off” adds an additional amount to your check once your husband applies and you’re eligible for a spousal benefit. The top off amount is calculated by subtracting your benefit at full retirement age (FRA) from 50% of your husband’s benefit at full retirement age.

A simplified example may help show the effect of an early start. Let’s suppose your own retirement benefit would be $1,000 a month at age 67 and your husband’s benefit at his full retirement age would be $3,000. Social Security subtracts your FRA benefit ($1,000) from half of his ($1,500) to determine the “top off” amount ($500). If you apply for your own unreduced benefit at age 67, the top off amount would be added once your husband applies for his benefit and triggers a spousal benefit for you.

If you start early, on the other hand, your own benefit would be permanently reduced. Starting at 62 means you’d receive $700 a month. Once your husband applies and the spousal benefit is triggered, you’d get the additional $500, but now you’d be receiving $1,200 a month instead of $1,500 you would get if you’d waited.

That doesn’t mean you should delay, Franklin notes. The additional cash could make it easier for your husband to put off filing. And, as noted above, an early start on your own benefit wouldn’t affect any future survivor benefit.

While spousal benefits are based on your husband’s benefit at full retirement age, survivor benefits are based on what he actually receives (or what he had earned, if he dies before starting benefits). If your husband waits to file until after his full retirement age, his benefit earns 8% annual delayed retirement credits until his benefit maxes out at age 70. As a survivor, you would be eligible to receive up to 100% of that benefit.