Ask Liz Weston

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Q&A

Q&A: A house in one state, a spouse in another. What about taxes?

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Dear Liz: My husband recently took a dream job in a different state. We are renting a place there, and it is his primary residence. We own our home in the “original” state, where I live and work. We intend to keep our home for another three to four years. How will this impact our taxes? We are married, filing jointly and our income is straightforward W-2. Will we need to file as residents in both states? I know most states will credit taxes already paid on income earned in another state, but which is our “primary” residence? I may base permanently in the new state because I can work remotely. I am confused about filing jointly when each spouse lives in a different state.

Answer: Please talk to an accountant about the best way to handle your returns. In some cases, spouses who live in different states can submit their federal tax returns as “married filing jointly” while filing their respective state returns as “married filing separately.” Other times, there may be tax advantages to filing jointly in one state, or the nonresident spouse will be required to file.

If you are required to submit a return to the nonresident state, your accountant can tell you whether you qualify for credits. Alternatively, there may be a reciprocal tax agreement between states that allows nonresidents to avoid taxes if they follow certain rules.

But you’ll want to be particularly careful if you currently live in a high-tax state with a reputation for aggressive residency audits such as California, New York and Illinois.

A state auditor may decide that your husband’s move is temporary and his income is thus subject to your state’s taxes. It would be up to him to prove otherwise, and that may not be as easy as changing his voter registration. A tax pro can help guide him, and later you, on the best way to establish residency.

Q&A: For Social Security benefits, playing a waiting game really pays off

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Dear Liz: My wife and I are both 63. She recently applied for Social Security. I will apply for mine when I am 70, at which time she will apply for a spousal payment, which will be half of mine. Last night as I was in bed I thought, “What if I die before 70?” Can she still wait until what would be my 70th year to collect my maximum benefit?

Answer: Your wife will get a larger survivor benefit because you delayed. If you die after she reaches 66 years and two months, however, she won’t get a larger check by waiting.

Social Security rules can be mind-numbingly complicated, and they’re different for different types of benefits, so this will take some explaining.

The three types of benefits that matter for this discussion are retirement benefits, which are based on your own earnings record; spousal benefits, which are based on a spouse’s earnings record while both partners are alive; and survivor benefits, which are based on a spouse’s earnings record after his or her death.

These benefits may be reduced if you start them before your “full retirement age,” which is different for survivor benefits than for retirement and spousal benefits, said William Meyer, founder of Social Security Solutions, a claiming-strategies site.

If your wife was born in 1957, then her full retirement age for retirement or spousal benefits is 66 years and 6 months. For survivor benefits, it’s 66 years and 2 months.

The full retirement age for retirement and spousal benefits is 66 for those born between 1943 and 1954. People born between 1955 and 1959 have full retirement ages ranging from 66 and 2 months to 66 and 10 months. Those born in 1960 and later have a full retirement age for retirement benefits of 67.

With survivor benefits, the schedule is pushed back two years. Survivors born between 1945 and 1956 have a full retirement age of 66. Survivors born from 1957 to 1961 have full retirement ages ranging from 66 and 2 months to 66 and 10 months. Survivors born in 1962 and later have full retirement ages of 67.

The reason you’re waiting to start retirement benefits until 70 is probably because you know your benefit will increase 8% for each year you delay between your own full retirement age and 70, when retirement benefits max out. The 8% per year increases are called delayed retirement credits. As you likely know, delaying is particularly important for the higher earner in a couple because that benefit determines what the survivor gets.

If you start retirement benefits before your full retirement age, your wife’s survivor benefit will be based on what you would have gotten at your full retirement age. If you delay your retirement benefits beyond your full retirement age, your wife’s survivor benefit will reflect any delayed retirement credits you have earned.

Your retirement benefit doesn’t earn delayed retirement credits after you’re dead, however. And your wife won’t earn delayed retirement credits on her survivor benefit. Once she reaches her full retirement age for survivor benefits, there’s no point in further delaying her switch from her retirement benefit to her survivor benefit.

Delayed retirement credits also don’t apply to spousal benefits. Her maximum spousal benefit would be half of your benefit amount as of your full retirement age. Because she started her own benefit early, however, her spousal benefit would be reduced.

The penalties for starting early are significant enough that it’s usually best to wait, and your wife may still have a “do over” option. If it’s been less than 12 months since she applied for benefits, she can repay any benefits she received and withdraw her application. That will undo her previous claiming decision and allow her benefit to keep growing. The claiming calculators and experts at Social Security Solutions and Maximize My Social Security can help you determine if that might be the best course.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.

Q&A: When your spouse dies, there are immediate financial steps to take. Here’s a checklist

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Dear Liz: What financial steps need to be taken right after your spouse dies?

Answer: Your attorney or accountant may have detailed checklists to guide you through the many tasks involved. In general, though, you’ll be settling the estate, notifying appropriate parties, signing up for any benefits and shutting down potential identity theft.

To start:

Get 10 to 12 certified copies of the death certificate (ask the funeral home for these).
Find any estate planning documents, such as a will or a living trust, to start the process of settling the estate. That may require opening a probate case at the county courthouse.
If you don’t already have an estate planning or probate attorney, consider hiring one for help.
Contact your spouse’s employer about any life insurance or retirement benefits, such as a 401(k) or pension.
File a claim if your spouse had life insurance.
Call Social Security at (800) 772-1213 to ask about survivor benefits. If you and your spouse were already receiving Social Security benefits, one payment ends at your spouse’s death, and you’ll get the larger of the two checks from now on.
If your spouse served in the military, contact the Veterans Administration to inquire about additional benefits.
Cancel your spouse’s health insurance.
Contact banks, brokerages, lenders and credit card companies to inform them of the death and close accounts or transfer them to your name alone.
Notify the three credit bureaus: Experian, Equifax and TransUnion.
Delete or memorialize social media accounts.
There are a few things to avoid as well. A big one: Don’t give away money or assets prematurely. These may be needed to settle the estate or you may want more time to make good decisions. If you’re getting pressure from family members or anyone else, refer them to your attorney.

Be careful about making big changes, such as moving or selling a home, in the next year or so because grief can impair your decision-making abilities.

Don’t try to do all this yourself. Let the attorney assist with estate-settling tasks and hire a tax pro to file your spouse’s final tax return. Also, consider talking to a fee-only financial planner. You may have options for payouts from retirement accounts, life insurance and Social Security, for example, and your choices could dramatically affect your future standard of living.

Q&A: How to freeze your credit

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Dear Liz: A few months ago you mentioned creating credit freezes that can be simply turned on and off at the customer’s convenience at no cost. However, you didn’t leave a website or an avenue to pursue a credit freeze with all three credit bureaus. Please provide more information on the steps in this process to achieve a credit freeze. It sounds like something I would like to try.

Answer: A credit freeze restricts access to your credit report and can be a good way to deter new account fraud. If someone tries to open a new account in your name, the lender won’t be able to pull your credit and thus is unlikely to approve the application.

Credit freezes do not affect your ability to use your credit cards or other credit accounts. You can temporarily thaw or lift the freeze any time you want to apply for credit. Placing, lifting and removing credit freezes is now free.

Experian’s credit freeze center can be found at https://www.experian.com/freeze/center.html.

Equifax’s is at https://www.equifax.com/personal/credit-report-services/credit-freeze/.

You’ll find TransUnion’s version at https://www.transunion.com/credit-freeze.

Just be sure to follow the instructions carefully and keep track of any personal identification numbers or passwords.

Q&A: It’s not too late for Mom’s stocks

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Dear Liz: My mother is 68. She has had a sizable amount of money in an old work 401(k) for several years now. Unfortunately, it has been stuck in the most conservative low-growth fund for more than 10 years during a time of great stock market growth. If she changed it to a more aggressive fund now, are there tax implications to consider, and would this be an unwise change at her age?

Answer: Ouch. The stock market as measured by the Standard & Poor’s 500 benchmark rose more than 250% in the last decade. Instead of more than tripling her money, her low-growth fund may have barely kept up with inflation.

She can’t get back those lost returns, but she could allocate her money more aggressively without having to worry about triggering taxes. Money in 401(k)s and most other retirement accounts is taxed only when it’s withdrawn.

Q&A: The perils of procrastination can be huge where finances are concerned

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Dear Liz: My husband was killed in 2016 and was self-employed for the last three years of his life. I hadn’t gotten around to filing his taxes until earlier this year in June. At first the Social Security rep told me we were approved for survivor benefits but within the hour changed her decision. She said that since it’s been more than three years, the IRS won’t report his credits to Social Security and that is what ultimately disqualifies my children and me. I’m so confused and feel like my stomach just dropped to the floor.

Answer: Understandably. This appears to be one of those awful cases where putting something off has profound, irreversible consequences.

Survivor benefits are monthly checks paid to a worker’s minor children, typically until they turn 18. Surviving spouses normally can start benefits at age 60, but they can start at any age if they’re caring for the worker’s minor children. In that case, the caretaking spouse qualifies for benefits until the youngest child turns 16.

Limits vary, but what a family can receive is generally equal to between 150% and 180% of the worker’s basic benefit. The average survivor benefit for children is more than $800 a month, and the average for a caretaking mother or father is over $900 a month.

No worker needs more than 40 credits, which requires 10 years of work, to qualify a family for survivor benefits. The number of credits varies by age, so younger people need fewer credits.

Even if your husband didn’t have the required number of credits for his age, survivor benefits could have been paid if he had worked for at least 18 months in the previous three years.

But there is a deadline for self-employed taxpayers to have their incomes counted toward Social Security credits, which they do by filing their federal tax returns. The deadline is three years, three months and 15 days after the end of the calendar year in which the income is earned, said economist and Social Security expert Laurence Kotlikoff of MaximizeMySocialSecurity.com.

The deadline for reporting your husband’s 2016 income passed in March, while the deadlines for his 2014 and 2015 income passed in March 2018 and March 2019, respectively.

Appeal the decision because it’s possible that your husband earned enough other credits to qualify your family for benefits even without his last few years of work. But steel yourself for the likelihood that you’ve lost thousands and perhaps tens of thousands of dollars of potential benefits.