October 26, 2015 By

Q&A: Lost tax return

Dear Liz: My CPA sent my completed tax return to my home address via first-class mail with no tracking number. The large envelope should have arrived in two days. Over a week has passed and it’s nowhere in sight. I am freaking out as it has all my financial data and is a gateway to fraud of every sort!

The various post office officials have really done nothing to assist in its location. I have credit freezes at all three bureaus and my bank accounts require passwords. What else can I do to try to avert disaster? I have been so distraught it has literally made me ill. And before you say it, yes, this mode of transit will never happen again.

Answer: It shouldn’t have happened in the first place.

With so much identity theft and tax refund fraud these days, it’s astonishing that tax preparers continue to send sensitive, personal information through the U.S. mail with no tracking — and in envelopes helpfully marked with the CPA firm’s name to make the returns easier for thieves to spot.

Your credit freezes should prevent identity thieves from opening new credit accounts in your name using purloined information, but they won’t stop tax refund fraud.

There’s typically not much you can do to protect yourself from this crime. People who have already been the victims of such fraud can request an “identity protection personal information number” or IP PIN from the Internal Revenue Service to prevent future fraudulent filings.

The IRS also allows residents of Florida, Georgia and the District of Columbia to request IP PINs as part of a pilot program, but residents of other states aren’t eligible.

You can try to file as early in the year as possible, but that’s no guarantee a criminal won’t file using your Social Security number first — and then it can take months to get any money you’re owed.

To help protect your bank accounts, see if your bank offers something called “two-factor authentication.” Two-factor authentication requires something you know, such as a password, plus something you have, such as a token that creates unique number codes or code that’s texted to your cellphone.

If your bank doesn’t offer this layer of protection, and only ascertains your identity with the use of security questions, strongly consider moving your accounts to another bank.

Security questions are easy to hack, as evidenced by the massive breach of the IRS’ Get Transcript service, where hackers were able to successfully answer the security questions for hundreds of thousands of taxpayer accounts.

Filed Under: Q&A, Taxes Tagged With: , , ,
October 19, 2015 By

Q&A: Cosigning a loan

Dear Liz: Our son graduated from college last year and was recently hired as a permanent employee for a company he was contracted with for the past year. He wants to buy a new car but has limited credit history.

He has a credit card he has had since starting college. He uses it lightly and pays the balance off every month. If we are asked to cosign a loan, will paying for the car positively impact his credit scores?

Answer: Yes, an auto loan if paid on time should help his credit scores, but you shouldn’t cosign for it.

Many people who cosign loans somehow miss the important point that they are putting their good credit into someone else’s hands — and that one missed payment can trash that good credit, knocking 100 points or more from their scores.

Your son may be the most responsible 20-something on the planet, but he could still make a mistake. The only time that it makes sense to cosign a loan is when you are going to make all the payments on the debt.

He shouldn’t assume that his credit history is insufficient to get a loan. He can get his FICO scores, including the auto scores most often used by lenders, for about $20 apiece at MyFico.com. He should then take those scores to his local credit union to see what interest rate he would be offered on a car loan.

If it turns out his credit isn’t quite up to snuff, the credit union may have some kind of “credit builder” personal loan that can help improve it. (Credit unions are owned by their members and tend to have better rates and terms than many other lenders.)

Since he hasn’t had an auto loan before, discuss with him how easy it is to overspend on a car when you aren’t paying cash.

The costs of insuring, maintaining and repairing a car, plus the depreciation, can be as much as the monthly payment. In other words, the vehicle is likely to cost him twice what he thinks it will.

Once he sees how much of his paycheck is eaten up by car costs, he might be willing to consider buying a used car instead of a new one or saving up to pay cash.

If he does go ahead, make sure he understands the dangers of being “upside down” on a loan. Owing more than a car is worth leaves you vulnerable if the car is stolen or totaled, since you won’t get enough from the insurer to pay off the loan.

You can buy extra coverage for the gap, but a better approach is to make a large down payment and limit the loan term to three or four years.

Filed Under: Credit Scoring, Q&A Tagged With: , ,
October 19, 2015 By

Q&A: Understanding pension vs Social Security

Dear Liz: I recently retired as a lifelong federal employee after 40 years of service. I participated under the old Civil Service Retirement System. My pension is about $85,000 per year. I will be 64 this year.

Twenty years ago, my ex-wife and I divorced after 17 years of marriage. Friends of mine have indicated that because we were married more than 10 years, I am eligible for a spousal Social Security benefit. I thought because I was covered under the CSRS, any Social Security received would be offset against the monthly pension payment.

I think this is due to the government pension offset, which has been in effect since 1983. My Social Security benefit would in effect be zero. Is my understanding accurate?

Answer: Yes. If you’re receiving a government pension based on work for which you didn’t pay Social Security taxes, then the pension offset typically reduces the amount of any so-called dependent benefits you might receive by two-thirds of the amount of that pension.

That reduction can wipe out any spousal or survivor benefit you might otherwise get.

Before the offset, people with government pensions that didn’t pay into Social Security could wind up better off than people who had paid into the system their entire working lives.
Those who paid into the system would get the larger of the checks to which they were entitled — either the dependent check or their own — while those who had pensions outside the Social Security system could get both their own benefit and dependent benefits.

There is a way you could have received a spousal benefit, and that’s if you had put off receiving your pension, said Laurence Kotlikoff, coauthor of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

If putting off the pension would have increased the amount you received, it could have made sense to do so and take the spousal benefit in the meantime.

There are various other exceptions to these rules, so you should check out the government pension offset information available at the Social Security site, www.ssa.gov.

Filed Under: Q&A, Retirement Tagged With: , ,
October 15, 2015 By

Four ways to get a jump on tax season

bigstock-U-s-Income-Tax-Return-Form-28476797-e1390508229663Taxpayers face a cliffhanger again this year as Congress dithers about extending more than 50 expired tax breaks, including popular deductions for college tuition and fees, mortgage insurance and sales taxes.

As we wait for lawmakers to act, though, we still have time left in the year to make adjustments based on changes that have already happened. In my latest for Reuters, I share four ways to get a head start on tax season.

In my latest for Bankrate, how to find an honest financial advisor.

Filed Under: Liz's Blog, Taxes Tagged With: , ,
October 12, 2015 By

Q&A: Social Security spousal benefits and divorce

Dear Liz: My former husband is 11 years older than I am, and we were married for 15 years.

I am 54 and have never remarried. When I turn 62, can I claim spousal benefits based on his work record because he will be past full retirement age? Or do I have to be at my own full retirement age of 67 before I can claim the divorced benefit?

I was thinking that I could start claiming spousal benefits at 62 and then wait until I am 70 (letting my benefit grow). At that point, we can see which benefit is larger — half of his benefit or my full benefit. He has made much more money than I have through the years, but he has also been unemployed off and on while I have been employed consistently.

Answer: You can claim divorced spousal benefits as early as age 62 long as you remain unmarried and your marriage lasted at least 10 years.

But you lose the option to switch from a spousal benefit to your own benefit if you start Social Security before your own full retirement age.

So if your plan is to get the maximum benefit, it’s important to wait until you turn 67 to apply. At that point, you can file a restricted application for spousal benefits only and receive an amount equal to half of your ex’s benefit while letting your own grow a guaranteed 8% each year until age 70, when your benefit maxes out.

Filed Under: Divorce & Money, Q&A, Retirement Tagged With: , ,
October 12, 2015 By

Q&A: Rolling 401(k) into an IRA

Dear Liz: I’m leaving my job later this month and am trying to decide what to do with my 401(k) account. Some of my friends say to leave it where it is, and others say to roll it into a traditional individual retirement account or Roth IRA. Which is best?

Answer: You can’t roll a 401(k) directly into a Roth IRA. You would first need to roll it into a traditional IRA, then convert that to a Roth and pay the (often considerable) tax bill.

But let’s back up a bit. There are few reasons you might want to leave the money where it is, if you’re happy with your employer’s plan. Many large-company plans offer access to low-cost institutional funds that are cheaper than what you might find as a retail customer with an IRA.

Money in a 401(k) also has unlimited protection from creditors in case you’re ever sued or wind up filing for bankruptcy. When the money is in an IRA, the protection is typically limited to $1 million.

If you’re not happy with your old employer’s plan, you could transfer the account to your new employer’s plan if that’s allowed. If not, you can roll the 401(k) into an IRA, but choose your IRA provider carefully.

You’ll want access to a good array of low-cost mutual funds or exchange traded funds (ETFs). The costs you pay to invest make a huge difference in how much you eventually accumulate, so it’s important to keep those expenses down.

If you want help managing the money, many discount brokerages offer access to financial planners and some, including Vanguard and Charles Schwab, offer low-cost digital investment advice services. The services, also known as “robo-advisors,” use computer algorithms to invest and monitor your portfolio.

You’ll want to arrange a direct rollover, in which the money is transferred from your 401(k) account into the new IRA.

Avoid an indirect rollover, in which the 401(k) company sends a check to you. You would have 60 days to get the money into an IRA, but you’d have to come up with the cash to cover the 20% that’s withheld in such transfers. You would get that cash back when you file your taxes, but it’s an unnecessary hassle you can avoid with a direct rollover.

Before you decide to convert an IRA to a Roth, consult a tax professional.

Conversions can make sense if you expect to be in the same or higher tax bracket in retirement, which is often the case with young investors, and you can tap some account other than the IRA to pay the income taxes. But these can be complex calculations, so you should run your plan past an expert.

Filed Under: Investing, Q&A, Retirement Tagged With: , , , ,
October 5, 2015 By

Q&A: Home remodel

Dear Liz: I would like to add on and remodel so my home will be nice for me when I retire in a few years (probably around age 65).

I have a recently refinanced 30-year mortgage at 4.1%, but I’ve been making additional principal payments on a 20-year schedule. I think I can do what I want for around $200,000. (But of course it may be more.)

Post-construction, I’m estimating that the house would have a market value of $800,000 to $900,000, but the real motivation is to have new heating and air conditioning, new windows and floors, and electrical wiring.

I think I deserve it, despite the major disruption that remodeling provides. My question is: Do I do this with cash, or should I finance it?

If things work out as planned, I’ll have a pension of around $7,000 a month that should take care of my living expenses (including the ability to pay a bit of a higher mortgage), and I have about $350,000 in post-tax savings.

I additionally have about $500,000 in pretax retirement accounts that I plan to draw off of for inflation as the years go by.

I have never been comfortable with a lot of risk — I’ve never even had a car payment — but I probably could have amassed more if I hadn’t been so financially conservative.

Answer: You’re contemplating adding a considerable amount of debt at a time in life when most people are eager to pay theirs off.

They want to reduce their living expenses and the amount they have to pull from retirement funds. Being debt-free is one way to reduce the chances of running short of money after you quit working.

That’s not to say debt in retirement is always bad — especially for people like you, who have enough pension income to cover living expenses plus a good amount of other savings.

Your investments, if properly deployed, are likely to earn a better return than the after-tax cost of your debt. That said, your conservative nature could make it hard for you to sleep at night if you face significant house payments after you stop working.

You should discuss your options with a fee-only financial planner who can evaluate your entire financial situation.

You can discuss tapping your savings for the remodel, taking on more debt, changing the scope of what you want or moving. If what you’re after is a more modern home, it may make more sense to move than to endure the expense and disruption of a major remodel.

If you do remodel, consider adding features that will allow you to age in place more safely, such as installing grab bars, widening hallways and doorways, improving lighting and eliminating steps where possible.

The National Assn. of Home Builders has an Aging-in-Place Remodeling Checklist on its site, at www.nahb.org.

Filed Under: Q&A, Retirement Tagged With: , , ,
October 5, 2015 By

Q&A: Social Security benefits

Dear Liz: My husband and I will be retiring at the end of 2016. He will be 70 and will start taking his Social Security; I will be 65 soon after.

Thanks to your advice, I plan to sign up to get 50% of his Social Security benefit when I’m 66 (my full retirement age) and switch to my own benefit later.

But will my own Social Security be less because I won’t be earning any money between age 66 and 70? If so, would I be just as well off taking my own benefit at 66 or should I still wait until I’m 70? Money needs will not be an issue.

Answer: Your benefit will grow 8% every year you put off filing for your own retirement checks between age 66 and age 70. That’s a powerful incentive to delay, especially when you can get spousal benefits in the meantime.

If you did work after age 66, your benefit might increase a bit more depending on how much you earned.

Your Social Security benefit is based on your 35 highest-earning years, so a higher-earning year late in life could replace a lower-earning year earlier in life.

Your continued employment would have the biggest effect if those lower-earning years showed no or very little income.

Filed Under: Q&A, Retirement Tagged With: , ,
September 28, 2015 By

Q&A: The legitimacy of tax reduction companies

Dear Liz: I fell behind on making my quarterly estimated tax payments for a long list of reasons, and when I file my return, the IRS will find out. I have heard they can seize your IRAs, which I have but do not want to cash out to pay.

I found a service on the Internet with good references and no bad reviews. The company said it can help get a payment program and often a reduction in the amount owed. It seems worth a couple thousand dollars to try it. Your thoughts?

Answer: There are a number of reasons why a company might have no negative reviews online. Maybe it’s a great company. Or maybe it’s not, but it just launched or took over a legitimate firm with the intention of fleecing as many people as possible.

Don’t be persuaded by the idea that the company might reduce what you owe. Settlements aren’t impossible, but the taxpayers who get them (typically after long and drawn-out battles) are those whose financial situations are dire and not expected to improve.

The IRS has many, many ways to collect its due and won’t just roll over because you don’t want to pay.

In any case, you don’t need to hire someone else to set up a payment plan for you.

If you owe $50,000 or less as an individual or $25,000 or less as a business, you can request an installment plan online and get an immediate response. If you owe more than those amounts, you can request an installment agreement using Form 433F.

The costs are low. If you can pay your balance within 120 days, the plan is free. Otherwise you’ll pay $52 for a direct debit agreement or $105 for a standard or payroll deduction agreement. Lower-income taxpayers can get a reduced fee of $43.

For more, visit http://www.irs.gov/Individuals/Payment-Plans-Installment-Agreements.

If you can’t pay your balance in the allotted time, you may need to hire some help. You can get referrals to CPAs who can represent you in front of the IRS from www.aicpa.org.

Filed Under: Q&A, Taxes Tagged With: , , , ,
September 28, 2015 By

Q&A: Free credit report

Dear Liz: I was trying to get my free credit report as you suggested in a recent column. I was asked to pay $1, which made me very uneasy. Why do they do this?

Answer: The fact that you were asked to pay for your free credit report — even a nominal amount such as $1 — shows that you went to the wrong site.

That can happen if you typed the correct site, www.annualcreditreport.com, into a search engine, rather than into your browser address bar, and didn’t carefully review the options before you clicked.

These look-alike sites are supposed to disclose that they’re not the real thing, but sometimes those disclosures are easy to miss.

The real site notes that it’s the only site for free credit reports and is authorized by federal law. You don’t need to provide a debit or credit card to get your reports, although you will have to provide identifying information such as your Social Security number.

Filed Under: Credit Scoring, Q&A Tagged With: , ,