Ask Liz Weston

Get smart with your money

Q&A

Q&A: The case for filing a tax return

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Dear Liz: A couple on Social Security who hadn’t received their stimulus payments wrote that they “do not make enough income to file tax returns.” It might be worthwhile to let your readers know that, even if one’s income is below the amount where they must file a tax return, they nevertheless may file a tax return. I volunteer at a site where we do free tax preparation, and we encourage filing even when not required. It can help identify or potentially prevent identity theft, and it provides documentation of tax status that may be helpful in the future.

Answer: Thanks for that tip. People receiving Social Security weren’t required to file tax returns to receive their stimulus payments of up to $1,200 each, but as you noted there can be other advantages to filing even when it’s not necessary.

Most stimulus payments have been delivered at this point, although a congressional committee estimated 30 million to 35 million had not been sent. If you got a letter saying your payment had been sent, but you haven’t received the money, you can ask the IRS to trace your payment by calling (800) 919-9835.

Q&A: Coronavirus stimulus checks, tax refunds and the IRS’ backlog hell

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Dear Liz: I’m a CPA. I sent out your recent column about IRS backlogs to two clients just this morning. It’s nice to have a published article backing up what I’ve unfortunately been having to tell clients for a few weeks now.

Answer: Pandemic-related shutdowns, years of congressional budget cuts and the effort required to push out more than 159 million stimulus checks have left the IRS facing a massive backlog. National Taxpayer Advocate Erin Collins estimated that 4.7 million unopened paper tax returns had accumulated as of mid-May. Taxpayers who filed paper returns and are due a refund may be in for “a long wait,” Collins told Congress last month. Many lower-income people and those who lost jobs are in dire need of the money, but it is unclear when they will get it.

Q&A: Arizona mom doesn’t want a trust

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Dear Liz: My mom is 93 and lives in Arizona. I’m in California. She refuses to complete a revocable living trust, and after several years, I have given up with the request. She states she has added my name to the deed to the house and her bank account. She believes she has done enough. She states she completed a will that she got at Office Max. What would be my first steps if she precedes me in death?

Answer: She may be stubborn, but she’s making mistakes that could impair her quality of life and saddle you with a big, unnecessary tax bill. Consider trying to persuade her to fix these errors before it’s too late.

Not having a living trust isn’t necessarily a crisis. Yes, a living trust would allow your mother’s estate to avoid probate, the court process that typically follows death. But probate in Arizona typically isn’t as long or expensive as it is in California.

What’s more important is having documents in place that allow you (or someone else) to handle her finances and make healthcare decisions should she become incapacitated. Without that, you might have to go to court, which could be a long and expensive process (especially now, with the backlog created by COVID-19-related shutdowns).

A living trust also would make it relatively easy for a trusted person to step in and handle her affairs if necessary. In the absence of a living trust, you should insist she fill out an advanced care directive that would allow a trusted person to make healthcare decisions for her. There are free versions for each state at PrepareForYourCare.org, along with instructions about how to make it valid. If she doesn’t have a computer, you can print out Arizona’s version and send it to her.

She also needs to create a power of attorney for finances. Offer to hire an estate planning attorney to do this, since it’s a relatively simple form and not likely to be expensive. There are online forms and software that can do this if she absolutely refuses to consult an attorney.

An estate planning attorney might also be able to help you get off the deed. When she added you to the deed, your mom signed you up to pay capital gains taxes you wouldn’t owe otherwise. All the appreciation in the home that happened during her lifetime would be taxable, when it doesn’t need to be.

Let’s say she bought the home for $25,000 and it was worth $250,000 when she died. If you inherited the home and sold it for $250,000, you would owe no capital gains taxes.

If she gives you the home before her death — which she essentially did by adding you to the deed — you don’t get the valuable step-up in tax basis that keeps you from having to pay capital gains taxes on the appreciation that happened during her lifetime. Instead, you would owe capital gains taxes on the $225,000 appreciation. (This is a simplified example meant to help you and her understand the magnitude of the blunder.)

Arizona is one of the many states that has “transfer on death” deeds for real estate. These deeds would allow the house to avoid probate and come directly to you. That’s almost certainly a better solution than the one she chose.

Q&A: Still no coronavirus stimulus check? You’re not alone

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Dear Liz: Both my wife and I are on Social Security retirement benefits. We were told we had to do nothing to get our stimulus payment even though we don’t file tax returns. We’ve made two calls to the IRS and gotten no suggestions from them.

Answer: If your Social Security payments are direct deposited, your relief payments should have been sent to that bank account. If you don’t have direct deposit, your payments should have been mailed. You (or a computer-savvy friend) can check to see the status of your payment at the “Get My Payment” section of the IRS.gov website.

If your payment isn’t on the way or there’s another problem, you should reach out to the IRS. It’s not clear from your statement — “no suggestions from them” — if in your previous attempts you actually reached a human being or just a recording. Please make sure you’re calling the right number because the stimulus payment number — (800) 919-9835 — is different from the general taxpayer hotline. You may have to be patient because hold times can be long.

Q&A: The IRS is finally staffing up. Here’s how to get your coronavirus stimulus money

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Dear Liz: We do not make enough income to file tax returns, so we used the IRS site to apply for our economic stimulus payment ($1,700 for one adult and one teenage child). We received a response email stating our information was received successfully by the IRS several weeks ago. We included our bank deposit information for a fast direct deposit but the money has not arrived and we hear that the government ran out of money. We are desperate. What can we do or who can we speak with about this delay?

Answer: The government did not run out of money, and at a minimum you should be able to file a tax return next year to get your stimulus payment as a refundable credit. Since you need the money now, though, you should follow up with the IRS.

The IRS has reopened the general taxpayer helpline that was shuttered because of the coronavirus pandemic, but it has also added thousands of phone reps to a special hotline to deal with stimulus payment problems: (800) 919-9835. That’s the number you should call to inquire about your payment.

(Previous columns have dealt with people’s refunds being held up because the IRS didn’t have enough workers to open its mail. Tax processing centers are reopening, but it will take awhile to work through the backlog. You can check the status of a refund through the “Where’s My Refund?” tool on the IRS site or by calling (800) 829-1954.)

Q&A: The ups and downs of reverse mortgages

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Dear Liz: I have been a reverse mortgage specialist for the last 12 years and had some thoughts about the writer who complained that the $40,000 she initially borrowed had grown to a debt of $189,000, or more than her home was worth.

Using a compound interest calculator, it would take about 16.5 years for the debt to grow that large. The borrower would have lived in their home for all that time without making payments toward the debt, although they were still responsible for taxes, insurance and maintaining the property. They can stay in the home for as long as it’s their principal residence. Once they leave the home, the lender will sell the home and receive the difference between the sales price and the loan balance from the government insurance program that everyone with a reverse mortgage pays into. Otherwise, no lender would take out this loan for a potentially long term and risk losing money in the end. Maybe it was a good deal.

Answer: Possibly, but she regretted the decision anyway. She took out a reverse mortgage at a time of financial hardship and now wishes she hadn’t.

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People facing financial crises often develop tunnel vision and grab at solutions without thinking through the future costs of their decisions. (The excellent book “Scarcity: Why Having Too Little Means So Much” by Sendhil Mullainathan and Eldar Shafir explains the science of why that happens.)

Advertising for these loans can gloss over the downsides, such as potentially not being able to tap your equity later, when you may need it more. Reverse mortgages can be a good solution for some seniors but certainly not all of them.