Ask Liz Weston

Get smart with your money

Q&A

Q&A: Time to move, but what about the capital gains?

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Dear Liz: My husband and I built a home on a hillside over 30 years ago in a desirable neighborhood with a beautiful view. We thought it would be our retirement home, but life had different plans. Now seniors, dealing with age, stairs and progressive health issues, we have been advised that selling and moving to a senior assisted living facility is the best option for us before we are forced by circumstances to move. And, we were told, it would be less expensive than having full-time, in-home care.

We are concerned that capital gains would take a big chunk out of the sales proceeds from our home, and that’s money we need to pay for assisted living. Can we use the purchase price of the vacant lot against the capital gains? Can we use the bank loan for building the house against the capital gains? Can we use the cost of an apartment or condo in an assisted living residence against the capital gains? What other things can be used against capital gains other than general home improvements?

Answer: A large gain wouldn’t just reduce the amount of money you have for the next phase of your life. It also could increase your Medicare premiums for a year, thanks to the income-related adjustment amount or IRMAA.

You’ll determine your potentially taxable capital gains by deducting your tax basis from your home sales proceeds. Your basis includes the purchase price of the lot and the cost of construction, plus any qualifying home improvements you’ve made over the years.

The two of you can shelter up to $500,000 of home sales profits from capital gains taxes. Capital gains also can be reduced if you have capital losses — in other words, if you’ve sold stocks or other assets for a loss.

What you do with money doesn’t affect the capital gains taxes you pay. Decades ago, you could defer capital gains by buying another home of equal or greater value, but that’s no longer the case.

You may have some alternatives to lessen the impact of the gains, such as an installment sale where the buyer pays over time. Another option would be renting out rather than selling your home.

A tax pro can provide guidance.

Q&A: Bankruptcy may be best option for indebted widow

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Dear Liz: I am an 82-year-old widow with a disabled daughter in a desperate financial situation. Payments on my credit cards and a personal loan eat up half the income I get from Social Security, my late husband’s pension and my IRA. My total debt is over $100,000 and my only assets are a car worth $35,000 and the fast-dwindling IRA with just $25,000. I need advice on how best to proceed: bankruptcy or loan consolidation or something else?

Answer: Please make an appointment with a bankruptcy attorney as soon as possible.

There are other solutions for debt, including a debt management plan through a credit counselor, debt settlement or a consolidation loan. Debt management allows people to pay off what they owe over time, often at a lower interest rate. Debt settlement involves negotiating with creditors to accept less than what they’re owed. A consolidation loan replaces multiple debts with a single loan, often at a fixed interest rate.

Your situation is simply too dire for these other methods to make much sense, however. Bankruptcy could allow you to legally erase the debt and preserve what’s left of your limited funds.

Q&A: Required withdrawals could change Social Security taxation

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Dear Liz: Is it true that when you start your required minimum distributions from 401(k) and 403(b) plans, you give up your monthly Social Security payment? I plan to start RMDs next year at age 71 thinking I will get less money for more years.

Answer: Your withdrawals from retirement plans won’t reduce your Social Security directly. The additional income could, however, make more of your Social Security payment taxable.

Taxes on Social Security are based on something called “combined income,” which is your adjusted gross income plus any nontaxable interest you earned plus half of your Social Security income. If you’re single and your combined income is between $25,000 and $34,000, then up to half of your Social Security payment may be taxable. If combined income is over $34,000, up to 85% may be taxable. For people who are married filing jointly, the bracket for up to 50% taxation is $32,000 and $44,000 while combined income over $44,000 can trigger up to 85% taxation.

To be clear, this does not mean that 50% or more of your benefit goes to taxes. It means that 50% or more of your benefit may be subject to your income tax bracket.

Q&A: Future mate hasn’t filed tax returns. Am I liable?

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Dear Liz: I’m engaged to someone who just confessed that they have not filed tax returns for the last several years. How do we fix this? If they owe a lot of money, could the IRS come after me if we’re married?

Answer: Technically, debts incurred before marriage are considered separate. But there are many ways premarital debt can affect postmarital life.

If you live in a community property state, for example, creditors could come after jointly owned assets if your spouse fails to pay what they owe. Your spouse’s debt could affect how much you two can borrow if you want to apply for a mortgage or other joint obligation. And the money your spouse uses to pay off the debt isn’t available for other uses that could benefit both of you. That could include everything from paying bills to going on vacation to saving for retirement.

The IRS is not a good creditor to have, in case you had any doubts. The agency has many enforcement powers, such as withholding refunds, taking part of someone’s paycheck and seizing property to pay debts. Consider working with a tax pro to get the missing returns filed as quickly as possible. The IRS also offers payment plans for those who can’t pay in full.

Q&A: Financial institutions reject powers of attorney

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Dear Liz: I read your column about the parent who unexpectedly had to take over for their incapacitated son. You suggested every adult have a power of attorney and healthcare proxy. Excellent advice! However, as I discovered in dealing with my father’s illness and estate, these general documents are not always recognized by the very institutions they were designed for. His bank, mortgage company and health insurance company would only recognize their versions of these documents.

Fortunately, while he was still able to, I was able to procure each of these documents with his signatures on them but it was very stressful at a difficult time for all of us. I would suggest you amend your advice to people to check to see if their banks and so on also require their specific forms.

Answer: Financial institutions are supposed to accept properly drafted powers of attorney, but some of them insist on their own forms, agrees Burton Mitchell, an estate planning attorney in Los Angeles.

“Sometimes one can get around these rules by appealing to higher ups in the organization, but it is unnecessarily difficult, time-consuming and complicated,” Mitchell says.

Checking with your financial institutions now could avoid hassles later.

Q&A: When money disappears from a mother’s estate

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Dear Liz: My mother recently passed and my sister is handling all the legalities. At one point, my sister mentioned our mother had a sizable savings account plus two retirement accounts valued at $400,000, and that I would receive something. Now she is simply saying, “I don’t know where the money has gone.” She handled all my mother’s finances for years before her death. How is this possible? I can’t hire an attorney, nor do I want to alienate my sister or seem greedy. What should I do?

Answer: If your sister handled your mother’s finances for years and she’s settling the estate, then she almost certainly knows where the money went. Why she won’t tell you is the mystery.

Your mother’s money may have been eaten up by long-term care expenses, which can be breathtakingly expensive. That’s especially true if there was a long gap between your sister’s disclosure about the accounts and your mother’s death.

If that were the case, though, your sister could just say so.

There are many other possibilities. Your mother could have been scammed, or gambled away the money, or been the victim of financial elder abuse. Abusers are often people the elders know, including relatives and caregivers.

Perhaps your sister didn’t help herself during your mother’s lifetime, but arranged to be the beneficiary of all the accounts, either with or without your mother’s consent.

You don’t have many options if you aren’t willing or able to consult an attorney, but you wouldn’t be greedy to ask for some clarity from your sister.