Q&A

Q&A: How to finance a remodeling project

July 28, 2025 By Liz Weston

Dear Liz: I am doing a small remodeling job to my home that will cost $80,000. I have enough in my investments to withdraw the $80,000. Is it better, tax wise, to get a home equity loan to pay for it?

Answer: Like so many tax questions, the answer depends on your circumstances. How your investments would be taxed depends in part on what account they’re in. Withdrawals from most retirement accounts are taxed as income, and can incur penalties if you take the money out too early.

Withdrawals from regular brokerage accounts also can be taxed as income if you’ve held the investments less than one year. If the investments have been held for more than one year, you can qualify for more beneficial capital gains tax rates. The amount of tax you would pay depends on how much the investments appreciated in value since you bought them as well as your income tax bracket. Most people pay a federal capital gains rate of 15%, although lower income taxpayers can qualify for a 0% rate while higher earners pay 20%.

You may have the opportunity to engage in what’s known as “tax loss harvesting.” That means selling investments that have lost value since you bought them, and using that loss to offset the gains on other investments you’ve sold.

Interest on home equity borrowing, meanwhile, may be deductible if the proceeds are used to improve your home and the combined total of your mortgage debt doesn’t exceed $750,000 for a married couple filing jointly or $375,000 for singles.

To deduct the interest, though, you must itemize your deductions. The vast majority of taxpayers now take the standard deduction of $31,500 for married couples or $15,750 for singles. People 65 and older can take an additional $1,600 per qualifying spouse or $2,000 if single. In addition, people 65 and over can take an additional $6,000 bonus deduction if their income is under certain limits. The bonus begins to phase out for single filers with modified adjusted gross income over $75,000, and for joint filers over $150,000.

That’s the long answer. The shorter answer is that the taxes you’ll pay cashing in your investments are likely to be less, and perhaps significantly less, than the interest you’d pay on the loan. But you’ll need to do your own math, or ask a tax pro for help.

Q&A: Revocable vs. irrevocable trusts

July 22, 2025 By Liz Weston

Dear Liz: What is the difference between a revocable trust and an irrevocable trust? Which one is better? I am a widow with two sons who will inherit my estate. My net worth is $1.4 million, including a mortgage-free house.

Answer: The two types of trusts serve different functions, so neither is inherently better than the other.

Revocable trusts can be changed as long as the trust creator — that would be you — is still alive. You retain control over the assets in the trust and can sell or dispose of them as you wish. The most common revocable trust is a living trust, which allows estates to avoid the court process known as probate.

Irrevocable trusts typically can’t be changed. They are often used to protect assets or reduce an estate for tax purposes. The trust creator generally loses control over what happens to the assets in the trust. Irrevocable trusts are typically more complicated to set up and to administer, and may require a separate tax return.

An estate planning attorney can review your situation and advise which kind of trust, if any, might be best for your situation.

Q&A: Your credit card was unfairly canceled? Here’s how to fight back

July 22, 2025 By Liz Weston

Dear Liz: For decades I owned two credit cards that earned airline miles with all my expenditures. I always paid the bills in full on time and never missed a payment. Earlier this year, I mailed in checks to cover the balance as I always do. But then I noticed the checks had not cleared my account after three weeks. I assumed the payment was lost in the mail, so I stopped payment on the checks and paid the amount I owed in full online. But then the checks came through to the bank. Since the checks had been stopped, they were returned, and even though I had paid my bill in full, both of my cards were canceled.

I called the customer service number several times and spoke to supervisors and they all said I had a great case, but then I received letters back rejecting my requests to get my cards restored. I tried to apply for a new card and that too was rejected. My credit rating is very high, and this seems very unfair to me as a longtime loyal customer. I have other credit cards but these were the most important to me for the accumulation of miles as I travel a lot. Is there anything that can be done to reverse the decision?

Answer: You need to attract the attention of a human being with the power to override this credit card issuer’s automated systems and that’s no easy task.

You did the right thing by calling the customer service number several times, since phone reps can vary considerably in their ability to solve problems. You might have to cycle through several reps before you find one with enough savvy, training and interest to actually help you.

Since you washed out with the phone reps, your next step should be contacting the office of the bank’s chief executive. That may just earn you a form letter, or you may catch the attention of someone who realizes how unfair the cancellations were and who is motivated to help.

In the past, a complaint to the Consumer Financial Protection Bureau often prodded banks and other companies to do the right thing by their customers. The current administration’s attempts to kill the bureau are being challenged in court, and the agency is currently accepting complaints again, but it’s unclear how much help you can expect to get.

Even if you can’t get the bank to reconsider, you should resolve to stop sending checks through the mail. Mail theft and check fraud are soaring, while electronic payments continue to be a safer and more secure way to pay.

Also, you don’t have to give up accumulating miles for your favorite airline. Other credit card issuers offer general travel rewards that allow you to transfer miles to airlines (and hotels and other travel providers). While airline-branded cards can help you earn elite status and come with other perks, general travel rewards cards offer the flexibility to book with a number of different carriers.

Q&A: Approaching retirement? Don’t count on rules of thumb

July 15, 2025 By Liz Weston

Dear Liz: I have a few questions about my income taxes during my upcoming retirement. I would like to know if doing a Roth IRA conversion will be worth it for me since I might be in a higher tax bracket when I retire. Is there a rule of thumb in regards to doing this conversion? I’m also getting considerable income from my tax-free municipal bond and money market fund. Will that income be taxable when I retire and will it count toward how the government calculates my Medicare premiums?

Answer: Rules of thumb can be incredibly helpful in many areas of personal finance. Guidelines such as “spend less than you earn” and “pay yourself first” apply to virtually everyone. Even more specific recommendations, such as the 50/30/20 budget, can apply to many if not most situations. (The 50/30/20 budget recommends limiting “must have” expenses to 50% of after-tax income, leaving 30% for wants and 20% for savings and extra debt repayment.)

As you enter retirement, though, you’ll be making decisions that may be irreversible. It can be much harder to rebound from mistakes and you’ll have fewer years to do so. That’s why it’s important to get individualized advice from pros you can trust.

Converting a regular retirement account to a Roth IRA can make sense if you expect to be in a higher tax bracket in retirement and can pay the taxes on the conversion without raiding the account. But the conversion also can trigger higher Medicare premiums.

The same is true for municipal bond interest. Muni bond interest typically avoids income tax, but will be included in Medicare premium calculations and may cause more of your Social Security benefit to be taxable as well.

A tax pro can advise you about these issues and offer strategies to lower your lifetime tax bills.

Q&A: What to do if you don’t trust your trustee?

July 15, 2025 By Liz Weston

Dear Liz: I own several properties. I have a living trust that names my two minor children as beneficiaries. I’ve told my attorney that I want to transfer the properties to my children using the county form. This will give my children who are under 10 years of age ownership as tenants in common with the right of survivorship. I believe this avoids any tax consequences. I will still keep my living trust and make some adjustments per this change. My attorney states I will lose the step-up in tax basis if I do this. As I see it, this may not be a concern as my primary goal is to give my children these properties in the event of my passing. I do not trust anyone whom I name as trustee to my living trust. I do not care about the step-in-basis as doing it this way avoids delays, assures ownership and avoids possible fraud. The trustee could sell the properties and spend the money. Keep in mind my children are minors as of this date. Sure, they could file a lawsuit, but you need money to file an action and once the money is long gone, good luck in getting it back. This way it gives immediate ownership to my children, and I avoid these problems that may occur.

Answer: If you really don’t know anyone you can trust to look after your children’s interests, then you’ve got quite a dilemma.

Your children are too young to legally own real estate in their own names, so some kind of guardian or trustee would need to be involved in managing the property, notes Jennifer Sawday, an estate planning attorney in Long Beach. Plus, you have no idea now whether your kids will be able to responsibly handle such an inheritance once they’re legally allowed to take over at 18 or 21 (depending on the age of majority in your state). Few people that age are ready for such a big responsibility. If a child develops an addiction or spendthrift tendencies, they could quickly waste their inheritance.

Plus, transferring property can have huge tax consequences, including the loss of step-up in tax basis that your attorney mentioned as well as property tax reassessments. (In California, such transfers avoid reassessment only when a primary residence is transferred and the child continues to live in the home. Commercial property, rental property and vacation homes get reassessed upon transfer.)

If you have no friends or relatives who are ethical, honest and trustworthy, then you’ll need to consider hiring a professional fiduciary or trustee. Your attorney can discuss your options.