Ask Liz Weston

Get smart with your money

Q&A

Q&A: Starting Social Security too early

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Dear Liz: Does the Social Security Administration still allow a person to start taking Social Security benefits at age 62 and then later return the full amount received and begin taking the higher delayed benefits? For people who don’t need the income, this seems like a smart strategy as they could obtain the investment income on the benefits received from age 62 to 70 as well as the higher benefits amount starting at age 70.

Answer: Social Security closed that particular loophole in 2010.

As you know, Social Security retirement benefits increase each year you put off applying between age 62 and age 70, when benefits max out. An early start typically means a permanently reduced benefit.

Before 2010, people who started early, but who were able to repay all the money they received, were allowed to restart benefits at an older age and claim the larger checks as if they’d never applied before. This do-over prompted some recipients to apply early, invest the money and enjoy a kind of interest-free loan from the government.

People who make the mistake of starting Social Security too early still have a couple of options. They can withdraw their application for benefits within 12 months, but they are required to repay any benefits received, including benefits received by family members such as spousal or child benefits.

Another option is to wait until their full retirement age, which is currently between 66 and 67, and simply suspend their benefit.

No money has to be paid back and the recipient receives the delayed retirement credits that increase their benefits by 8% for each year they delay. Benefits will be automatically restarted at age 70, although the recipient can start them earlier, if desired.

Q&A: Saving at online banks

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Dear Liz: My wife keeps over $60,000 in her checking account at a brick-and-mortar bank. I think that is a bad idea. Too easy for possible fraud. I have tried to convince her the safest place to keep the bulk of her cash is in a savings account, preferably in an online bank, which I believe provides added protection against fraud as long as we maintain good computer health. What do you think?

Answer: Many people have the opposite conviction, which is that online banks are somehow less safe than brick-and-mortar versions. In reality, both types offer encryption and other safety measures to deter fraud. Accounts are insured by the Federal Deposit Insurance Corp. and covered by federal banking regulations designed to protect consumers against fraud.

Your wife’s money wouldn’t necessarily be safer in a savings account, but she’d earn a little more interest. Many online banks currently offer rates of about 1% on savings accounts. If she moved all but $10,000 out of the checking account, she could earn about $500 a year in interest and perhaps more if the Federal Reserve continues to raise rates.

Q&A: How a ‘like-kind’ 1031 exchange can help you defer real estate capital gains taxes

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Dear Liz: My husband and I are selling a commercial property for $600,000 and we have capital gains questions. Our Realtor said that we have 90 days to buy another property but suggested we don’t make a purchase due to the state of the economy at this time. We are looking for any suggestions to lessen our capital gains. Do you have any suggestions that we could look into or articles to read?

Answer: Your Realtor is referring to what’s known as a “like-kind” or Section 1031 exchange. These exchanges allow people to defer capital gains taxes when they sell commercial, rental or investment real estate as long as the proceeds are used to purchase similar property.

Section 1031 exchanges happen all the time, in all sorts of economic conditions, so your Realtor’s attempt to dissuade you based on “the state of the economy” is a bit odd. Also, like-kind exchanges don’t have to be completed in 90 days. Owners have 45 days to identify potential replacement properties and a total of 180 days to complete the transaction. There are a number of other rules you must follow, so you’ll want to use companies known as exchange facilitators that specialize in handling these transactions.

Your first step, though, should be finding a qualified tax professional. You’ve just experienced what can happen when you turn to non-tax professionals for tax advice.

While your desire to educate yourself is laudable, and you certainly can find books about taxes at your local bookstore, there’s no substitute for consulting an experienced tax pro who can give you personalized advice.

Q&A: How to avoid Medicare late enrollment penalties

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Dear Liz: I am 65, still working and have health insurance through my employer. I have not enrolled for Medicare and have been told I do not need to. I plan to once I retire. There is a passage in my Social Security statement that says, “Because you are already 65 or older, you should contact Social Security to enroll in Medicare. You may be subject to a lifetime late enrollment penalty. Special rules may apply if you are covered by certain group health plans through work.” I have tried to research further through the Medicare website but can’t find a clear answer about whether or not I am OK not enrolling at this time.

Answer: If your employer has 20 or more employees, then you’re fine for now. When you stop working for that employer, you’ll have eight months to sign up for Medicare without owing penalties.

If you want your Medicare coverage to start when your job-based coverage ends, though, you should sign up a month before you retire. Similar rules would apply if you were covered by a spouse’s workplace health insurance plan. As long as your spouse is still working for the employer that provides the coverage, you can avoid permanent Medicare penalties.

If your employer has fewer than 20 employees, however, you may be required to sign up for Medicare when you’re first eligible. Check with your employer.

Q&A: Newlyweds’ home sale taxes

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Dear Liz: You recently wrote about how home sales are taxed but I have a question. My son was single when he bought his condo. He is now married and planning on selling it. Does he qualify for the $250,000 exclusion or the $500,000 exclusion?

Answer: As you know, the exclusion allows home sellers to avoid capital gains taxes on a certain amount of profits as long as they owned and lived in the home at least two of the previous five years. With married couples, only one spouse needs to meet the ownership test but both must meet the “use” test. In other words, both your son and your son’s spouse must have lived in the home for at least two years before the sale for the couple to qualify for the $500,000 exclusion. The couple must file a joint return in the year they sell the condo, and neither spouse can have excluded gain from the sale of another home during the two-year period before selling this home.

Q&A: Credit scores and usage

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Dear Liz: Thanks for your recent column about how credit scores react to heavy credit card usage. We pay our credit cards in full each month but recently we had big charges on three cards for vacations, home supplies and other purchases. I am the primary account holder on all three cards and my credit scores tanked! I even got email warnings about it from my credit monitoring service.

I have paid off two of the cards and will pay off the third one soon. My husband has one credit card in his own name that he occasionally uses and he is an authorized user on the others. I have always been the fanatical financial partner so he thinks it’s funny he has great scores and I look like a loser! Good thing we were not planning to do a house purchase or refinance the mortgage.

Answer: Pretty soon your husband will have to find something else to tease you about. Your scores are likely to return to their previous levels once the high balances are paid off and you return to your normal spending habits.

Many people are surprised by how dramatically credit scoring formulas react to the amount of available credit they’re using. But this knowledge can help you the next time you’re planning to get a major loan.

For example, you could throttle back your credit card usage starting a couple of months before your application. Alternatively, you could make weekly payments instead of monthly ones to ensure the balances reported to the credit bureaus, and used in your scores, are as low as possible.

Another approach is to pay off your balance a few days before the statement closing date, since the balance on that date is the one that’s typically reported to the bureaus. (If any charges show up after you’ve paid off the balance, you’ll need to make a second payment before the due date to avoid late fees.)