April 7, 2014 By

Independent contractor clarity

Dear Liz: I was taken aback by your answer to the receptionist whose employer was paying her as an independent contractor although she should have been paid as a W-2 employee. I believe your response was to lie on her tax returns and hide the fact that her employer was doing something illegal. I cannot say in how many ways that is wrong. As a human resources professional, I would advise this person to contact regulators under her state’s whistle-blower protections and let them know what has happened and take the advice that they give. If the writer has been given a 1099, you can be assured that others in the company have too. Her name remains anonymous. Even if her employer finds out it was her, she has recourse if she’s fired. I’ve always enjoyed your column and look forward to reading it each Sunday, but this response was totally off the charts.

Answer: Actually, the advice was exactly the opposite. Tax pro Eva Rosenberg recommended telling the truth by filing new forms, which would alert the IRS to the employer’s deception. Rosenberg said that it probably would take the tax agency a couple of years to get around to auditing the employer, which would give the receptionist time to find a new job.

Also, not all states have laws protecting whistle-blowers, and some of those that do apply only to public employees. No one should assume she is protected by such a law without during further research.

Filed Under: Q&A, Taxes Tagged With: , ,
April 7, 2014 By

Can a small credit card improve your credit score?

Dear Liz: I am trying to increase my credit scores so I can buy a house in a couple of years. My scores are pretty bad, but I do have a car loan that I have never been delinquent on. I have recently obtained a secured credit card with a $300 limit. Will a credit card with such a small limit help improve my credit score?

Answer: Yes, but you may need longer than two years to get your scores up to snuff, depending on how bad they are.

Regaining points always takes much longer than losing them, so you should make sure to pay all your bills on time and use your new credit card lightly but regularly. Charge less than $100 a month and pay the balance in full, because there’s no advantage to carrying a balance.

After six months or so of regular payments, consider adding another card to the mix. In a year or two, you may qualify for a regular credit card that will continue to enhance your scores.
Also, make sure you’re looking at your FICO scores, because those are the credit scores most mortgage lenders use. Other scores may be offered for free or sold by the credit bureaus, but they typically aren’t FICOs.

Filed Under: Credit & Debt, Q&A Tagged With: , ,
April 7, 2014 By

Love and money

Dear Liz: I am in a new relationship with a great woman. I’ve talked a little bit about money and retirement with her (she’s 30). I am trying to let her know that it would be wise to contribute at least enough to her company’s retirement program to get the full match. What are some books or articles that would show her the importance of saving for retirement? I like her, but this can be a deal breaker for me. What is the best way to introduce her to personal finances without scaring her?

Answer: You could start by hopping down from that high horse you’re riding.

The fact that she’s not saving for retirement is unfortunate but hardly unusual. Many people her age have trouble understanding the need to start saving young for retirement. Even those who do may have trouble investing their money, thanks to the 2008 market crash and subsequent recession. A recent survey by MFS Investment Management of people with $100,000 or more in investable assets found nearly half of adults under 34 say they would never be comfortable investing in stocks.

Of course, millennials need to get comfortable with the idea of stock market investing, because otherwise they’re unlikely to grow their wealth enough to afford a decent retirement. Some books that can help them understand the principles of investing — and the importance of scooping up those free company matches — include:

•”Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back,” by Kimberly Palmer.

•”Get a Financial Life: Personal Finance in Your Twenties and Thirties,” by Beth Kobliner.

•”On My Own Two Feet: A Modern Girl’s Guide to Personal Finance,” by Manisha Thakor and Sharon Kedar.

As you talk to your girlfriend, remember that few couples are on exactly the same page financially. Everyone has different family cultures and experiences growing up that inform how we deal with money. Asking her to talk about her background with money and taking the time to understand her perspective is a great place to start your conversations about finances. It’s certainly better than issuing ultimatums at this early stage.

Filed Under: Q&A, Saving Money Tagged With: , , ,
March 31, 2014 By

When is the best time to take spousal benefits?

Dear Liz: My wife will be 62 in a few months. I am 77 and we both work full time. Can she collect her spousal Social Security benefit while still working and take her full benefit at 70?

Answer: That option is available to her only if she waits until her full retirement age (currently 66) to apply for spousal benefits. If she applies for spousal benefits before age 66, she won’t be able to switch to her own benefit later. Also, applying early means that her benefit would be reduced by $1 for every $2 she earns above an annual limit, which is $15,480 in 2014.

Filed Under: Q&A, Retirement Tagged With: , ,
March 31, 2014 By

Can life insurance be used as an estate planning tool?

Dear Liz: I am 70 and my wife is 59. My pension covers us for both our lifetimes. We have no debt. My wife and I do not need the required minimum distributions I will soon have to start taking from my 457 deferred compensation plan, which is currently worth $1 million. I planned to invest these distributions in an index fund to leave to our son. My accountant recommends instead that I buy a joint whole life insurance policy for me and my wife because it will be tax free when our son inherits our estate years from now. Does it make sense to buy insurance as an estate planning tool?

Answer: Does your accountant sell insurance on the side, by any chance?

Because a tax pro should know that the money in that index fund would get a so-called step up in tax basis when you die and your son inherits the account. If he promptly sold the investments, he wouldn’t owe any taxes on the growth in the account (the capital gains) that happened while you were alive. Even if he hangs on to the investments for a while, he would owe capital gains tax only on the growth in value since your death. That’s a pretty awesome deal.

If you buy life insurance, by contrast, you’d have to weigh any tax benefit against the not-insubstantial amount you’d pay the insurer for coverage. At your ages, such a policy would be far from cheap.

Any time someone suggests that you buy life insurance when you don’t actually need life insurance, you would be smart to run the proposed policy past a fee-only advisor — one who doesn’t receive commissions or other incentives to sell insurance.

There’s an outside chance that your accountant recommended a permanent life insurance policy for estate tax purposes. These taxes will be an issue only if the combined estate of you and your wife is worth more than $10 million. If that’s the case, you should consult an estate planning attorney about your options.

Filed Under: Estate planning, Q&A Tagged With: , ,
March 31, 2014 By

Does Paying Off Old Debts Help Your Credit Score?

Dear Liz: How can I get a clear and complete picture of the debts that are hurting my credit score? I have my credit report already. I’m a bit lost and I need to get my credit cleared up to buy a home.

Answer: You actually have three credit reports, one at each of the major credit bureaus: Experian, Equifax and TransUnion. Your mortgage lender is likely to request FICO credit scores from each of the three, so you need to check all three reports.

You get your reports for free at one site: http://www.annualcreditreport.com. There are many sites masquerading as this free, federally mandated site, so make sure that you enter the URL correctly. You may be pitched credit scores or other products by the credit bureaus while you’re on this site, but you won’t be required to give a credit card number to get your free reports. (If the site is demanding that you give your credit card number, you’re at the wrong site.)

You should understand that old, unpaid bills may be depressing your scores, but paying them off may not improve those scores. In other words, the damage has been done. You may be able to reduce the impact if you can persuade the collectors to remove the accounts from your reports in exchange for payment, something known in the collections industry as “pay for delete.” But you probably can’t erase the late payments and charge-offs reported by the original creditor before the accounts were turned over to collections, and those earlier marks against you are even more negative than the collection accounts.

That’s not to say you should despair. Over time, your credit scores will improve as you handle credit responsibly. But you shouldn’t expect overnight miracles.

Filed Under: Credit & Debt, Credit Cards, Q&A Tagged With: , ,
March 24, 2014 By

Triggering the Gift Tax

Dear Liz: In 2007, my parents signed over their house deed to my name. Does this trigger the gift tax? They never filled out a gift tax form. Is it too late? Dad has passed on but Mom is still with us. She has Alzheimer’s disease, and I have her power of attorney. Are there no taxes due because of the lifetime exclusion?

Answer: Yes, a gift tax return should have been filed, but no, the gift tax itself almost certainly wasn’t triggered. In 2007, each of your parents would have had to give away more than $1 million in their lifetimes before gift tax would be owed. The gift tax exemption limit has since been raised to more than $5 million.

A tax professional can help you file the overdue return. Then you should consult an attorney about what to do next.

If your parents’ intent was to avoid taxes by transferring the home to you, they probably made a mistake. By giving the house to you, they also gave their tax basis. That means that when you sell the house, you would have to pay capital gains taxes on the difference between the sale price and what they paid for it, perhaps many years ago. The capital gains would be decreased by any improvements made in the subsequent years and by selling costs, but you still could face a substantial tax bill.

If you’d inherited the home after their deaths, on the other hand, you would get a new tax basis that essentially makes those gains tax-free.
You could undo the gift by transferring the deed back to your mother and filing another gift tax return. (Again, no tax probably would be owed.) But that’s probably not something you’d want to do if your mother will qualify for Medicaid, the government program that pays nursing home expenses for the poor, said Howard Krooks, an attorney with Elder Law Associates in Boca Raton, Fla., and president of the National Academy of Elder Law Attorneys.

Medicaid looks back at the previous five years to see if the family transferred assets for less than fair-market value and delays eligibility if such transfers are found. Since you’re outside the five-year mark, you may want to leave things the way they are if Medicaid is in your mom’s future, Krooks said.

An elder law attorney can help you sort through the options. You can get referrals from the National Academy of Elder Law Attorneys at http://www.naela.org.

Filed Under: Q&A, Real Estate Tagged With: ,
March 17, 2014 By

Charitable giving can help keep tax deductions steady

Dear Liz: Regarding the reader who was worried about not having sufficient tax deductions: I recommend charitable giving. As our mortgage interest per payment fell, I augmented it with charitable giving to maintain the same annual total for income tax deductions (interest plus charity). As the years go by, our interest decreases and charity increases. Payments to charity accomplish a social benefit, while interest payments just line the pockets of bankers. We give to a broad variety of charities: national, local and international organizations, religious and secular, health and social care, care for children at risk, veterans, Red Cross, etc. The great thing about charitable giving is that we get to choose whom we wish to help. When asked, most organizations will keep your demographic information private so that you are not inundated with requests via the sale of donor lists.

Answer: Thanks for sharing your approach, but people should understand that it requires paying out more money over time to maintain the same level of itemized deductions.

Mortgage payments typically remain the same over the life of the loan, with the amount of potentially deductible interest shrinking and the amount applied to the principal increasing with each payment. So as the amount of deductible interest declines, you would have to increase your contributions to charity in addition to making your mortgage payment each month if you wanted to keep your itemized deductions unchanged.

Filed Under: Q&A, Saving Money Tagged With:
March 17, 2014 By

How should couple with age gap tap Social Security spousal benefits?

Dear Liz: I am 55 and my wife is 65. She only worked a few part-time jobs as she spent most of her working years raising our nine beautiful children. My question is, since she does not have enough credits to collect Social Security on her own work record, can she claim spousal benefits on my work history? If so, at what age and how will it affect my benefits?

Answer: Your wife can receive spousal benefits based on your work record, but those checks can’t start until you’re old enough to qualify for benefits at age 62 (when she’s 72).

If you apply at 62, however, you’re typically locked into a check that would be about 30% smaller than what you’d get if you waited until your “full retirement age” to start. Full retirement age used to be 65, but it’s now 66 and will gradually increase to 67 for people born in 1960 or later.

At your full retirement age, you have the option to “file and suspend,” in which you file for retirement benefits and then immediately suspend your application. Your wife can start receiving spousal benefits, but because you aren’t actually receiving checks, your benefit can continue to grow until it maxes out at age 70.

For many couples, it makes sense for the higher earner to delay starting benefits as long as possible. Given your big age gap, however, you may be better off with a hybrid approach: starting your own benefits (and your wife’s spousal benefit) at age 62 and then suspending your benefit when you reach full retirement age, said economist Laurence Kotlikoff, a Boston University professor who created the site MaximizeMySocialSecurity.com to help people analyze their claiming options. Your benefit would grow 8% a year from the time you suspend to the time you restart at age 70. Your wife would continue to receive her spousal benefit in the interim.

Because your wife will be older than her own full retirement age of 66 when she starts receiving checks, she will be entitled to half of the benefit you’re scheduled to get at your full retirement age. What she gets doesn’t diminish what you get. Spouses who haven’t reached their full retirement age when they apply for spousal benefits have to settle for a discounted check.

Clearly, claiming decisions can be complicated, especially for married people and even more so when there’s a big gap in their ages. AARP has a free calculator that can help most people understand their options. T. Rowe Price also has an easy-to-use calculator, but it doesn’t work for married couples with more than a six-year age gap.

For a more detailed and customizable calculator, you may want to pay $40 to use the software at sites such as MaximizeMySocialSecurity.com or SocialSecurityChoices.com, co-developed by economist (and Social Security recipient) Russell F. Settle.

Filed Under: Q&A, Retirement Tagged With: ,
March 10, 2014 By

When inheritances don’t come

Dear Liz: I read with interest the question you received from the widower who thought he should inherit from his father-in-law, despite the death of his wife. Your answer was great, but it got me thinking about the mind-set that makes someone even think to ask the question. It’s obvious that the asker and his late wife clearly lived their life expecting to inherit a large amount of money. Which leaves unasked, how did they live and what did they save on their own? Did they take vacations instead of save? Did they not save at all? The bottom line here is that you need to reinforce that there is no “sure thing” in expected inheritances and encourage people to amass wealth on their own. Someone else’s money is someone else’s money, and even if he intends to leave it to you, an illness, a lawsuit or some other loss could wipe out anything he meant you to have.

Answer: People who expect an inheritance to save them from a life of not saving are courting disappointment.

About half of those who die leave less than $10,000 in assets, according to a 2012 study for the National Bureau of Economic Research. Many failed to save adequately during their working lives, but even those with substantial assets can find their wealth eroded by longer lives, market setbacks, chronic illness and nursing home or other custodial care.

Hopes of an inheritance also can be dashed by remarriages, poor planning or both. For example: Dad dies without a will and Stepmom inherits the bulk of the estate, which she gives to her own kids. Or Mom thinks she’s tied up everything in a trust, but her surviving spouse figures out a way to invade the principal. Or Grandma gets victimized by a gold-digger or a con artist, leaving nothing but hard feelings.

Most of those who do inherit don’t get fortunes. The median inheritance for today’s baby boomers is $64,000, which means half get less, according to a 2010 study from the Center for Retirement Research at Boston College.

So you’re right that the best approach for most people is to prepare as if there will be no inheritance, since if there is one, it probably won’t be much.

Filed Under: Q&A Tagged With: ,