q&a

Q&A: Tax consequences of giving versus bequeathing

December 14, 2020 By Liz Weston

Dear Liz: Someone who expects to be an executor recently wrote to you about a plan to distribute individual pieces of art to family members. Your response addressed the executor’s responsibility to determine the art’s worth before doing so. You also suggested having the parent designate what was to go to whom. What would the consequences be of the parent giving the pieces of art to the intended recipient prior to death? My mother did both; i.e., gave some to me and some to my sister prior to her death, and designated others to be distributed following her death. She had personal rather than financial reasons for doing it this way.

Answer: Let’s say your mom bought a painting from a struggling artist for $500. Later, the artist became famous and the painting’s value rose to $500,000. If she gave you the painting and you sold it, you would have to use the amount she paid — her basis — to determine the taxable profit ($499,500).

If she bequeathed the painting to you instead, the artwork would get a new tax basis which is usually its value on the day she died. You could sell the painting for $500,000 and not owe a dime in taxes.

Few people have artworks that experience that kind of appreciation — or any appreciation, for that matter. The issue of basis most often comes up when people are transferring real estate, stocks or other assets in transactions that are reported to the IRS. If your mom did have valuable works, though, transferring them through bequests could be advisable.

Q&A: Windfall creates Medicare headache

December 14, 2020 By Liz Weston

Dear Liz: A couple of years ago, I was forced to receive a windfall by the sale of a company in which I held stock. Besides taking a huge tax hit, I just got my Social Security estimate for 2021 in which my Medicare bill went up by 47%. This year my income will go back down to normal levels. Is there any way to convince Social Security that this was a one-time event and it shouldn’t adjust my Medicare premiums?

Answer: There’s typically a two-year lag between receiving a windfall and potentially having your Medicare premiums raised because of IRMAA (Medicare’s income-related monthly adjustment amount). You can appeal the increase if your income dropped in the meantime because of one of the following life-changing events:

Marriage
Divorce or annulment
Death of a spouse
Work stoppage
Work reduction
Loss of income-producing property (because of a disaster or other event beyond your control, not due to a sale or transfer of the property)
Loss of pension income
Employer settlement payment (due to employer’s bankruptcy or reorganization)
If any of those circumstances apply, you can call Social Security at (800) 772-1213 to arrange an interview. Alternatively, you can download form SSA-44 from the web and mail it in. You will need to provide proof of the event, such as a death certificate, divorce decree or documents from an employer.

Q&A: How to help your adult kids build their own credit

December 14, 2020 By Liz Weston

Dear Liz: My first house is paid for, and my oldest daughter and her husband are living there now. I added her name to my credit card, which is paid in full every month, but otherwise she hasn’t established any credit. I have been paying the utilities up until now, but they are going to take them over. Will changing my name and direct debit bank information to theirs on the accounts help establish her credit?

Answer: Some alternative credit-scoring systems do use utility payments to supplement the information in people’s credit reports. Experian Boost, for example, allows people to add such payments and potentially increase their Experian credit scores. Still, your daughter would be smart to continue adding traditional credit accounts to her reports.

One way to do that is with something called a “credit builder loan,” which is offered by some credit unions and at least one online lender, called Self. Essentially, the applicant borrows a certain amount, which the lender puts in a savings account or certificate of deposit. The borrower can claim the money after making a certain number of payments. The payments are reported to the three credit bureaus, contributing to her scores.

She also could apply for a credit card on her own, to supplement the one you added her to. If her credit isn’t yet good enough to qualify for an unsecured card, she could consider getting a secured card that gives her a line of credit equal to the amount she deposits with the issuing bank.

Q&A: Reconciling checking accounts

December 7, 2020 By Liz Weston

Dear Liz: Any suggestions for the best way to catch up with monthly statements from checking accounts? Friends and I need to know: Should we start from the first one we missed or work backward?

Answer: With the switch to online banking, many people don’t reconcile their checkbooks anymore. In fact, many don’t use checks, so there’s no risk that one will clear belatedly and trigger overdrafts.

That’s not to say overdrafts aren’t possible or that errors and fraud don’t happen. People should review their transactions regularly, even if they don’t reconcile.

To answer your question, typically the best way to start reconciling your checking account is to start from the first month you missed and work forward.

Q&A: Don’t get creative with mom’s money

December 7, 2020 By Liz Weston

Dear Liz: My 91-year-old mother lost her mobile home (and everything else) in a fire. I was able to put her in assisted living and she is actually doing better than when she was by herself. There was insurance money, which is now in a joint account, but considering her age, we have decided not to buy another place. Is there something I should do with this money? Friends have told me I should invest it. Her new home will keep her whether she pays or is (eventually) on Medicaid.

Answer: You should talk to an elder law attorney before doing anything with the money. Typically, your mom wouldn’t be able to get on Medicaid until she spends virtually everything she has. If she tries to avoid spending her money by transferring it improperly, the transfer could delay her eligibility. You can get referrals from the National Academy of Elder Law Attorneys.