Ask Liz Weston

Get smart with your money

q&a

Q&A: How to start an IRA for your new Gen Z college graduate

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Dear Liz: My son is about to graduate from college and, as a present, I want to use $10,000 to start an IRA for him. But which is better? A Roth or a standard IRA?

Answer: Congratulations to both of you! Starting a retirement account is a great idea, but you should be aware of the numerous rules that limit who can contribute and how much.

Let’s start with the annual contribution limit, which for 2022 is $6,000 for people under 50. (People 50 and older can make an additional $1,000 “catch up” contribution.) Also, your son needs to have earned income — such as wages, salary or self-employment income — that is at least equal to the size of the contribution you want to make. In other words, he needs to earn $6,000 for you to contribute $6,000. If he’s about to start a full-time job, that probably won’t be an issue, but if he’s not working, or working only part time before starting graduate school, that might further limit how much you can contribute.

For all of those reasons, a Roth IRA contribution may be best. He won’t get an upfront tax deduction but withdrawals in retirement will be tax free. He can withdraw Roth contributions at any time without taxes or penalties, so the Roth can serve as a de facto emergency fund. Obviously, it’s better to leave the money alone to grow, but having access to the cash could be helpful while he builds a regular emergency fund.

Q&A: How to get tax return copies

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Dear Liz: Isn’t it the duty of an accountant to send their client the final tax forms that they filed with the IRS and the state? My accountant keeps “forgetting” to do so, and I’ve called him twice to do this. I’m not sure if his constant “forgetfulness” is due to laziness or a health issue such as dementia. I suspect it might be the latter, as he never used to be this way in past years.

Is there another way to get a copy of my returns? I will obviously be looking for a new accountant.

Answer: Yes, you can request copies or transcripts of your returns from the IRS and your state tax agency.

Transcripts are free, and are available for the previous three years. Personally identifiable information such as your name, address and Social Security number will be hidden, but you’ll be able to see all the financial entries, such as your adjusted gross income, taxes paid and so on. You can request transcripts online at irs.gov/individuals/get-transcript, by phone at (800) 908-9946 or by mail using either Form 4506-T or Form 4506-T-EZ and using the IRS address listed on the form.

Copies of your actual tax returns will cost you $43 each. You can request those by filling out and mailing Form 4506.

Your state will have similar procedures, which you can find by searching for your state’s name and the phrase “How do I get a copy of my state tax return?”

Q&A: Why credit scores drop suddenly

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Dear Liz: The same thing happened to me as to the person in your column whose credit score dropped more than 100 points after large purchases. We bought plane tickets for international travel and our credit score took a significant but temporary hit. This also happened when we made a charitable gift by credit card. After an appeal, I was able to get the credit limit on the credit card we use the most increased, and I’m waiting to see if that prevents the credit score from dropping going forward. I did check our credit reports and there were no missed payments or other problems.

Answer: Credit scores can drop when you use a lot of your available credit, but a 100-plus-point drop is unusual and should be investigated. You’re smart to look for ways to mitigate the damage from high usage. Asking to have credit limits increased is one way; another is making a payment before the statement closing date. The balance on that closing date is what’s generally reported to the credit bureaus, and thus what’s factored into your scores. Just remember to pay off any remaining balance before the due date.

Q&A: Homeownership and taxes

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Dear Liz: Five years ago I co-signed on a mortgage for my daughter’s condo in another state. I provided the down payment and paid to upgrade the water, HVAC and kitchen appliances. She paid the mortgage and all other expenses. She also claimed the mortgage interest on her taxes every year. She just sold the condo and is moving to another state. The net proceeds will mostly be used for the down payment on the next property. My name will not be on that one. She will pay me back for the down payment in installments.

I’m aware that the year a property is sold is the only time to claim the upgrades for a deduction. I haven’t been claiming any part of the condo in the last five years. Is there some way to do that on my 2022 taxes? Or should she take the deduction and pay me back in more installments down the road? Obviously, I don’t want to make a claim that will hurt her 2022 taxes, but it would be nice to recoup some of it.

Answer: Home improvements on a personal residence aren’t deductible. If your daughter had paid for the upgrades, she could use the cost to reduce the amount of home sale profits that might otherwise be subject to capital gains taxes. These upgrades can be added to the home’s tax basis, which is typically the amount that was paid to purchase the home. The basis is what is deducted from the amount realized from the sale. It’s the sales price minus any selling costs, such as real estate commissions.

People who live in a home for two of the five years prior to the sale can exclude up to $250,000 of those profits from taxes. (Married couples can exclude up to $500,000.) Unfortunately, those limits haven’t changed since 1997 even as the average home sale price has nearly tripled.

Too often, people don’t discover they owe a tax bill until after they’ve invested the money in another home or otherwise spent it. If your daughter hasn’t already, she should consult a tax pro so she understands what, if any, taxes she may owe on her sale.

Q&A: One big trip whacked this reader’s credit score. How is that possible?

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Dear Liz: I normally use about 5% of my credit card lines and pay them off every month. I just made a major trip purchase that pushed my month’s usage to 31%. My score dropped from 820 to 708 in one day. I can’t believe that the score dropped so much. I have paid my accounts in full for decades. I immediately paid the current balance instead of waiting for the due date in hopes that the score will return. Hard for me to believe this is so sensitive. Comment please.

Answer: Credit scoring formulas are incredibly sensitive to how much of your available credit you’re using. It doesn’t matter whether you pay your balances in full. What matters is the size of your balance on the day that your credit card issuer reports to the credit bureaus. The balance is often, although not always, what you owe on the statement’s closing date.

The large drop you witnessed could indicate a bigger problem, however, such as a missed payment or a collection showing up on your credit reports.

Visit AnnualCreditReport.com and request free copies of your credit reports from each of the three major credit bureaus. (Be careful here: You should type annualcreditreport.com into your browser’s address bar, because searching for AnnualCreditReport.com can turn up a bunch of look-alike sites that might try to charge you for credit monitoring or other services.)

All this assumes that you were looking at the same type of score from the same credit bureau. If you looked at a FICO 8 from Experian on Day 1 and a VantageScore 3.0 from TransUnion on Day 2, then any “movement” in the scores could be chalked up to a difference in the formulas or the underlying data at the credit bureaus.

Q&A: This retiree’s tax preparer allowed IRS fines to accumulate for 15 years. Now what?

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Dear Liz: I have a question about an unethical accountant. I am a retiree living on my investments. My accountant continually put me on extension and every October told me how much to pay. Finally, I created an account with the state tax agency and discovered I was being billed for interest, fees and penalties for failing to pay estimated quarterly taxes. What really gets me angry is how I was never told I needed to pay these taxes each quarter. This has been going on at least 15 years. What are my options? Is there an entity that governs the behavior of accountants?

Answer: There is — if your tax preparer is actually an accountant. Some tax preparers use that title even if they don’t have an accounting credential, said Henry Grzes, lead manager for tax practice and ethics with the American Institute of CPAs.

If your tax preparer is in fact a certified public accountant, then you can make a complaint to your state’s board of accountancy. You can find a list of boards here. Otherwise you can consider contacting the Better Business Bureau, your state’s consumer protection agency or the Consumer Financial Protection Bureau, Grzes said.

A good tax preparer will alert clients to ways they can reduce their tax bill and will discuss the reasons for filing an extension as well as the need to make quarterly estimated payments, Grzes said. But there are no federal regulations governing tax return preparation, although some states have such laws, he said.

For example, anyone who is physically in California and prepares tax returns for a fee, and who is not an attorney, CPA or enrolled agent, is required to register with the California Tax Education Council, Grzes said. The CTEC site has information about how to file a complaint against a tax preparer who isn’t governed elsewhere.