q&a

Q&A: Big severance creates a tax problem

August 27, 2018 By Liz Weston

Dear Liz: My husband is being laid off with a severance package equal to seven months’ pay. What’s better for tax avoidance in California, a 529 college savings plan contribution or investing in an IRA?

Answer: A 529 college savings plan contribution won’t save you taxes in California. There’s no federal deduction for such contributions, and unlike most other states, California doesn’t offer a state tax break, either.

Your husband can contribute up to $5,500 to IRAs for each of you, plus an additional $1,000 per person if you’re 50 or over. Whether the money will reduce your 2018 tax bill depends on your income and whether you’re covered by workplace retirement programs.

If your husband had a 401(k) or similar plan, he would be able to deduct his contribution only if your modified adjusted gross income as a married couple filing jointly is under $101,000. A partial deduction is available until the tax break phases out at $121,000.

If you aren’t an active participant in a workplace plan, however, higher income limits apply. Your husband can make and deduct a spousal IRA contribution for you as long as your joint modified adjusted gross income is under $189,000. A partial deduction is available until the tax break phases out at $199,000.

Even if you’re able to reduce your taxable income with such contributions, you’ll still probably owe a sizable tax bill on this severance. Please consult a tax pro about how much of the money to put aside and whether you’ll need to make any payments before next year’s tax deadline.

Q&A: When the path to the altar is littered with old debts

August 20, 2018 By Liz Weston

Dear Liz: My fiancee has incurred a lot of medical debt during the course of our relationship. She works 13- to 14-hour days at two jobs so she can start saving for the wedding and our shared goals, which include buying her a car, sending me to grad school without incurring more student debt, creating a real emergency fund for us, and moving out of my apartment into a new one.

She thinks her credit is horrible (though she has never checked it) and she knows with the medical bills, it is getting worse. She doesn’t think she can move in because she can’t buy a car.

What should I do? Should I help her with her debt so we can actually plan for the wedding scheduled next July? Or should I let her deal with it herself?

My biggest concern in all of this is that I have significantly better finances. I worked hard in college and have a full-time job that pays a living wage. I’ve been in my own apartment for two years.

Sometimes I feel resentful of the fact that she cannot contribute to our household like I can, and I worry that I will have to shoulder our shared goals. I am particularly worried I will have to pay for the wedding, which I am finding more and more ridiculously expensive every day (we’re only spending $5,600), while not being able to save for grad school.

I really am not sure how to give up my frustration and face reality, and our reality is that medical debt is holding up our plans.

Answer: It’s understandable that you’re frustrated. But please don’t take it out on your fiancee, who sounds like a hard-working person who had the bad luck of getting sick.

Working 13-hour days isn’t sustainable, particularly for someone with health issues. She may already have more medical debt than she can reasonably repay, and continuing to struggle with these bills may make achieving other goals impossible.

Encourage her to make an appointment with an experienced bankruptcy attorney. Bankruptcy may not be the right choice for her, but the attorney should be able to assess her situation and discuss her options.

Her debt may be manageable with some help from you. In that case, you two need to discuss how to handle this and your finances in general.

Don’t listen to people — or your own preconceptions — telling you there’s only one way couples should handle money. Some married couples keep their finances entirely separate. Some combine everything — all assets and income are joint, and so are all debts. Most take a middle path, combining some accounts and obligations while keeping others separate.

Finances can also evolve. You may be able to contribute more now, but your fiancee may become the primary breadwinner when you start graduate school. When that happens, would you expect her to help you pay the student loan debt you acquired before marriage, or will that be your obligation?

What’s most important is that you figure out how to work as a team, without resentment and unspoken expectations. It may help to schedule a visit with a fee-only financial planner to discuss your shared goals and how you’ll fund them. You can get referrals to fee-only advisors who charge by the hour at the Garrett Planning Network, www.garrettplanningnetwork.com, and to those who charge monthly fees at the XY Planning Network, www.xyplanningnetwork.com.

Q&A: Death means capital gains take a holiday for heirs selling a house

August 13, 2018 By Liz Weston

Dear Liz: I am in my mid-80s and in declining health. I want to advise my beneficiaries about possible taxation on the sale of my home after I expire. I bought the place in 1995 for $152,000. It now has a market value of about $400,000. The issue is whether that gain is taxable upon the sale after my death. I also have a $57,000 long-term capital loss carry-forward in my income taxes, which is being written off at a rate of $3,000 each year.

Answer: The gain in your home’s value won’t be taxable at your death. Instead, the home will get what’s known as a “step up in basis.” That means its new value for tax purposes will be its market value when you die. So if it’s worth $400,000 when you die and your heirs sell it for $400,000, no capital gains taxes will be owed on the sale.

The news isn’t so good for your capital loss, however. Any unused carryover expires at your death and can’t be transferred to your estate.

As you know, capital losses — losses on investments or assets that you sell — can be used to offset capital gains and reduce your tax bill. If your losses exceed your gains, you can offset up to $3,000 of ordinary income each year. Any capital loss remaining after that can be used the next year in the same way: first to offset capital gains, then to offset up to $3,000 of ordinary income.

Often when taxpayers have such a loss, they’re encouraged to sell investments that have increased in value to help use up the loss faster, but you should talk to your tax pro and estate planning attorney to see if that makes sense in your case.

Q&A: Auto dealers must abide by credit check limits

August 13, 2018 By Liz Weston

Dear Liz: I have loans and have paid my credit cards in full for over 30 years. My FICO score is 829. I don’t really care as I don’t plan to borrow in the future. I check my score and reports occasionally to check for a possible error or scam. Other than this, is there any reason at all that I should care?

I did notice a car dealership checked my score when recently I submitted a down payment check to order a car for which I would pay in full. I don’t believe they would refuse to sell me the car for cash if I had a lousy credit score, so they probably wanted some measure of reassurance about whether I have a lifestyle that could afford completing the deal.

Answer: You have many FICO scores, not just one, but if any one of them is 829, then the rest of them are probably pretty good, too.

Credit scores are used for more than borrowing decisions. In most states (but not California), insurance companies can use credit information to set premiums. Cellphone companies, landlords and utilities use them as well.

Car dealerships, however, aren’t supposed to pull your credit scores without your permission. That’s a violation of the federal Fair Credit Reporting Act.

If the dealership got your permission by telling you a credit check was necessary for a down payment (or an all-cash deal, for that matter), then it misled you.

To prevent money laundering, dealerships are required to ask for identification and a Social Security or Tax ID number from buyers who are purchasing a car for more than $10,000 in cash. That’s it.

But some dealers pretend the anti-terrorism Patriot Act requires them to check your credit when you pay cash, which is nonsense. Typically, dealerships run credit checks to see if they can make an extra buck by financing the deal. Those checks are coded as hard inquiries that can damage people’s credit scores. (That’s in contrast to what happens when you check your own credit, which creates “soft” inquiries that don’t affect scores.)

Your scores are high, so the credit check probably didn’t ding them much. But the dealership was accessing information about you that it didn’t need to have. Plus, the more outfits that have your credit information, the greater your risk of identity theft.

If you didn’t give your OK, you could file a Fair Credit Reporting Act lawsuit to collect up to $1,000 from the dealership. If you did give your permission, strongly consider withholding it the next time if you’re not interested in financing your vehicle.