Ask Liz Weston

Get smart with your money

Taxes

Q&A: Rebalancing your portfolio can trigger tax bills

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Dear Liz: Is there a tax aspect to rebalancing your portfolio? You’ve mentioned the importance of rebalancing regularly to reduce risk.

Answer: Rebalancing is basically the process of adjusting your portfolio back to a target asset allocation, or mix of stocks, bonds and cash. When stocks have been climbing, you can wind up with too high an exposure to the stock market, which means any downturn can hurt you disproportionately.

There definitely can be tax consequences to rebalancing, depending on whether the money is invested in retirement plans.

Rebalancing inside an IRA, 401(k) or other tax-deferred account won’t trigger a tax bill. Rebalancing in a regular account could. Investments held longer than a year may qualify for lower capital gains tax rates, but those held less than a year are typically taxed at regular income tax rates when they’re sold.

Tax experts often recommend selling some losers to offset winners’ gains, and “robo advisor” services that invest according to computer algorithms may offer automated “tax loss harvesting” to reduce tax bills.

Monday’s need-to-know money news

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Today’s top story: How to size up your property tax assessment. Also in the news: How to never miss a credit card payment again, what it takes to retire early, and how to save money by embracing the ‘pain of paying.’

How to Size Up Your Property Tax Assessment
Don’t be caught offguard.

How to Never Miss a Credit Card Payment Again
Automate your credit life.

Dreaming of an Early Retirement? Here’s What It Takes
Never too early to get started.

Save Money by Embracing the ‘Pain of Paying’
Cash can hurt.

Thursday’s need-to-know money news

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Today’s top story: 4 ways to get a sales price when there isn’t a sale. Also in the news: What to buy and skip in September, why your kid’s after-school job may mean tax homework for you, and why your credit card debt is worse than your mortgage debt.

4 Ways to Get a Sale Price When There Isn’t a Sale
It can be as simple as just asking for one.

What to Buy (and Skip) in September
Skip the televisions.

Your Kid’s After-School Job May Mean Tax Homework for You
When to file a return.

Your Credit Card Debt Is Worse Than Your Mortgage Debt
The difference between good and bad debt.

Q&A: Big severance creates a tax problem

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

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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: Figuring the tax toll for an inherited house

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Dear Liz: I inherited my home when my husband died. If I sell this house now at a current market value of around $900,000, what will be the basis of the capital gains tax? I think at the time of my husband’s death, the house’s market value was $400,000.

Answer: Based on your phrasing, we’ll assume your husband was the home’s sole owner when he died. In that case, the home got a new value for tax purposes of $400,000. That tax basis would be increased by the cost of any improvements you made while you owned it. When you sell, you subtract your basis from the sale price, minus the costs to sell the home, such as the real estate agent’s commission, to determine your gain. You can exempt up to $250,000 of the gain from taxation if it’s your primary residence and you’ve lived in the house at least two of the previous five years. You would owe capital gains taxes on the remaining profit.

Here’s how the math might work. Let’s say you made $50,000 in improvements to the home, raising your tax basis to $450,000. You pay your real estate agent a 6% commission on the $900,000 sale, or $54,000. The net sale price is then $846,000, from which you subtract $450,000 to get a gain of $396,000. If you meet the requirements for the home sale exclusion, you can subtract $250,000 from that amount, leaving $146,000 as the taxable gain.

If your husband was not the sole owner — if you owned the home together when he died — the tax treatment essentially would be the same if you lived in a community property state such as California. In other states, only his share of the home would receive the step-up in tax basis and you would retain the original tax basis for your share.