Dear Liz: My husband and I are in our 80s, living in a retirement community. Our investment account is valued at $550,000. This should see us through until we die. We have neither pension nor other assets. Social Security provides $2,760 a month and we are in the lowest tax bracket. Our financial advisor is using tax loss harvesting “to save us from capital gains tax”. We are both uncomfortable with this. Taking a loss on purpose does not seem like a safe path and should be for people with a long-term future. Should we ask him to stop using this trading method?
Answer: Tax loss harvesting involves selling investments that have fallen in value to offset some or all of the gains on investments that have gained in value. The point is to reduce capital gains taxes. Since you are in the lowest tax bracket, however, your federal tax rate on long-term capital gains is effectively zero. It’s hard to imagine how your adviser would justify tax loss harvesting given your situation.
Go ahead and ask them. The answer should give you an insight into how much your adviser knows, or cares, about your individual circumstances. Of course, you should stop tax loss harvesting unless there’s a good reason to do so, but you may also want to start looking for a new adviser.
Keep in mind that most financial advisors do not have your best interest at heart. They can recommend investments or follow strategies that make them money, regardless of whether the recommendations are the best fit for your financial situation.
If you want an advisor committed to putting you first, you’ll need to look for one who is willing to be held to a fiduciary standard. These advisors include certified financial planners, certified public accountants (including those who are personal financial specialists), and accredited financial advisors. A fiduciary would have taken the time to understand your financial situation and then designed a strategy to best suit your circumstances.
When an inherited home is sold, it pays to know the tax rules
Dear Liz: My sister and I inherited a house from our mother in 2003. At the time, it was valued at approximately $500,000. It is now worth $1.3 million and we want to sell and split the profits. My sister has been living at home since mom died. Approximately how much would the tax liability be?
Answer: You’ll determine the potentially taxable gain by subtracting the tax basis—the amount the home was valued at at your mother’s death, plus any qualifying improvements—from the sale proceeds. Your sister can exclude $250,000 of her share of earnings since she owned and lived in the home for two of the previous five years. If her share of the gain was $400,000, for example, she would owe long-term capital gains taxes on $150,000 of it.
As a nonresident, you would not have the option to exclude any of the gains, so you would owe long-term capital gains taxes on your entire $400,000 share. Long-term capital gains rates depend on your income, but the federal rate is 15% for most.
A man dies young, a widow wonders: What are my survival benefits?
Dear Liz: My question is related to survivor benefits. How much does the surviving spouse receive in Social Security benefits if the higher-earning spouse dies at age 59 before he or she becomes eligible? He worked for over 40 years and met all the requirements, except that he had not reached the minimum age. I plan to wait until next year when I’m 60 to collect. Will my survivor benefits be based on what he would have received if he had reached the full retirement age of 67?
Answer: The short answer is yes, but your survivor benefit will be significantly reduced if you start at age 60, and you’ll also be subject to the earnings test, which reduces your check by $1 for every $2 you earn above a limit. set, which in 2024 is $22,320. The income test disappears once you reach your full retirement age.
You are also allowed to switch from a survivor benefit to your own, or vice versa. Most Social Security benefits do not allow for such flexibility. You can collect survivor benefits while allowing yours to grow, for example, if your benefit would eventually be larger.
A paid service like Solutions Social Security or Maximize My Social Security can help you determine the best claim strategy.
Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions can be sent to her at 3940 Laurel Canyon, Nr. 238, Studio City, CA 91604, or by using the “Contact” form at askliweston.com.
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