Clean Slate May Not Win the Best Credit Rating
Q: My 21-year-old son is determined to build an excellent credit rating so he can buy a house in a few years.
He believes that by paying off his credit cards in regular monthly installments, rather than wiping the slate clean at the end of each month, he can show a pattern of steady repayment. He argues that this is what potential lenders want to see.
I always thought that the best credit record was achieved by paying off your bills completely and promptly.
Who’s right? --S.K.P.
A: Your son raises a valid point; lenders do look for a steady history of prompt repayment of bills. Typically, experts say, a potential lender would scan a mortgage applicant’s credit report looking for at least 24 months of on-time credit repayment.
If your son uses his credit cards only sporadically, he might be wise to spread out repayment over a few months--figuring that the extra interest charges he incurs are worth the price of building a strong credit report.
But if he uses his credit cards regularly, he would be money ahead to repay them in full every month. This way he avoids the extra interest charges and still demonstrates a responsible use of his credit.
By the way, this advice from Robin Leonard, the author of several books for consumers on credit, applies equally to people seeking to rebuild their credit history after a bankruptcy, foreclosure or other financial problems. Creditors do like to see a steady pattern of repayment, and stretching out a payment schedule can demonstrate that.
But you should not use this strategy as an excuse to pile on charges when you should be paying off that balance.
Figuring the Taxes on Nevada Vacation Home
Q: I own a vacation home in Las Vegas but maintain a primary residence in California. May I deduct the property taxes I pay in Nevada on my California income taxes? --S.S.
A: Yes. Even though the vacation home in question is out of California, your property tax payments are fully deductible on both state and federal tax returns. If your home in Las Vegas were a rental, your property taxes would be a business expense and would be itemized on Schedule E of the tax forms.
When to Sell Under Profit Exclusion Rule
Q: My wife was born in June, 1940. We want to sell our home as soon as we can while taking advantage of the profit exclusion available to homeowners over age 55. What is the earliest date we could sell? Can the house be a rental? --J.K.
A: Assuming that your wife is older than you, the earliest possible date you could sell the home and still take advantage of the $125,000 profit exclusion is June, 1995. If you are older, then the date is your 55th birthday.
To qualify for the exclusion, you must have lived in the home for three of the last five years.
So, theoretically you could rent the home as early as June, 1993.
However, practically speaking, that would not be wise.
Unless you could guarantee that you would have a buyer in June, 1995, you would either have to move back into the home or face the prospects of losing your immediate eligibility for the profit exclusion because you would no longer meet the “three out of the the last five” rule.
When is Contribution to IRA Tax Deductible?
Q: I will be retiring next month and will begin receiving my pension in January. I am 71 years old. Will I be able to make a deductible contribution to an individual retirement account now that I am drawing a pension?
My wife is age 65. May she make an IRA contribution? --R.R.L.
A: Your ability to make a deductible IRA contribution does not hinge on whether you are receiving a pension. The important issues are your age and the source of your income. If you pass those requirements, then the next issues are whether you are covered by a qualified employer pension plan and the extent of your earnings.
The law says that you must stop making deductible IRA contributions in the year in which you turn age 70 1/2. (This effectively cuts you out right now.) In addition, you may only make IRA contributions with earned income. Pensions are not considered earned income.
However, taxpayers who are drawing a pension and are under age 70 1/2 and still earning an income may make a deductible IRA if they are not covered by their employer’s qualified pension program. If they are covered by a qualified pension program, they might still be able to make a deductible contribution if their earnings are less than $35,000 per year for single taxpayers and $50,000 for married couples filing joint returns.
If you met all the above qualifications except for age, you might still be able to make a deductible IRA contribution. How? Taxpayers over age 70 1/2 who are working may make a deductible contribution for a non-working spouse under that age. The contribution may not exceed $2,000 and the entire amount must be allocated to the account of the spouse.
Property in Living Trust Gets Revalued
Q: The living trust my wife and I have has property in it now valued at $140,000. We paid $7,000 for it 30 years ago.
When we die, will the property be revalued as of the last of us to die, or will the basis that our children inherit be $7,000? --H.S.
A: The property will receive a step up in its tax basis upon the death of you and your wife. The fact that the property is in a living trust is immaterial to its valuation for income tax purposes.
When the first spouse dies, the property will be revalued and it will be revalued again upon the death of the second. Your children will not inherit the original tax basis.
