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Mother could pay big price for taking bad advice on business deductions

Money Talk

Dear Liz: My two brothers have taken over managing my 81-year-old mother’s two rental properties. They have told her that a ski vacation she paid for, which she took with their families, is a business deduction. Same with many other credit card purchases. Are they putting my mother at risk?

Two other brothers have gotten a lot of heat for charging ski vacations to the company credit card. Their names are Mark and Andrew, and their dad’s name is Bernie Madoff. Ring a bell?

It is possible to combine a vacation with a business trip and deduct some of your own expenses. But it isn’t smart to write off family members’ expenses or even your own transportation costs if the trip was primarily for pleasure. If she’s ever audited, your mother is going to have a tough time explaining how your brothers’ wine tab and her granddaughter’s skiing lessons qualified as a business expense.

The rules, which can be complicated, are laid out in IRS Publication 463, Travel, Entertainment, Gift and Car Expenses. But your mother clearly needs more than a pamphlet at this point. She should have her own tax professional, preferably a certified public accountant or an enrolled agent familiar with rental property rules, to advise her and review her tax returns. Your brothers are playing fast and loose with tax laws, and it’s your mother who could pay a big price if she’s ever audited.

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Take advantage of mortgage-free savings

Dear Liz: My wife and I are about to sell our home and move in with her parents. We’ll have to drain our savings of $15,000 to pay off the rest of what we owe on the mortgage. After the sale, however, our reduced expenses mean we’ll have at least an extra $5,000 a month. We’re carrying roughly $20,000 in credit card debt and make $130,000 a year in income. I see this mortgage-free living as a great opportunity and don’t want to waste it. Can you recommend a good book or point us in a direction to ensure we capitalize on this interesting time in our lives?

That must have been one massive mortgage you were carrying. You may feel positively giddy once those payments are gone, but don’t let it go to your head.

It would be easy to ratchet up your spending now that there’s so much extra money in the bank, but resist the urge. Concentrate first on wiping out your credit card debt, then focus on building up your emergency savings. The discipline of paying off debt and building savings will help you learn to live within your means — something you obviously weren’t doing when you took on that home loan and built up credit card debt.

You also should be saving aggressively for retirement, if you aren’t already. Take advantage of any workplace retirement plans, contributing at least enough to get the full company match, and consider funding Roth IRAs for both of you. Roth contributions aren’t tax deductible but the money is tax-free in retirement, and you can contribute up to $5,000 each as long as your modified adjusted gross income as a married couple filing jointly is under $167,000.

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You can learn more about the basics by reading Eric Tyson’s excellent primer, “Personal Finance for Dummies.”

Differences between credit report websites

Dear Liz: In one recent column, you referred your readers to AnnualCreditReport.com as a site to get a copy of your credit report. In another column, you suggested readers visit MyFico.com to check their credit scores. Does the information available at these two sites overlap, or are they different enough to warrant a trip to both?

The two sites are quite different, although they have some of the same information.

AnnualCreditReport.com is the federally mandated site that allows you to see your credit reports at each of the three major bureaus — Equifax, Experian and TransUnion — once a year for free.

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While you’re on that site, the credit bureaus will try to sell you credit scores, among other products. But the scores they’re selling may not be the FICO scores that lenders use.

To get your available FICO scores, you would need to visit MyFico.com. There, for $15.95 each, you can buy your FICO scores from Equifax and from TransUnion. (Experian no longer sells FICO scores to individuals, although it continues to sell your FICO score to lenders.)

So my advice is to visit AnnualCreditReport.com at least once a year to review your credit reports for free. Whenever you’re going to be in the market for a major loan, buy access to at least one of your scores from MyFico.com so you can see where you stand with lenders.

Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 12400 Ventura Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at https://www.asklizweston.com. Distributed by No More Red Inc.

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