Bank failures spotlight brokerages’ SIPC insurance: How it works
Dear Liz: In light of the recent bank failures, I am wondering about the safety of investments with a brokerage firm. If the brokerage firm that I am using fails, do I stand to lose money even though I am invested in specific stocks or bonds? Does it make a difference if I have money in one of their branded money market funds?
Answer: Your brokerage probably is a member of the nonprofit Securities Investor Protection Corp., which protects against the loss of cash and securities when a covered brokerage fails. Accounts are insured up to $500,000 per customer, including a $250,000 limit for cash.
Covered securities include stocks, bonds, Treasurys, certificates of deposit, mutual funds and money market mutual funds. (Money market accounts and certificates of deposit are considered investments rather than cash under SIPC rules.)
The “per customer” limit is based on how the accounts are owned or titled. If you have a retirement account and a regular brokerage account, for example, separate $500,000 limits would apply to each.
SIPC coverage kicks in if a brokerage fails and securities or cash are missing from your account. You also have protection in case of unauthorized trading or theft from your accounts. SIPC insurance does not protect you against stock market drops or other declines in the value of your investments.
With the recent failures of Silicon Valley Bank and Signature Bank, here are ways to make sure your money is safe.
Grandma needs tax help
Dear Liz: My grandma is 78, divorced, and has not filed taxes in the last decade. I was wondering what she should do because she is head of the household and taking care of three adopted kids and needs help.
Answer: Please help connect your grandmother with AARP Foundation Tax-Aide, which provides free virtual and in-person tax help. You may be able to help her make an appointment and gather the documents she’ll need to file those missing tax returns.
Your obviously busy grandma may have procrastinated on filing her taxes because she worried about a tax bill.
But depending on her income and circumstances, she may have been eligible for refundable credits or other tax breaks that could have put money back in her pocket. (The tax law provides a three-year window to claim a refund, so she would already have lost out on refunds from the earlier years.)
If she does owe taxes and penalties, the IRS has payment plans that could help. A Tax-Aide volunteer will explain her options for paying any overdue bills.
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Tax pitfalls of a house gift
Dear Liz: I have a friend whose mom gave him and his sibling her house a few months before she died. They sold it right away. He got a 1099-S tax form and is confused about what the capital gains are. Technically there were none because they sold it right after she died.
Answer: Ouch. If your friend and his sibling had inherited the home after the mother died, you would be right — there would be little or no capital gains, because the house would receive a new value for tax purposes on the day the mother died. That “step up” to the current market value would mean no taxes would be owed on all the appreciation that occurred during the mother’s lifetime.
But that favorable tax break happens only when property is transferred after death. Instead, the mother gave the house to her children during her lifetime. That means they got her tax basis as well — essentially what she paid for the house, plus any qualifying home improvements. They will owe capital gains tax on the difference between that basis and the net amount they realized from the sale (the sale proceeds minus any selling costs).
It’s unfortunate the mother didn’t consult a tax pro before transferring the home. Urge your friend to do so now because there may be ways to reduce (but not eliminate) the tax bill that resulted.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.