Money Management

Must you occupy a home to claim mortgage interest?

Q My parents are moving into a cottage I own. Can I continue to take a tax deduction for the mortgage interest, even though I don't live there myself?

A You can treat the cottage as a second home, provided you don't offer it for rent or resale. (If you already have a second home, you can deduct mortgage interest on either, but not on both.) Or if your parents pay you fair rental value, you can report the rent as income and write off mortgage interest and other expenses. If those costs exceed the rent, the difference is considered a passive loss. You may be able to deduct some or all of that, depending on your adjusted gross income and whether you participate in other passive activities.

Can your practice have multiple money purchase plans?

Q I'm self-employed and have a money purchase retirement account with a broker, under a prototype plan sponsored by the firm. I also want to invest some of my contributions in no-load mutual fund shares unavailable through my broker. If I set up a money purchase account directly with the fund, I'll have to adopt its prototype plan, but the fund's representative claims it would be illegal for me to maintain both plans. Is he correct?

A No. You can have more than one money purchase plan, but your annual contributions to all of them must not exceed the limit for that type of plan. For eligible employees, the limit is generally 25 percent of salary, but you'll have to reduce this in figuring the deduction for contributions you make for yourself. To do that, first subtract half of your self-employment tax from your practice net. Your maximum deductible contribution is 20 percent of the remainder, but not more than $35,000.

Valuing jointly owned assets after the first spouse dies

Q In the past 10 years, my wife has put up a third of the money toward some investments that are registered to us jointly and will go to the survivor. Will their full value be included in my estate if I die first? What if she predeceases me?

A Half the value of assets owned jointly with right of survivorship is considered part of the estate of the spouse who dies first. For estate tax purposes, that means half the total fair market value on the date of death. Of course, the surviving spouse owes no estate tax on the inheritance. But he or she must later use that same value as cost basis in figuring any capital gain or loss on the sale of the inherited half. The survivor's basis for the noninherited half is 50 percent of the total original cost.

For instance, let's say you bought the assets for $60,000—you paid $40,000 and your wife paid $20,000. Even if your wife dies first, your cost basis for the half you didn't inherit is $30,000, not the $40,000 you originally paid.

Variable annuity bonuses that sometimes vanish

QI've seen ads for variable annuities that offer "bonus credits." One company says it will add 4 percent to any purchase—for example, a $20,000 contract would have a $20,800 starting value. What's the catch?

A Insurers have devised several ways to recoup bonus credits. Surrender charges—that is, penalties for early termination—may be higher for annuities that come with a bonus than for those without one, or the penalty period may run longer. Some insurers will deduct more annually to cover risk factors, or they'll simply tack on extra fees. Still others may limit bonus credits to the initial premium or to payments during the first year. Or you may have to cough up the bonus if you make a withdrawal, if a death benefit is paid to your beneficiary, or for other reasons.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management.

Medical Economics

2001;14:99.