Money Management

How to get out of a car-lease contract

QWe're unhappy with our leased family car, but the lease has more than two years to run. We'll have to pay a hefty termination fee, unless we can find someone who's willing to take over the lease. How do we go about that?

A Carefully. Assuming your finance company allows transfers (some won't if the lease is less than six to 12 months old, for instance), you may still be liable if your replacement lessee defaults, owes lease-end charges, or causes uninsured damage to the car. Coverage for these risks can be costly and isn't widely available. The finance company will charge a transfer fee up to several hundred dollars and will probably tack on a fee for checking the new lessee's credit.

Also, you might have to offer a cash incentive to get a replacement. And you'll have to pay for a newspaper classified ad or for help from an online service such as Swapalease.com or LeaseTrading.com. All told, the lease transfer could set you back $2,000 or so. Considering the expense and risk, you'd best think twice unless you can find a reliable friend or relative to step into your shoes.

Social Security benefits and working after retirement

QI retired last year at 63 and began collecting Social Security benefits. I'm considering a part-time job that would pay me $20,000 this year. I'd lose some benefits, I know, and would have to pay 30 percent federal tax on my earnings, but no state tax. Would I have enough left to make it worthwhile?

A If you take the job, you'll forfeit $1 of Social Security benefits for every $2 you earn above $11,280 in 2002. That amounts to half of $8,720, or $4,360. But you'll lose some money even if you don't take the job, because 85 percent of the additional benefits you'll collect—$3,706—will be taxable in your 30 percent bracket. Since the tax would total $1,112 (30 percent of $3,706), working would actually cost you only $3,248 more in benefits ($4,360 minus $1,112).

Because you'd pay 30 percent in income tax and 7.65 percent in Social Security tax on your $20,000 salary (yes, you still pay the tax even though you're collecting benefits), your take-home from the job would be $12,470. Reducing that by the $3,248 benefit loss leaves you $9,222. Is that sufficient compensation for your time? Only you can decide.

Two cheerful notes: After you turn 65 next year, your benefits won't be trimmed, regardless of how much you earn. And in any month preceding your birthday that year, every $3 of excess earnings will cost only $1 of benefits.

Avoiding the limit on business meal deductions

QA doctor friend insists on paying for our business meals, because he says he gets full tax-free reimbursement from the corporation he works for. Since the IRS allows deductions for only 50 percent of such expenses, how is that possible?

A If he provides his employer with adequate evidence of the expense and the business reason for it, the amount reimbursed isn't included in his taxable income. But even if the corporation pays the full cost of the meal, it can claim only half of it on the corporate tax return.

A two-part retirement plan can boost contributions

QMy corporation has a combined profit-sharing and 401(k) plan. If I make the maximum 401(k) contribution from my $128,000 salary in 2002, what's the largest deductible amount the corporation can contribute for me?

A $29,000. For 2002, you can defer up to $11,000 of salary, and your employer can contribute 25 percent of your compensation to the profit-sharing plan.

Under the rules that took effect this year, your compensation includes deferred salary. But total contributions to your account can't top $40,000. So even though 25 percent of your $128,000 salary equals $32,000, the corporation's maximum deductible contribution drops to $29,000 because you're deferring $11,000.

However, if you'll be 50 or older in 2002, you can put an additional $1,000 into your 401(k) without lowering the corporation's $29,000 contribution.

Can you claim more than one home-sale exclusion?

QI moved into my present home in December 2000 but wasn't able to sell my old one until April 2001. Thanks to the home-sale exclusion—up to $250,000 for singles like me—my gain was tax-free. Now I've accepted an attractive job offer in another part of the country, starting this August. I can make a $50,000 profit by selling my existing home then, but my accountant says I should delay until April 2003, since I can't claim a second exclusion for any gain on a sale occurring less than two years after the first sale. Is he right?

A No. An exception applies in your case: You get a prorated exclusion, because the second sale is due to a change in employment. This is true even though you haven't owned and occupied your home for at least two of the five years preceding the sale date and you've already claimed an exclusion for another sale that took place in the past two years.

Since the period between sales is 16 months, your exclusion would be 16/24 of $250,000—more than $166,000—well above your actual $50,000 gain.

How to avoid trouble between joint property owners

QMy brother and I are splitting the cost of a two-family house we're buying as an investment. Since each of us wants to leave his share to his respective heirs, should we take title to the property as tenants in common?

A Forming a partnership may be a better alternative. If you're tenants in common and one of you dies, whoever inherits his share will become a tenant in common with the survivor. If the two parties don't see eye to eye on how to manage or dispose of the property, a court proceeding may become necessary to force its sale.

A partnership agreement between you and your brother can forestall trouble by establishing in advance what steps should be taken if one of you wishes to terminate the arrangement or a change of ownership results from death, divorce, or bankruptcy. The agreement should include the terms for a buyout, too, in case one becomes necessary.

Deducting an IRA contribution before you make it

QI took a deduction for an IRA contribution on my 2001 return, which I filed in March. Later I received a bank statement showing that the money wasn't deposited in the IRA account until early April. Am I liable to be penalized?

A No. IRA contributions made by April 15—the due date of your return for 2001—can be claimed for that year, regardless of when you filed, unless you want them to count for 2002.

When two birds in the bush beat one in the hand

QIt seems to me that stocks likely to split tend to rise in price. Assuming this is true, how can I take advantage of it?

A First you need to identify potential split candidates. Check Standard & Poor's The Outlook, which publishes a list periodically and may be available in your local library. You can also consult Web sites offering investment advice on splits, such as www.stocksplits.net and www.2-for-1.com .

From those candidate lists, choose stocks whose share prices will fall in the 20 to 45 range after they split. Investors generally find stocks in that range more attractive than pricier ones, so an increase in demand for the new, less expensive shares may boost their price. Also check a source such as The Value Line Investment Survey to see if the company's earnings are expected to improve soon. An earnings boost could push up the stock's price, especially if analysts believe it could lead to a hike in the stock's cash dividend.

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

2002;11:147.