Money Management Q&As

July 20, 2007

PMI premiums; splitting assets; auto insurance

Using HSA funds for a child

My wife and I both list our 21-year-old son as a dependent on our health insurance plans, but neither plan fully covers the expenses for his minor chronic health conditions. Can my wife withdraw funds from her health savings account for those unreimbursed medical costs?

Only if your son qualifies as a dependent on Dec. 31, 2007 (even if he receives the medical care sooner). That generally means he must meet certain age, residency, and income requirements (for details, see IRS Publication 501, available at http://www.irs.gov).

Can you deduct your PMI premiums?

A friend who's buying a new home claims he'll be able to deduct his premiums for private mortgage insurance. I thought those weren't deductible, so who's right?

He is. Taxpayers who buy a home in 2007 can deduct their PMI premiums, thanks to a recent law change. Only those with adjusted gross income of $100,000 or less ($50,000 for married taxpayers who file separate returns) can claim the full cost of their premiums, however.

The itemized deduction decreases by 10 percent for every $1,000 of income over that amount and phases out completely once AGI reaches $110,000 (or $500 and $55,000, respectively, for spouses filing separately.) The new deduction took effect Jan. 1 and applies only to mortgages issued on or after that date. Your friend shouldn't get too excited about this break, however, because it will expire at year-end unless Congress moves to extend it.

Mistakes to avoid when splitting assets

My husband and I separated a year ago and have decided to divorce. We're on good terms, so we'll just divide our investment portfolio, bank accounts, and other assets equally. Besides what they're worth, though, what else should we consider?

Several things, starting with liquidity. It's not uncommon for couples to make what seems like an even split, but one spouse winds up with most or all of the bank accounts while the other gets the house, car, and other assets that aren't easily tapped. Unless the latter spouse brings in enough other income to cover routine bills, he or she may be forced to take loans against home equity or sell the house or other possessions just to make ends meet.

You'll also want to make sure neither of you will get hit with the lion's share of the taxes. To avoid that you'll have to look at the basis of all the assets and whether the profit on their sale will be taxed as ordinary income or capital gains.

Make sure you understand all of the distribution rules for your retirement plans, since those will also determine when or whether you can tap your long-term savings.

For help in evaluating all the potential ramifications, you may want to consult a financial planner or accountant who has expertise in the financial aspects of divorce.

When an auto insurer settles too low

I recently totaled my 2-year-old Cadillac CTS-V, but the settlement check from my insurer is much too low. The car was in perfect condition and had a special trim package plus other custom features that added to its value. How do I get the insurer to compensate me fairly?

You'll have to gather documentation to prove the car's true worth and ask the insurer for an adjustment. You may be able to build an adequate case on your own if you have recent pre-accident photos showing the car's condition, receipts for the customizations, data from online pricing sites or private-party sales, and the like.