Reading between the lines of care facility brochures; Can you take advantage of this IRS giveback? Stay within the rules when you switch IRAs; If you buy a muni for more than face value; Breaking even when you pay points; How to establish credit when you have no record
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Q: An elderly relative has asked my advice in choosing an assisted-living facility, where she can get help with daily chores. Brochures from a couple of them look good, but can we trust what they say?
A: It's the admission contract that counts, not the sales pitch. Several organizations representing the elderly caution that facilities' promotional materials often promise more than their written agreements oblige them to deliver. For instance, they may give the impression that residency is for life, when in fact a resident will be discharged if his or her deteriorating physical condition requires a higher level of care than the facility is able or licensed to provide. The brochure may also claim falsely that staff is available around the clock or is trained to deal with Alzheimer's and other illnesses that create special needs.
Your relative should also make sure that she understands the facility's fee structure, which the brochure may conveniently fail to spell out. The contract might allow the facility to raise fees based on periodic re-evaluations of her needs and levy additional charges for "extra" serviceswhich could include snacks, housekeeping, laundry, utilities, personal care services, and transportation.
For pointers on evaluating assisted-living facilities, check with AARP ( www.aarp.org ), the Assisted Living Federation of America (www.alfa.org), and the National Center for Assisted Living ( www.ncal.org ).
Q: For many years, my wife has run a consulting business from home and deducted expenses for a home office in connection with it. For that reason, we could claim only part of the exclusion on the gain from the sale of our previous home in 2000. I've read that the IRS has recently revised this rule. Is it too late for us to benefit from the change?
A: No. You have until three years from the date you filed your return for 2000 to amend it. Suppose the office occupied one-fifth of the house and you sold the property at a $300,000 profit. Although that's less than the $500,000 exclusion a married couple can claim, $60,000 (one-fifth of $300,000) was attributable to the office, and the exclusion didn't apply to this amount in 2000. Now you can recoup $12,000the 20 percent tax you paid on the $60,000 gain.
Q: Earlier this year, I withdrew some money from a Roth IRA and rolled it over to a second Roth IRA within 60 days to keep the tax break. Now I'd like to make another withdrawal from the first account. Can I roll it into a third Roth IRA, or must it go into the second?
A: Neither. You have to wait 12 months before you can make another rollover from the first account, regardless of which IRA you designate to receive it. But you can get around this obstacle by arranging for a direct (trustee-to-trustee) transfer from the first IRA to either of the other two. As long as the funds don't pass through your hands, the 12-month limit on rollovers won't apply.
Q: I recently paid more than face value for a 5 percent municipal bond that matures in 10 years. If I have a loss when it's redeemed or sold, can I claim a tax deduction?
A: Maybe. Regulations require you to gradually reduce your cost basis by amortizing the premium over the bond's life. So if you hold it to maturity, your tax basis will equal its face value and you'll have no gain or loss. But suppose you sell the bond at par (face value) after you've amortized half the premium. Then you can claim the remaining half as a loss.
The result may be different, though, if the bond issuer has reserved the right to call (redeem) it before maturity. In that case, you must amortize the premium at a pace that will reduce your tax basis to the redemption value at the call datemeaning that you'll have no gain or loss if the issuer calls the bond at that time.
Let's assume you just bought a $10,000 muni issued in 1983 and you paid $11,000 for it. The bond will mature in 2013, but it's callable in 2008 at $10,500. You'd amortize the $1,000 premium at the rate of $100 a year, so that it will decline to $500 by 2008. If the issuer doesn't exercise the call option then, you'd continue to gradually amortize the remaining $500 premium so that it's down to zero by 2013.
What if you decided to sell the bond at par ($10,000) in 2011? The premium will have shrunk to $200, making your tax cost $10,200, and you'd claim a $200 loss.
This example uses straight-line amortization ($100 a year), which is permissible for bonds issued before Sept. 28, 1985. But for later issues, you must use the much more complicated constant-yield method, described in IRS Publication 550. Better yet, you may want to consult your broker or tax adviser.
Q: I'm trying to decide whether to reduce the interest rate on a home mortgage by paying points. Can you suggest how to figure when I'd break even?
A: The simplest way is to divide the up-front cost by the monthly savings. Say the lender would charge one point to lower the rate from 638 to 618 percent on a 30-year mortgage. If you borrow $150,000, you'd pay $1,500 (1 percent of principal) to cut your monthly outlay from $935 to $911, or $24. Dividing $1,500 by $24 gives you a break-even point 60 months out.
This approach overlooks two important factors, though. If you're using the loan to finance the purchase of a new main home or improve your present one, you can deduct the full amount of the points on this year's tax return, reducing your overall cost. It's also sensible to consider how much you could earn by investing the amount you'd pay for points. A rule of thumb: If your investment return is likely to equal or exceed the mortgage interest rate, you shouldn't pay points unless they're immediately tax-deductible.
Q: My daughter, who just graduated from college, has no credit record of her own, because she's been using my credit card until now. What should she do to establish an acceptable record independently?
A: She could start by getting gasoline-company and department-store credit cards issued in her name; their requirements are the least stringent. They'll ask for a bank account number, so if she doesn't already have an account she must open one before applying. Also, she should make sure the card issuer routinely reports transactions to a credit bureau. After charging purchases for about three months and paying the bills on time, she can try applying for one of the major bank cards.
Another option is for you to guarantee a card for her. Just ask the bank that issues your own card to establish a separate account in your daughter's name, for whatever limit you choose. Keep in mind, though, that if she fails to pay her balance, you'll be liable for it.
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management Q&As. Medical Economics Dec. 19, 2003;80:75.