Ask the Experts: Best ways to save, and make money doing it

Mar 15, 2010 — The Sacramento Bee

By Claudia Buck

Mar. 15, 2010 (McClatchy-Tribune News Service delivered by Newstex) -- Where to find higher rates on short-term savings. How to help a mother save income when selling her longtime home.

Those are this week's money management questions to our online team of "Ask the Experts" advisers, who offer free advice on taxes, investing, personal finances and wills/estates.

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QUESTION: Where can my parents park $132,000 for a year or two to get a better return than the 1.1 percent on their current CD?

ANSWER: Unfortunately in these days of low interest rates, your parents do not have many options without either locking up the funds in a longer-term (investment) or taking additional risk that ultimately could result in some loss of principal.

Due to the short timeframe investing these funds, there is a trade-off: By not taking any real risk with the principal, your parents are giving up potential long-term rewards.

I would advise researching local credit unions. Some have certificates of deposit where funds can be withdrawn as needed. Your parents would have the liquidity they wanted and still could achieve higher interest rates than a normal savings account.

Another option would be online banks, such as (Charles) Schwab Bank or E-Trade. For example, I just looked at the ING online checking account, which is currently paying 1.25 percent APY for a deposit of your size. Not too bad by today's standards while still preserving your liquidity.

You will want to do a significant amount of research before deciding where to deposit these funds. I would also make sure the funds are covered by FDIC insurance.

_Michael R. Tate, investment adviser

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Q: My 82-year-old mother has decided to sell her house in Los Gatos, Calif., and move into a senior living community. She bought the house in 1975 for about $42,000 and plans to list it for about $700,000. She is very worried about capital gains on the house, since she needs this money to live on for the rest of her days. She has roughly $10,000 in the bank and about $75,000 in debt from a $150,000 line of credit on her home. Her only income is $700 a month from Social Security. How big a hit will she take from capital gains/taxes when her house sells? Is there any way she can protect or shelter this income?

A: Assuming she has lived in the house for two of the past five years, she will be able to exclude $250,000 of the gain when calculating the taxes due (married couples can exclude up to $500,000).

The cost basis of the home is not only the purchase price, but also the cost of any improvements (new roof, kitchen remodeling, etc.) and her expenses in selling the home. This total cost basis would be deducted from the sales price to determine her capital gain.

The good news is that the current long-term capital gains tax rate is only 15 percent and may even be zero if her taxable income is low enough. Before selling the house, be sure to discuss her situation with a qualified tax professional.

_Susan Soesbe, certified financial planner

A: To ensure your mother minimizes the capital gain on the sale of her home, you should help her find all the records pertaining to the home's purchase and any capital improvements done to the home during her 35 years of ownership.

These records establish your mother's adjusted cost basis; the higher the basis, the less capital gain is realized. You figure gain basically by subtracting your basis from the net sales price, after subtracting the commission and other expenses of the sale.

For more details, see IRS Publication 523, Selling Your Home.

In 2010, the maximum tax rate on long-term gain for assets held more than one year is 15 percent. To estimate how much tax will be due, see Form 1040-ES, Estimated Tax for Individuals. That form is also used to make sure enough estimated tax is paid after the sale to avoid a penalty for underpayment. See Publication 505, Tax Withholding and Estimated Tax.

IRS publications can be downloaded at www.IRS.gov or ordered by mail by calling 800-TAX-FORM.

Best wishes to your mom and to you for helping her plan her future!

_Jesse Weller, IRS

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