Reader Question: I just refinanced my home and was offered the option of monthly payments or ‘bi-weekly’ payments which they say will save me lots of money because it will result in one ‘extra’ payment per year. Is this true and is it a good deal? C.H.
Answer: If the bi-weekly payment offer is free, it’s your best choice. On a $100,000 mortgage payable for 15 years, that extra payment per year will save you around $3,000 in interest and shave 16 months off your mortgage. If they are charging you for this service, realize that you could do the same thing by making an extra payment each year with no additional fees.
Reader Question: In prior columns, you’ve mentioned that large gifts between family members are possible. Would my 93 year old mother be allowed to gift me her house, which is valued at about $200,000, tax free? M.S.
Answer: Yes, but as with most tax questions, the answers are rarely simple. Read on… There are two kinds of gift limitations. First, the law allows anyone to make tax free annual gifts of up to $13,000 to anyone or as many people as they wish without imposition of a gift tax. Married couples can join together for gifts of up to $26,000 per year. In addition to the annual gifts, the law allows for lifetime gifts of up to $5 million ($10 million for married couples) in 2012 dropping to $1 million ($2 million for married couples) in 2013 unless Congress chooses to raise the limits. So, yes, your mother could gift you her home with no taxes. She would need to file a gift tax return.
However, this may not be your best strategy. If the cost basis in her home (what she paid for the home plus capital improvements) is less than the value, you’ll now own the home with her cost basis. If you later sell the home, you may incur taxes on the gain. There are two strategies you might consider to avoid the capital gains tax. If you use the home as your primary residence for a minimum of two years, you’ll receive an exemption for up to $250,000 of capital gains ($500,000 for married couples). Another strategy would be to have your mother sell you her home for its current market value based on an appraisal. She’ll owe no capital gains taxes because of her $250,000 exemption. You’ll owe her a note for $250,000 which she can ‘gift’ to you in the form of ‘forgiving’ the note. She’d still need to file a gift tax return related to the gift of the note to you. Now you own the home based on the current market value.
Reader Question: I turned 70 years old on January 28, 2012. Will I have to make a Required Minimum Distribution (RMD) from my IRA before the end of 2012? T.D.
Answer: You have two choices. Based on your date of birth, you turn 70½ in June of this year. The law says that you must make your RMD by April 1 of the year following the year you turn 70½. This means that you could take the RMD either this year or by April 1 of next year. If you wait until next year, you must take two distributions, your 2012 RMD plus your 2013 RMD. Since the RMD is a taxable event, most people would choose to avoid taking two in the same year.