Podcast: Property Taxes, Lending Money to Family, Social Security

Gain financial insights from episode 4 of the 6-part podcast series by Kiplinger. This episode, learn more about:

• How you can trim your property taxes
• How to smartly lend money to family members
• When to claim social security to optimize the amount you receive

Click play to listen now!

Transcript:

Kiplinger’s Talk About Money podcast

Sponsored by Synchrony Bank

[WELCOME AND SEGMENT 1: Trim Your Property Taxes]

[Soft theme music playing]

MICHAEL: It’s hard to say no to family members when one of them needs financial help. But how do you help without putting your own finances in jeopardy? Or without disrupting family harmony? Today we’ll hear about smart ways to give – or lend – money to relatives.

After that, we’ll tell you about the financially optimal time to take Social Security retirement benefits.

But first, we’ve got some tax-saving advice for homeowners who are facing rising property tax bills. That’s all coming up on today’s episode of Kiplinger’s Talk About Money, sponsored by Synchrony Bank. We’ll be right back.

[theme music gets louder; plays for 5 to 10 seconds, then fades]

MICHAEL: Welcome back to Kiplinger’s Talk About Money, sponsored by Synchrony Bank. I’m your host Michael Causey, and today we’re discussing some ways for homeowners to trim their property tax bills. Joining me now is Kim Lankford, money expert and former Ask Kim columnist for Kiplinger’s Personal Finance magazine. Kim, thanks for being here.

KIM: My pleasure, Michael. This is one of those good news-bad news situations. Home values are soaring in many parts of the country. But so are property tax bills.

MICHAEL: You don’t have to tell me. We’ve seen that here on the east coast. Ouch.

KIM: Right! But there is one other piece of news – and it’s good. Homeowners who are willing to do a little homework can actually get their property taxes reduced.

MICHAEL: Okay, that sounds like a worthwhile homework assignment. So where do we start?

KIM: First, make sure you are getting all the tax breaks you deserve. For instance, your state or local government might allow you to exempt a portion of your primary home’s value from taxes. Or, you may be eligible for a credit depending on your income or if you’re a senior or veteran. You’ll need to check with your state’s department of taxation – or its website – to find out if you qualify.

MICHAEL: Sounds easy enough. What’s next?

KIM: Look for errors on your property record card at the assessor’s office. You can also find your record card online at the assessor’s website. This card describes your property’s features – information that’s used to determine the value of your home. Errors can cause an assessor to overestimate what your house is worth.

MICHAEL: What sort of errors should you be looking for?

KIM: Obvious errors are the wrong square footage of your house or an inflated lot size. Or, the assessor might have you down for an extra bedroom or bathroom that you don’t have. Bringing these errors to the assessor’s attention could get the assessed value of your home reduced.

MICHAEL: What if there aren’t any errors? Are you stuck with the assessed value?

KIM: No. You should also check out the property cards of similar homes in your neighborhood. This is public information. If you find that other houses of similar size and age are assessed at a much lower figure, you have a good argument to challenge your assessment. You can also use real estate sites such as Zillow.com and Trulia.com to research the sale of comparable properties.

MICHAEL: So how do you appeal an assessment?

KIM: Each state has its own rules. But when you get your new assessment in the mail, the form will tell you how to appeal. Often you can do it in person or in writing – or even over the phone. Just make sure you don’t miss any deadlines.

MICHAEL: What happens then?

KIM: Well, you should get a verdict in a couple of months. And if the assessor doesn’t rule in your favor, you’re not out of options. You can take your case up to the appeals board.

MICHAEL: Not to be a skeptic….but, Kim, do you really think it’s worth the trouble to appeal?

KIM: Definitely! The National Taxpayers Union Foundation says 30 to 60 percent of properties are over-assessed. Yet fewer than five percent of people appeal their assessment.

MICHAEL: Wow, that means a lot of people are overpaying.

KIM: You’re right. But Michael, I’ll end on some good news again. The National Taxpayers Union also reports that if you take the time to properly prepare your appeal, the chances are you’ll end up with at least a partial victory.

MICHAEL: Okay, you convinced me. Kim, this is all good information and thanks for sharing it with us today.

Later on in this episode, we’ll find out when is the optimal time for retirees to claim Social Security retirement benefits.

But first, we’ll talk about lending money to family. Is this ever a good idea? And if the answer is yes, how should you do it without jeopardizing your finances or your relationship with the borrower. That’s all ahead on Kiplinger’s Talk About Money, sponsored by Synchrony Bank. Don’t go away!

[promo break 1]

In addition to consistently competitive rates, Synchrony Bank offers you convenient ways to manage and access your hard-earned money, including their mobile app available for both iOS and Android devices. Download it today from the App Store or Google Play. Synchrony Bank, Member FDIC.

MICHAEL: Welcome back everyone. In today’s main feature, we’re talking about lending - or giving - money to family members. Of course, many parents want to help their young adult children get a first car or home. And it’s natural to want to help out a relative who has fallen on hard times. But it’s not always easy. And there are some risks to this.

KIM: That’s right, Michael. Parents worry that giving too many handouts to a child can keep them financially dependent. Or, by helping one child, parents might stir up resentment among the other kids who aren’t getting money from mom and dad. And if you make a loan to a cousin, for example, what do you do if he/she doesn’t pay you back? You also need to think about what impact these handouts or loans would have on your own finances.

With us today to navigate these thorny issues is one of my colleagues – Eileen Ambrose – an editor for Kiplinger’s Personal Finance magazine. Welcome, Eileen.

EILEEN: Hi, Michael and Kim. Thanks for having me on the episode!

MICHAEL: We’re happy to have you here!

So Eileen, I guess if you sense you’re going to be hit up for a loan by a relative, just avoiding them isn’t going to work. But how do you go about lending money – especially if you want to get paid back.

EILEEN: Well, first of all, make it a rule never to lend more than you can afford to lose. And second, make sure you approach family loans like a business transaction.

MICHAEL: How so?

EILEEN: You write down the terms. The loan amount. Repayment schedule. Any interest to be charged. And then both of you sign the document. This way, as time goes on and memories fade, there is no dispute over whether the money was a loan or gift. In fact, loans that aren’t documented usually aren’t repaid.

KIM: And there’s one more reason to document your loan: If you don’t get repaid, you may be able to deduct the loss on your tax return as a bad debt. The IRS, though, will look at this very closely.

EILEEN: That’s right. The IRS will expect you to document your efforts to collect.

MICHAEL: But how do you decide how much interest to charge a family member? I can see this causing some friction.

EILEEN: The IRS each month publishes guidance on the minimum amount of interest you should charge. The IRS doesn’t expect you to charge interest on loans for less than $10,000 – although you can. But if you don’t charge interest on large loans, the IRS will assume it’s a gift and not a loan.

MICHAEL: Why does this matter?

EILEEN: Well, you’re allowed to give up to $15,000 a year to an individual without having to file a gift tax return. Married couples can give twice that amount to a person.

Any amount you give over these limits will chip away at the amount you’re allowed to exempt from federal estate and gift taxes. This might not be an issue for most people, though.

KIM: That’s true. Right now you can exempt nearly 11 and a half million dollars in gifts over your lifetime from estate and gift taxes. After 2025, though, that amount drops back to five million. Still, a sizable sum.

MICHAEL: So, if you do want to give money to a family member, rather than lend money, is there a smart way to do this?

EILEEN: One good way – if you’re in a much higher tax bracket than your family member – is to give appreciated stock. If the recipient’s income is low enough, their gains on the sale of the securities might be taxed at a low rate of 15% - or less.

KIM: A lot of parents help children buy their first home. In fact, I read that if friends and family were a business, they’d be the seventh largest mortgage lender in the country.

MICHAEL: That’s a lot of loans from the Bank of Mom and Dad!

EILEEN: Yes, it certainly is. But be careful if you take this route. Helping a child buy a home is more complicated if your child is also trying to get a mortgage from the bank.

KIM: So what’s the best way to help out, Eileen?

EILEEN: The easiest way to help a child here is to provide the down payment as a gift. This way the bank won’t view your gift as an outstanding debt. But you’ll need to provide bank statements and a letter signed by you and your child, verifying this gift isn’t a loan that will have to be repaid.

MICHAEL: Buying a house is expensive. And you might need that money later. What if you would rather make a loan – rather than a gift? What do you need to do in that case?

EILEEN: Well, a bank will take this loan into account when deciding whether to give your child a mortgage. Documentation is also very important. You’ll need to create a promissory note that outlines the terms of your loan. Some parents go so far as to file a lien on the property with the local government.

MICHAEL: That sounds serious.

EILEEN: But it’s a necessary step, if you want your child to be able to deduct the mortgage interest she pays you on her tax return. And it can protect you if your child defaults on your loan.

MICHAEL: How so?

EILEEN: You can foreclose. Although your loan would be second in line to be repaid if your child has also taken out a mortgage with a lender.

KIM: Oh-oh. Foreclosing on a child. That can’t be good for family harmony.

EILEEN: Not likely. And that would be a tough decision to make.

That’s why there are services like the National Family Mortgage to manage your home loans to immediate family members. It handles all the paperwork, manages the payments and sends out late-payment notices if necessary. The fee is based on the size of the loan. It runs as high as $2,100 plus a monthly fee for servicing the loan.

MICHAEL: That may be well worth the money if it prevents a huge rift in the family.

KIM: Eileen, a lot of grandparents want to help grandkids with college tuition. What’s the best way to do this?

EILEEN: Grandparents have to be careful here. This can actually backfire if the student would be eligible for financial aid. By giving money for college, a grandparent could substantially reduce the amount of aid the students gets.

MICHAEL: What should a grandparent do in this case?

EILEEN: An easy way to help a child is to contribute to a parent’s 529 college saving account – which will have less impact on aid. Or, grandparents can wait until the student graduates and help repay any student loans.

KIM: With college tuition so high, many parents are asked to co-sign on a child’s private student loans. But this, too, has risks for the parents, right?

EILEEN: Yes. If the child doesn’t repay the loan, the parent is on the hook to repay. And the parent’s credit history can be damaged if the child misses payments or is often late with them. And parents might not even be aware that there is any problem until they apply for credit.

MICHAEL: That must be a very difficult family conversation.

KIM: Let’s talk about fairness. What if a parent or grandparent is lending or giving money to one kid, but not the others? I can see that causing resentment when the others find out.

EILEEN: You’re right. Explaining why you are helping out one child, might help alleviate some resentment. Parents, for instance, can say they are helping one child with a down payment on a house, and will do the same for the others when they are ready to buy.

Some parents or grandparents try to balance things out by making equal gifts to other family members at the same time. Or, you can make things equal through estate documents. For instance, if you gave one child $50,000 for a house or college, you can reduce his inheritance by that amount and adjust it for inflation.

MICHAEL: Well there you have it: How to be the family bank while keeping the family harmony. Thanks, Eileen and Kim, for explaining how to navigate what can be a very sensitive subject.

We’ll take a break here for a word from our sponsor, Synchrony Bank. When we return, we’ll talk about a new study that looked at when retirees claim Social Security. The study found that many people are forfeiting a lot of income by taking benefits at the wrong time. Stick around, we’ll right back.

[promo break 2]

For more great practical tips and helpful insights that can help you achieve your financial ambitions, be sure to check out the Synchrony Bank blog. Visit synchronybank.com forward slash blog today. That’s synchronybank.com forward slash blog , member FDIC.

[CLOSING SEGMENT: Claiming Social Security at the Right Time.]

MICHAEL: Welcome back to our final segment, in which Kim and I will talk about the best time to claim Social Security benefits. A new study has found that today’s retirees are forfeiting an average of $111,000 per household over their retirement – largely because they are claiming benefits too early. That’s a lot of money to leave on the table.

Kim, is there any rule of thumb to help people decide when is the right time to claim benefits?

KIM: If only it were that easy, Michael. There is no single optimal time for everyone. Your health, finances and how long you’re likely to live will determine what’s the best time for you.

MICHAEL: When can you start retirement benefits?

KIM: The earliest is age 62. But every year you delay – until 70 – your benefit grows. So you have an eight-year window to start benefits. That study you cited by United Income found that most retirees take benefits at age 63.

MICHAEL: Is that such a bad thing?

KIM: Well, you need to understand the tradeoff. If you start your benefits before your full retirement age – which is 66 to 67 for those in their fifties and early sixties – your benefit will be reduced. That’s because you’ll be collecting more checks over your lifetime, so the checks will be smaller.

MICHAEL: How much smaller?

KIM: Well, if you start benefits at 62, your checks will be as much as 30% less than if you waited until your full retirement age.

MICHAEL: That’s a big haircut. Okay, what if you wait until 70?

KIM: Every year you delay benefits beyond your full retirement age, your benefit grows by 8% - until age 70. Not only that, all future cost of living adjustments will be based on this bigger benefit.

MICHAEL: That’s a better return than my investments have earned some years. So why don’t people just wait?

KIM: For a lot of reasons.

Many people think that they might not live that long in retirement. So, they’re afraid they won’t collect much in benefits if they wait.

People also hear that Social Security has some long-term funding issues. So some worry that Congress is going to cut benefits at some point to shore up the program. They figure they might as well take benefits before that happens.

And the study found that people hear that they are eligible for benefits at 62. So they lean toward taking benefits around that time.

MICHAEL: Are there situations in which you should take benefits early?

KIM: Yes. Taking benefits early makes sense if you’re in poor health and not likely to live decades in retirement. Or if you were forced into early retirement by a layoff, you might have no other choice but to take benefits early.

MICHAEL: I sense a “but” coming…

KIM: You’re right. But besides these good reasons for taking benefits early, the study’s authors say most retirees would be best off delaying benefits until 70.

And they ran the numbers looking at retirees today. They calculated these retirees stand to lose out on $111,000 of income per household during their retirement – largely because they claimed Social Security too early.

MICHAEL: So how do you convince folks to wait, given most retirees take benefits at 63?

KIM: One way is to talk about longevity. Most people underestimate how long they’ll live. In reality, if you make it to age 65, your life expectancy is 84 if you’re a man and nearly 87 if you’re a woman.

MICHAEL: And it could be longer!

KIM: You’re right. So as you spend down your retirement accounts, having the biggest Social Security check possible in those later years can make a big difference in your life.

Another reason for married couples to delay: Once one of them dies, the other will go down to one Social Security check – whichever is larger of the two checks. So again, you want that check to be as large as possible.

MICHAEL: Good to know, Kim, and thanks so much for sharing your time and expertise today. That wraps things up for today’s episode of Kiplinger’s Talk About Money, sponsored by Synchrony Bank, member FDIC. Thanks for listening!

[final promo break and disclaimer]

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Disclosure: Kiplinger’s Talk About Money podcast was written and produced by The Kiplinger Washington Editors, Inc. Kiplinger is not affiliated with Synchrony Bank or any of its affiliates. The opinions and recommendations expressed in this podcast are solely those of Kiplinger and do not represent the advice, opinions or recommendations of Synchrony Bank or any of its affiliates. Synchrony Bank, Member FDIC.