3 Tricks to Discussing Finance

iStock_64968931_XSmallJoe grew up in a financially relaxed household. Money came easily to his parents and when they needed something, it was there. He wasn’t spoiled, just well taken care of. Lucy was just the opposite. Money was scarce. Choices had to be made.

When Joe and Lucy got married, their two very different financial tracks had to merge. Much like Joe and Lucy, all of us have stories about what money was like growing up. As we enter into and manage relationships, merging those financial stories is a crucial element to the relationships’ long-term success. The following points provide guidance on how to do so.

Set expectations around your goals 

Funding your children’s schooling is a classic example. For the Joe-like individuals, the answer seems obvious – their parents paid for their schooling, so they feel obligated to do the same. The Lucy answer is starkly different. Whether it’s paying for schooling themselves, or getting some kind of scholarship, they need to have some skin in the game. Whatever the outcome, being proactive with a plan is what matters.

Couples at or near retirement can face equally difficult crossroads. One person may be under the impression they’re going to downsize the home to buy a small condo and spend their time traveling. The other person is completely attached to the home they’ve lived in for 40 years and has no intention of selling it. They want to stay closer to their family and the community relationships they have built. Wow! Sounds like fireworks. Again, plan ahead. Don’t wait until your last day of work to have this discussion. Have it now.

If your goals align, great. If not, tweak them to arrive at a compromise. Goals, plans and circumstances change, so continue to have the conversation. I suggest an annual check in. That way things can evolve naturally and you’re not stuck dealing with a dramatic change 20 years down the road.

Who manages the finances? 

It’s completely natural for one person in the relationship to gravitate to the finances. In our example, it’s typically the Lucy types – those that had to make choices about how to spend their money. Over time, that person comes to know their finances like the back of their hand. So what happens if that person is suddenly no longer around? Financial relationships can often live on a teeter totter. One person carries the weight, and the other is left suspended in air. Once the weight is gone, the other person may land pretty hard. Neither person in the relationship wants this, so it’s best to take steps to ensure both people have a baseline understanding of the household finances.

Tip: If you’re working with professionals (CFP®, CPA, etc.), make sure the non-financial person attends all meetings. This allows all parties to increase their plan acumen steadily over time and establish relationships with the professionals.

Full disclosure 

Be honest with yourself and with your partner about your financial habits. Until recently, I’d never encountered a “secret bank account.” In this case, someone siphoned money into a bank account their spouse was completely unaware of. The intention was to create a pool of money that could continually fund their spending habits. A secret like this is a ticking time bomb. It’s probably one of the primary factors behind the statistic that finance-related issues are the number one cause of divorce. Divorce is much more catastrophic than a secret bank account. Again, it’s best to have full disclosure.

Review your various account statements – bank, investment, credit cards, loans, etc. I know it’s easy to toss them into the shredder with the envelope still sealed, but most of us need to be aware of what we spend, so it’s good to get in the habit of reviewing the statements. Twenty minutes a month is all it should take. The intent is for you to get a rough baseline of where your money is going. Knowledge is power. Understanding the big picture of your spending and savings habits is crucial to your long-term success.


Like Joe and Lucy, we all come from different financial backgrounds. The above discussion topics will help those looking to merge paths as well as those who are on an independent path. Start with setting the expectations and defining goals together. From there, ensure that all parties have a baseline understanding of the financial picture. Move to full disclosure – for most of us, this should be nothing more than getting all of the information on the table. Before you know it, you’ll have a mutually agreed upon plan. Day by day and week by week, you’ll live this plan so you can accomplish all that is important to you.

We Sold Our Home for a Loss – Now What?

It took only nine years, but the real estate market has finally surpassed pre-2008 financial crisis level prices. Granted, not all parts of the country’s real estate market have risen as quickly, or to as high a level. If you bought property near the peak of the real estate mania or spent a fortune on renovations – or a combination of both – you may still end up selling for a loss.

Gains and losses are realized when capital assets are sold. The IRS considers pretty much everything you own to be a capital asset, including real estate, cars, stocks or bonds, collectibles and even your couch at home. If you sell the capital asset for more than you paid for it and earn a profit, you are subject to tax on the gain. If you end up selling for less than your cost, you incur a loss. In most cases, capital losses can be used to offset capital gains, and unused losses can be carried into future years to offset capital gains. However, losses on personal-use assets are generally not deductible.

Let’s see how the IRS treats gains and losses for real estate property.

Personal residence

The IRS treats personal-use property, like your primary residence or car, differently than investments. If you sell your house for less than your original cost plus improvements, i.e., adjusted cost basis, you can’t use the loss to offset any other capital gains or carry the loss forward into future years. To even things out, each spouse receives a $250,000 exclusion on the gains, thereby reducing the chances of you having to pay any capital gains taxes on the sale of your home.

To receive this full exclusion, you must meet the following criteria.

  1. You’ve used the home as your primary residence for two out of the past five years (use test).
  2. You’ve owned the home for two out of the past five years (ownership test).
  3. You did not use the home sale exclusion in the past two years.

In the event you don’t pass the use and ownership tests above, you may still be eligible to receive a partial exclusion if your reason for selling the home was due to an “unforeseen circumstance.” According to the IRS, these events include relocation for work, divorce or legal separation, birth of twins or more, becoming eligible for unemployment compensation, and damage of house due to natural or manmade disasters or condemnation.

As an example, consider a couple who bought their home for $500,000 and spent $100,000 on improvements, such as renovating their kitchen or bathrooms. Due to the improvements, the couple’s adjusted basis in the home is now $600,000. Remember, improvements increase your basis, while repairs are considered expenses and don’t count toward your cost basis.

The following four scenarios consider the tax implications of this couple selling for a loss, and for a gain.

Scenario 1

The couple sold the home for $750,000 after just three years of living in the house. Since the couple’s adjusted basis was $600,000, they realized a $150,000 gain on the sale. Each spouse receives a $250,000 gain exclusion, so they do not owe any capital gains taxes on the sale of their home. They met the exclusion requirements by living in the house for at least two out of the past five years, and by not using the exclusion in the past two years.

Scenario 2

Due to employment relocation, the couple sold their home at the current market price of $550,000, resulting in a $50,000 capital loss. Since capital losses from the sale of a primary residence can’t be used to offset other capital gains or carried forward into future years, the loss provides no tax benefit.

Scenario 3

The couple benefited from the hot real estate market in their area and sold their home for $1.5 million, resulting in a $900,000 gain after living in the house for five years. Since they met the exclusion requirements, they can exclude $500,000 of the gain, leaving $400,000 subject to long-term capital gains taxes.

Scenario 4

After living in the home for just one year to move closer to family, the couple sold their home for $900,000, resulting in a $300,000 gain. Lucky them, you might be thinking. However, since they did not pass the use and ownership tests, and they didn’t have to move because of an unforeseen circumstance, they are ineligible to use any of the gain exclusion. This leaves their entire gain of $300,000 subject to long-term capital gains taxes.  

Investment property

Real estate properties that you own and rent out either directly or through a partnership are considered investment properties. This type of capital asset receives capital gains treatment similar to other investments, such as stocks and bonds. Likewise, you don’t receive any sort of gain exemption like you do from your personal residence. The upside is you can use any losses to offset other capital gains and carry forward any remaining losses into future years. There are also income tax benefits to owning rental properties.

Parting thoughts

You might be thinking to yourself: If I have to sell my personal residence and it will result in a loss, why wouldn’t I just convert it into a rental property, and subsequently, sell it for a loss that can be used to offset other capital gains? This would be a great idea, but the IRS figured out this loophole and as a result, your basis in the property is adjusted to its fair value on the date you turn it into an investment property. In most cases, this wipes out your ability to realize any losses as your basis would decrease to its current market price.

No matter the outcome or reason, selling a home or purchasing a new home can be a very emotional and complicated decision. We recommend you speak with an advisor to ensure you’re making the best choices for your particular situation.

Women in the Advising Industry

Merriman CEO, Colleen Lindstrom, was recently quoted in an article from CNBC about women in the advising industry, giving three simple ways to help women make progress and close the profession’s gender gap. Check it out here.





Merriman INSIGHT – Using Qualified Charitable Distributions to Maximize Charitable Gifts

On December 18, 2015, the president signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. One of the popular tax provisions in this bill was to permanently extend the ability for IRA owners to make qualified charitable distributions (QCD) from their IRA to a qualified charity of their choice. Prior to the PATH Act, this provision expired multiple times since its debut in 2006, only to be temporarily extended by Congress each time, often at the last minute or retroactively. This uncertainty made charitable planning more difficult, but now we finally have clarity!

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works

IRA owners who are 70½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to qualified charity. The IRA owner can exclude the amount of the QCD from his or her gross income (thereby reducing their adjusted gross income), but any donation made via a QCD is not eligible for a charitable deduction. From a tax perspective, an exclusion from income is preferable over a deduction from income — particularly for those who don’t meet the itemized deductions threshold in the first place.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You’re only eligible to make a QCD if you are 70½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and private non-operating foundations are not eligible to receive QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning the check issued from your IRA must be payable to the organization. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor (for example, Charitable Remainder Trusts or Charitable Lead Trusts would not qualify). The donor cannot receive any economic benefit as part of the gift.

If you are interested in making a donation directly from your IRA to a charity, please reach out to your advisor to get started and make 2016 a year of giving!

Small Incentives Can Have a Big Impact

“Give your kids enough to do anything, but not enough to do nothing.”

investment philosophyWith the distractions and commitments kids have these days, it can be hard to find the right time and the best way to teach good money habits. Whether it’s learning simple budgeting skills or the benefits of saving for a long-term goal such as retirement, there is never a better time to start.

Just consider the impact of a kid investing $1,000 at age 12 versus waiting 10 years until after graduating from college. If the funds are to be used in retirement 50 years later and grow at a 8% annual rate, that $1,000 initial investment would grow to $46,901 with 50 years of compounding, versus $21,725 with 40 years to compound. The additional 10-year investment horizon for the 12-year-old leads to a greater than 50% increase in accumulated wealth due to the power of compounding.

Even though the benefits of starting to save and invest early are apparent, it can be difficult for a kid to understand the consequences of waiting to save for a car, house down payment or retirement when these obligations are far in the future. Providing small incentives can often bridge this gap. To teach kids a lifelong lesson, you can create a system of dollar-for-dollar matching of contributions to savings, matching a certain percent or even contributing on their behalf, to incentivize them to participate in school activities like debate club, student government, or choir. As a parent, you will in essence be providing an employer-like match on their contributions.

Savings account

Once your kid understands the basics of budgeting and why they should spend less than they take in, it’s time to open a savings account. You could help your child open the account online, but going to the bank may give them the best learning experience. A personal banker can help them open the account, and they can learn how to deposit and withdraw money, and then record those transactions.

After opening the savings account you can start offering small incentives, whether it’s contributing on your child’s behalf for good grades in school or paying them for chores around the house.

Roth IRA

There’s no minimum age for opening and contributing to a Roth IRA, as long as the minor has earned income from a job that issues a W-2 or 1099-MISC. An allowance for cleaning their room doesn’t count as earned income! For 2016, the most they can contribute to a Roth IRA is either $5,500, or their earned income for the year – whichever is smaller. A parent or guardian needs to be listed on the account until the child is no longer a minor.

If your kid has any amount of earned income during the year, a contribution to a Roth IRA provides tax-free growth and withdrawal in retirement. If your kid earns $600, you can match anything they contribute dollar for dollar, which can help incentivize them to contribute, say, half their earnings. So if they contribute $300, they receive $300 free money from you. The $300 they have left over can then be used on whatever they want!

Roth IRAs for minors can be opened at discount brokerages like Charles Schwab, TD Ameritrade, Vanguard or Fidelity.

Brokerage account

If your kid doesn’t have earned income to contribute to a Roth IRA, investing through a taxable brokerage account can provide many of the same benefits. Similar to a minor Roth IRA, a brokerage account needs to have a custodian, such as a parent, listed on the account until they are 18 or older, depending on the state the account is opened in.

This type of account provides more flexibility for withdrawals than a retirement account, and there’s no limit on the amount that can be deposited. These funds can be invested toward goals like saving for a car in the future, a house down payment or even to supplement retirement savings. A similar incentive system would work in this case.

In most cases, you can open this type of custodial account online at discount brokerages like Charles Schwab, TD Ameritrade, Vanguard or Fidelity.

Encouraging good savings habits and educating children on the power of compound interest will result in significant long-term benefits, both personally and financially. More importantly, it will help reduce their chance of encountering a shortfall in savings when it comes to their most important goals as they grow up.

What’s with the Bogus IRS and Microsoft Calls?

With smartphones providing 24/7 connectedness, and the aging of the US population, more and more innocent victims are falling prey to scammers. Whether it’s by phone, email, text message, social media, fax or mail, it can be a challenge to figure out what is a scam and what is real.

Phishing has been the most prevalent scam, where people open emails or visit websites that appear legitimate and are lured into providing personal and financial information. Lately, though, scammers posing as IRS or Microsoft employees have been particularly insidious – and successful. Since everyone knows to take the IRS seriously, and most people rely on Microsoft software for all or part of their computer needs, it isn’t difficult to understand how this happens.

The best plan of attack is to arm yourself with knowledge about how agencies like the IRS and companies like Microsoft contact their customers, and how to determine whether the caller is an employee of those organizations.

Internal Revenue Service

Across the country, taxpayers have been receiving calls from supposed IRS employees telling them they owe money, and that it must be paid promptly through a bank wire or prepaid card. These fraudsters sometimes threaten taxpayers with arrest, deportation or suspension of a business or driver’s license, and become hostile and insulting if you don’t pay them. You can find more information on these scams on the IRS website.

The only way the IRS initiates contact with taxpayers is by US mail – not by phone, email, text message, social media or fax. If you do receive a call from the IRS, record the employee’s name, badge number and call back number. Then call the IRS back directly at 1-800-366-4484 to determine if the person calling is actually an IRS employee, and if they have a legitimate reason for contacting you. Also, if you receive a letter in the mail from the IRS, you can verify that it’s legitimate on the IRS website.

The IRS recommends that if you suspect someone posing as an IRS employee has contacted you, report it promptly.


Similar to the IRS scam, thousands of people have received unsolicited calls from people claiming to be from Microsoft technical support, calling to help fix their computer, phone or tablet. The scammers have you visit what appears to be a legitimate website, then have you download malicious software onto your device. They may request credit card information for services, or direct you to a fraudulent website to enter the information. They identify themselves as employees of Windows Help Desk, Windows Service Center, Microsoft Tech Support, etc. You can get more information about these scams on the Microsoft website.

Here at Merriman, Tyler Bartlett recently received a call from one of these fraudsters posing as a Windows Help Desk employee. He immediately knew it was a scam because he uses a Mac at home, not a Windows computer. From Tyler’s experience, you can see the importance of being knowledgeable about the types of computers and devices you own and the software used on them on a regular basis.

Like the IRS, Microsoft does not initiate contact with customers. If you created a technical support case and you receive a call, you can verify the person is a Microsoft employee by matching up the Support ID given to you when you opened the case. If you didn’t initiate contact with Microsoft, get the person’s name, phone number and department, and then call Microsoft directly at 1-800-426-9400 to confirm that the caller is an employee with a legitimate reason for contacting you.

Keep in mind that Microsoft does not ask you to purchase software or services over the phone. If there’s any sort of fee or subscription for the service, or a payment request from someone claiming to be from Microsoft tech support, Microsoft recommends you hang up and report the incident to them and local authorities.

Final thoughts

The IRS and Microsoft aren’t the only large organizations whose customers have been victimized. Customers of organizations like Bank of America, Chase Bank, PayPal and Apple have received phishing emails with catchy subject lines written to entice you to open them and provide personal and financial information. Be on the lookout for subject lines such as “We have temporarily disabled your account,” “Information about your account,” and “About your last transaction.” Rather than potentially giving away your information to a crook, it’s worth contacting the institutions directly to clear up any matters.

Even though it may take more time, it’s important to ask the right questions to verify the caller is an employee of the company, and that they have a good reason for calling you. Also, it’s important to be cautious when opening links or attachments in emails from unknown senders.

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