Smart Money: Tax deductions won't offset net cost of mortgage

Bruce Williams is a national radio talk show host and syndicated columnist

Dear Bruce: Last year, my husband and I had to pay $4,700 in federal and state income tax. Now that our kids have all graduated from college and our house is paid off our tax liability is really going up. We are faced with not being able to itemize because we don't have the interest payments. We owe $25,000 on our two cars and about $4,500 on our credit cards at 0 percent. I figured our taxes this year will be about $9,000.

My husband has no taxes taken out of his Social Security, and only 12 percent on his retirement benefits on a gross income of more than $100,000. I figured we ought to buy our dream home, get a home-equity loan and use some of that money to buy a luxury car and/or buy a condo at the beach.

My husband doesn't want to do any of these things. It seems that we have always been the typical middle-class family who gets to pay for everything. W.M., via e-mail

Dear W.M.: Welcome to the real world. First, let me disabuse you of something: You can't borrow yourself to prosperity. Picking up tax deductions is not going to help very much given the fact that there will be an ultimate net cost to you. Your husband is in for a sticker shock if he doesn't allow some money to be withheld from his Social Security and goose the amount on his pension, given the fact that you are going to be in a higher tax bracket. That's reality.

I'm delighted that you can make a decent income, and $9,000 on $100,000 isn't bad. I know you feel abused when people are paying nothing, but there are a lot of folks paying a much higher percentage than you.

Dear Bruce: I sold my New Jersey home last year and moved to Florida. When I had my income taxes done this year I was told that I didn't have to claim any of the money that resulted from the sale of my home, which I lived in for many years. This didn't sound right to me. I made a $70,000 profit. Isn't that considered income for 2002? D.M. Crystal River, Fla.

Dear D.M.: Today is your lucky day. You are entitled to make a profit of up to $250,000 on the sale of your principal residence, which was your home 24 of the last 60 months, and pay no federal income tax. Since you were a resident of New Jersey for part of that year, you should check with your accountant as to whether you will have to file income tax for that state.

Dear Bruce: Can you explain tax brackets to me? Some publications refer to them as tax rates. What does it mean if we are in the "20 percent tax bracket"? M.D. Jackson, Mo.

Dear M.D.: Tax bracket, tax rate, same term. After your appropriate adjustments are made, which result in your "adjusted gross income," your tax bracket or tax rate is the percentage of that amount of money that you would owe. The percentage assessed is not assessed to your gross income, but rather your AGI, which is determined after itemizing deductions or the standard deduction if you choose to take it.

Dear Bruce: Are the revocable living trust kits that you can get at the office supply stores sufficient?

Do they contain all of the paperwork that is needed? Is it really necessary to hire an attorney for $1,000 or more? J.M. Las Vegas, Nev.

Dear J.M.: You must know that I am not a fan of do-it-yourself dentistry, surgery, law, accounting or other professional endeavors. The troublesome part of the path that you are considering is that you will never know, in the absence of a perusal by an attorney, whether your trusts are valid. I would be less than candid if I told you that I haven't looked at some of these do-it-yourself documents and they look pretty solid. But then I'm not an attorney, either.

Dear Bruce: We have owned a piece of property since 1986. In 1998, our next door neighbor, a lawyer, claimed that a piece of the property between the two homes is his even though our deed says it is ours, we paid the taxes on it and maintained it. The lawyer wrote us a letter stating that he has nothing to lose. If the case goes to court, his partner will take the case at no cost to him. The land is worth between $10,000 and $15,000 about as much as it would cost me to go to court. Injustice is apparent. The lawyer knows our financial status. We are missionaries. Is there any legal implication if we ask our supporters from the nearby churches for help? Maybe they could write to him. What do you think? J.M., via e-mail

Dear J.M.: First, you stated in your lengthy letter that he has a "quick claim deed." I think you mean a "quit" claim deed. The first thing that you need to determine is who allegedly had an interest in 1998 that could be assigned to the lawyer.

You claimed that you owned the property then; he is claiming that someone else did. This seems to be the genesis of your problem. I would be interested to hear from my attorney readers out there on the ethics of an attorney writing to a prospective litigant and telling them how it wouldn't cost him anything to take him to court. That smacks of a threat. I would think there is an ethics violation there, which should come back and bite him in a very tender spot.

In the absence of any help from my readers in that regard, I would go to the ethics committee of the local bar association. I have no problem with you reaching out to your flock for financial support. Writing to him and asking for him to change his mind is an exercise in futility.

Dear Bruce: I filed a claim in small claims court. The other party filed a counterclaim. Due to health reasons, I dismissed the case. I received a letter from the court with a court date. I called them, and they said they had my letter but needed another one.

I sent them one yesterday, but they say that unless the other party dismisses, we must still show up in court. I'm confused. - Kathy, via e-mail

Dear Kathy: Let's clear up the confusion. A counterclaim is simply an action against you. The fact that you dropped your case doesn't in any way obligate them to drop theirs. In the event you don't show up, you will lose by default. You are going to have to go to court and defend yourself. I cannot comment on the merit of your position, because you didn't tell what matter is under dispute.

Dear Bruce: Can my husband make out a will leaving his share of the home, car, truck and other things to his sister? All of these things are in my name, too. He will not make out a will to me. M.S., Homosassa, Fla.

Dear M.S.: In most states, at the very least, the spouse of a deceased individual is entitled to one-third of this person's estate. It will depend in some measure on how your property is titled.

If the real estate is titled "tenants by the entirety," or alternatively, "co-tenants with a right of survivorship," then the home will immediately come to you. He may or may not be able to leave his interest in the car and truck to his sister, depending on whether the one-third requirement is met.

I take it that the two of you aren't getting along very well, so it might be to your advantage to discuss this with an attorney as soon as possible. You might even suggest to your husband if he cares so little about you that he'd leave everything to his sister that a divorce might be appropriate.

Dear Bruce: Eight years ago, my husband and I drew up a living trust. The main properties we owned at that time were the home we lived in and some acreage (which has since been sold). We now have another home and would like to have our child appointed as executor. How do we do this without involving a lawyer and all his fees? We can hardly afford drawing up an entirely new trust, as our funds are limited in retirement. L.T., Grass Valley, Calif.

Dear L.T.: You are using terms that should not be interchanged. If you have a trust then you likely appointed a "trustee." An executor is named in a will. As to changing documents, it will be necessary to use an attorney. If you make a mistake and then die, the mistake could be very expensive to correct. When you say that you established a "trust" eight years ago, you have, instead, had a will executed. My point: These are legal matters. You should find counsel to represent you and sort it out.

Dear Bruce: Does a will have to be probated? My husband died more than a year ago, and I have yet to have his will probated because of the cost. R.S., Seguin, Texas

Dear R.S.: The will always should be filed, but not necessarily probated. If there are no assets, the probate process is most likely unnecessary. I know that money is short, but if you don't feel that you can afford to pay for the advice from an attorney, you might talk to the surrogate at probate court. They can tell you whether it is necessary to probate. Understand that once you tell the surrogate and he or she sees a legal need for having the will probated, they may have an obligation to see that it is done.