Who Pays If a Tree Falls
Kim Lankford fields your questions about homeowners coverage, COBRA eligibility, nondeductible IRA contributions, and first-time home buyer tax credits.
I have an old tree on my property, and my next-door neighbor is worried that it could fall over in a big windstorm. Whose homeowners insurance pays for cleanup if my tree falls into my neighbor's yard? --K.S., Largo, Fla.
Good question, especially because hurricane season begins on June 1. If your neighbor's property is damaged by your tree, then he should file a claim with his insurance company. But in most cases, nobody's insurance policy will pay if the tree falls but doesn't hit anything. If that happens, it's probably up to you to pay for cleanup if you want to keep your relationship with your neighbor cordial.
If the tree damages your neighbor's house or garage, his homeowners policy will generally pay to fix the damage to the structure. If your tree damages your neighbor's car, then the comprehensive-coverage portion of your neighbor's auto insurance usually pays to repair it. The same goes for your policies if the tree falls on your property.
Even when insurance covers tree damage, however, most policies pay only $500 to $1,000 for tree removal. It can cost a few thousand dollars to haul away a fallen tree, so keep some money in your emergency fund just in case.
Coping without COBRA
Does the recently passed health-care bill include a provision to extend COBRA eligibility beyond 18 months? --Gwen Robbins, Savannah
No. The original House bill would have extended COBRA coverage until 2014, when insurers will be prohibited from rejecting people for preexisting conditions, and individuals and small businesses will be able to buy coverage through insurance exchanges. But the version that was signed into law did not include that provision.COBRA is the federal law that lets you keep health-insurance coverage through your former employer for up to 18 months after you lose your job, as long as you pay the full premium. If your COBRA eligibility ends soon, start looking at alternatives now. First, see whether you can qualify for an individual policy. That may be your best bet if you're healthy, even if you still qualify for COBRA -- especially if you've exhausted the COBRA subsidy for laid-off workers. You can get price quotes from several companies at eHealthInsurance.com, or find a local agent at www.nahu.org.
A good way to cut costs is to raise your deductible. Plus, if your deductible is at least $1,200 for self-only coverage or $2,400 for family coverage in 2010, you can contribute tax-deductible money to a health savings account and use the money tax-free for medical expenses in any year.
If you have health issues that make it tough to find an affordable policy, check with your state insurance department (see www.naic.org) about its consumer protections -- most states, for example, provide continuation policies for people with health issues after their COBRA coverage terminates. Also, the health-care-reform law appropriated $5 billion to create a temporary high-risk pool for people with health issues, starting in late June (see Health Reform Phase 1: What You Will See When).
Lowering your IRA tax bill
Is there an easy way to find out whether any of the contributions we made to our traditional IRAs in past years were nondeductible? --M.E.S., Weston, Mass.
Keeping track of your nondeductible contributions will make a difference in your tax bill when you withdraw money or convert a traditional IRA to a Roth. Higher-income taxpayers who have retirement plans at work are allowed to contribute to a traditional IRA but prohibited from deducting those deposits. If you made nondeductible contributions, you should have filed a Form 8606 with your tax return each year to keep a running tally of the after-tax money in the account -- money that won't be taxed when you withdraw funds or convert to a Roth. (Sorry. You can't withdraw just your tax-free contributions. A portion of each IRA withdrawal or conversion will be tax-free based on the ratio of your nondeductible contributions to your total IRA balance.)
If you don't have documentation, you'll have to do some detective work. Your IRA administrator can't tell you whether your contributions to a traditional IRA were tax-deductible. But it can provide copies of Form 5498, which reports the amount of each contribution and whether it was for a traditional IRA or a Roth, says Ken Hevert, of Fidelity. Then you can compare that information with your tax records to see whether you took a deduction in those years. Focus your search on tax returns after 1986.
That's when Congress imposed limitations on who could deduct IRA contributions based on income and participation in an employer-based retirement plan. If you discover past nondeductible contributions that you failed to document, you can set the record straight by filing a separate Form 8606 now for each year you made a nondeductible contribution. Call the IRS (800-829-3676 begin_of_the_skype_highlighting 800-829-3676 end_of_the_skype_highlighting) to request forms for the appropriate years. Although there is a $50 fine for not filing Form 8606 when you should have, it may be waived if you can show reasonable cause. An IRS spokesman says you should attach a letter explaining your reason for failing to file and request an abatement of the penalty.
Tracking down nondeductible contributions may not be worth the effort if it doesn't involve a lot of money. IRA contributions were limited to $2,000 a year from 1982 through 2001.
Bum luck on the home buyer's credit
My daughter bought a condo in 2008. Does she still need to pay back the first-time home buyer's credit? I heard that she does, but it doesn't seem fair. --Greg Shields, California, Md.
Sorry, but she does have to pay back the credit. The 2008 first-time home buyer's credit wasn't nearly as generous as the newer version for buyers who close on a home purchase between January 1, 2009, and June 30, 2010 (and signed a binding contract by April 30, 2010). Home buyers who qualify for the later credit don't have to pay it back as long as they live in the house for three years.
People who bought a first home between April 9, 2008, and December 31, 2008, were eligible to receive a tax credit of up to $7,500 if they hadn't owned a home in the three years leading up to the purchase. But that credit must be repaid over 15 years, starting two years after you claim the credit. Your daughter must start repaying the credit when she files her 2010 tax return next spring.
If she got the maximum $7,500 credit, she must add $500 to her income-tax bill each year for the next 15 years. And if she stops using the condo as her primary residence, any remaining balance of the credit must be repaid when she files her tax return for the year she sold the home or moved. The payback amount, however, can't exceed the amount of profit made on the sale.