Q: I am a 35-year-old female and have worked at a music record label for the last five years. About six months ago, it closed part of our office and laid off some people. I was moved to my home office at my own request to become the company's first home-based worker. I handle promotion and am the Web master for our site. I'm known as a good, innovative worker and have come up with several ideas that have either saved the company money or boosted its income. I would like to ask for a cost-of-living raise, but I'm worried that the company would decide I'm too expensive to keep. With my bonus, I make $50,000. I don't know if there is a cap on salaries for certain positions.
A: Your company kept you when it laid off others. It approved your working from home, a first. You have Web skills. And all you want is a cost-of-living raise?
Honey, here are some financial facts of life: Companies routinely pay employees less than they are worth. They may pay a dime less or thousands of dollars less, but it's always less. Why? Because companies are in business to make money.
Your goal is to push your company as close to its break-even point on your salary as you can. My guess is you've got a lot of room to push, but you can find out for sure by talking to others in your field and related industries. Polish up the resume and do a little job hunting. I'm guessing that in this tight labor market, your reception will embolden you to ask for more than 2%.
Maximizing your compensation, by the way, should be as much a part of your financial plan as piling up retirement funds, reducing your debt and getting the best risk-adjusted return on your money.
Death and IRA Taxes
Q: If someone dies before taking out all the money from an individual retirement account, who pays the taxes? The person's estate or the person who inherits the IRA?
A: Both do, although the heir can get a tax break.
The amount in an IRA is included as part of a dead person's estate for estate tax purposes. This year, the first $650,000 of an estate is exempt from federal estate taxes. (The exemption is scheduled to rise to $1 million by 2006.) Anything more than that exemption amount is subject to tax rates that quickly climb to 55%. The estate pays the bill.
Once the estate taxes are paid and the IRA passes to the heirs, the heirs are entitled to a tax deduction to offset some of the income taxes that come due when money is withdrawn from the account. The deduction is equal to the amount of the marginal estate tax paid on the IRA.
Here's how it works. Say an IRA owner dies in 2006 with a $2-million estate when the exemption is $1 million. The estate will owe taxes on the remaining $1 million, which includes a $600,000 IRA, at about a 50% rate, for a total estate tax bill of about $500,000.
In the year or over the years the heirs withdraw money from that IRA, they will be able to use a tax deduction of about $300,000--the 50% rate times the $600,000 IRA.
The IRA can be assumed to be entirely in the taxable part of the estate. Another way to think about it is that the deduction equals how much the IRA increases the estate tax bill, compared with what the bill would have been without the IRA.
The deduction for estate taxes on an IRA is taken on Schedule A of an heir's income tax returns as money is withdrawn from the IRA, but it is not subject to the 2% floor that normally applies to miscellaneous deductions.
The problem is that sometimes nobody tells the heirs that they're entitled to this deduction, which means the heirs pay more tax than necessary. However, you don't get the deduction if no estate tax is paid on the IRA in the first place. Uncle Sam wants his due, after all.
Beware of Mortgage Scams
Q: Even though home prices have increased in our area, we still owe more on our house than it's worth, because we bought near the peak of the market. Now my husband has lost his job and we'll probably have to move to another state. I've heard ads on the radio from companies that claim they can get us out of our mortgage without hurting our credit. Does this really work?
A: It works nicely for the companies running these scams. You're still on the hook for the mortgage even after you hand them your house keys.
You may be able to save your credit and good name by arranging what's called a short sale: You sell the house and the bank agrees to accept the proceeds, even if it's less than what you owe. Talk to a knowledgeable real estate attorney.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at firstname.lastname@example.org or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.