Retirement Living Options

OPTIONS & INFORMATION RESOURCES

by Ellen Hoffman

Betsy McCreary, who has lived in New York City for fifty years and worked in the publishing industry, decided to use her retirement to explore and enjoy all of the neighborhoods and activities she didn’t have time for when she was working. She resides in the same rent-controlled, midtown Manhattan apartment where she has lived for thirty-four years.

In contrast, her brother John, who retired from a military career, moved to an old farmhouse in the Virginia countryside where he spent the first decade of his retirement creating and operating a vineyard and a winery. Now John’s moved on to video production, but he still chooses to live in this rather isolated but beautiful spot.

Before you make a decision about where to live in retirement you need to consider many factors—the daily lifestyle you want; proximity of children, grandchildren, or other relatives and friends; the type of climate you enjoy; and your health or medical needs. Ideally you should consider these personal and lifestyle factors first. Then you need to face reality. What can you afford? As usual, when it comes to financial issues, Uncle Sam enters the picture. Because tax impact can be crucial when you’re analyzing the pros and cons of where and how to live, this section combines the discussion of “Decisions You Need to Make” with information on the potential tax impact of your decisions.

Should I continue to live in my current home after retirement?

If your answer is yes, based on personal issues like those mentioned above, then you need to calculate whether your income will be sufficient to keep up the mortgage and/or expenses and taxes, and whether you need to remodel the home to make it safer or more comfortable.

Staying in your current home will probably be much more economical if the mortgage is already paid off. If you don’t own the house free and clear, you’ll need to figure out if your retirement income will be high enough for you to continue the payments. Regardless of whether you are retiring soon or a decade from now, don’t forget that mortgage interest can provide a big deduction on your federal taxes. However, if you’re close to paying off the house, most of your monthly payment is likely to be principal, which is not deductible. And even if you will not have to make mortgage payments, you’ll need to make sure that your retirement income will cover the cost of utilities, repairs, insurance, and property taxes. State and local property taxes are deductible on your federal return, but you’ll only really get the benefit if your total deductions exceed the standard deduction, which was $4,400 for a single individual and $7,350 for a married couple filing jointly in 2000. (If you’re 65 or older, the respective rates are $5,000 and $8,200.)

People who take out a reverse mortgage in order to stay in their home will not benefit from the mortgage interest deduction until and unless they sell the property. If a property with a reverse mortgage has not appreciated enough to cover the interest on the loan, you may not get a tax break on it at all. However, you generally will not have to pay income tax on the money you receive from the reverse mortgage—whether it’s in a lump sum, a monthly payment, or some other form of payment. The main exception to this is if you take the money in the form of annuity payments, which may be partially taxable.

Should I stay in my current home, but make it safer or more energy-efficient?

If you want to continue living in your home—as most people do—you should evaluate whether it meets your current and future physical needs. If it requires repairs or remodeling, do you want to undertake these projects, and can you afford the cost? If you or your spouse has a medical problem, you may be able to take some or all of the cost of some capital improvements to your home as a medical deduction on your federal form. However, to deduct any medical expenses at all, the annual total of those expenses must exceed 7.5 percent of your adjusted gross income. Also, if the improvements you make increase the value of the home, IRS will reduce your deduction by the amount of increase in the value in your property. IRS offers this example of how the medical deduction for capital expenses might work: Your doctor recommends that, because of a heart ailment, you install an elevator to go up the stairs. The elevator costs $2,000, and increases the value of your house by $1,400. You will be able to deduct only $600 as a medical expense.

Internal Revenue Service Publication 502 lists the following improvements to your home as acceptable medical deductions “if their main purpose is medical care for you, your spouse or a dependent” (for a complete list, order this publication by calling 1-800-429-3676):

· Constructing entrance or exit ramps;

· Widening doorways at entrances or exits, or inside the house;

· Modifying stairways;

· Installing railings, support bars, or other modifications to bathrooms; and

· Grading the ground to provide access to the house.

Should I sell the home I own?

A few years ago, The New York Times reported that a doctor and his wife, who had bought an entire island for $1 million, were expecting to sell it soon for $1.75 million—and pay little or no capital gains tax. How could they qualify for such a windfall? The explanation is that, like many other people who are close to retiring or already retired, they’re taking advantage of a tax law that allows a married couple to exempt up to $500,000 in profit on the sale of a primary residence.

For the doctor and others who made savvy real estate investments in their homes and have avoided selling because they didn’t want to pay the capital gains, the Taxpayer Relief Act of 1997 brought significant relief indeed. If you’re in this category, the law could mean extra cash in your pocket to use as you please—for example, to buy another retirement home or to travel—as well as increased freedom to think about selling the house without feeling constrained by a tax bite you can’t afford.

Previous requirements that you had to be at least fifty-five years old to benefit from the capital gains exclusion and/or roll the gain into purchasing a new residence within two years of selling the old one are no longer in effect. Under the new law, when you sell your house, you may exclude the capital gains of up to $250,000 for an individual and $500,000 for a couple from your federal tax. To qualify for the exclusion, you must have owned and lived in the residence for at least two of the last five years prior to selling it. You may also sell a home and benefit from the exclusion as many times as you want, as long as you live in each residence you buy for at least two years before selling it. (However, if you lived in the house for less than two years due to a change in your health or your job, you may still qualify for a tax break. See IRS Publication 523 for details.)

For people who might want to stay in their home, but would also like to benefit from an increase in value and from the tax break, Washington, DC, real estate lawyer Benny Kass suggests this strategy: Sell your house to your child or children, but continue to live in it and pay the rent to your kids. You’ll get some extra cash, because you can keep the profit up to the limits of the exclusion. Your children will receive the rental income—hopefully, enough to pay the mortgage and other expenses of maintaining the house—and, if the value of your estate will exceed more than $675,000 (this is in 2001; the figure will be $700,000 for 2002 and 2003) for each child, this will reduce or prevent your kids from having to pay inheritance taxes on the house in the future.

Should I buy a new home for my retirement years?

Let’s say you and your spouse own and live in a four-bedroom house in the city, which has a market value of $300,000, compared to the $200,000 it cost when you bought it. You want to retire to a two-bedroom condo in the suburbs or in a beach community. With the $300,000 from selling the city house—free of capital gains tax—you can undoubtedly purchase a very nice two-bedroom condo and still have money left over. There will be no tax penalty for the downsizing. You’ll have to figure out, however, whether it makes more sense to keep the proceeds of selling your house and get a mortgage, if you qualify for one, and benefit from the mortgage interest deduction, or to buy the new home outright. Because this type of calculation requires analysis of all sources of your retirement income and their tax consequences, ask your financial or tax advisor to help you figure this one out.

Should I move into a CCRC?

This choice is, first and foremost, a lifestyle decision: Do you want to live in a community where you will have easy access to various levels of medical and other services that you need now or may need in the future? If the answer is yes, and if you can afford a CCRC that appeals to you (a recent government study cited their cost as ranging from $34,000 for a studio apartment for one person to $439,600 for a two-bedroom home for a couple) and want to buy your CCRC home rather than rent it, be sure to consult an expert on the tax implications of both the home purchase and the fees you will have to pay for health and other services. The condo, co-op, or other home you buy in a CCRC carries with it the same obligations and risks as any other real estate purchase. When you move to a CCRC you may also purchase pre-paid health care coverage, and some of the cost of this fee may be deductible as a medical expense.

Should I be (or become) a renter in my retirement years?

Renters reap few, if any, tax benefits from Uncle Sam—but they also don’t have to worry about the expense and hassle of home maintenance, real estate taxes, and property insurance. If you’re tired of doing all of this yourself, look for a building or a development with a superintendent and let someone else take care of it.

I’ve always wanted to live in another country. what federal policies do I need to know about before making a decision?

Nicole Mewhinney of Winston-Salem, North Carolina, lived in France for twenty years. When she became eligible for Social Security, she had her benefits deposited in a bank account in the U.S. that she could draw on in France. She never had problems getting her Social Security or paying her taxes from overseas, but there was one problem that played a big role in her decision to return to live in America: not being eligible for Medicare.

Mewhinney is healthy, but after several years of paying for private health insurance, she says, she re-evaluated her situation. “I’m sixty-nine, and going to be seventy next July,” she explained. “At some point you have to plan for the future.”

Retirement should be a time when you can live out your fantasies and experiment with experiences that were not available in your working years. High on that list of experiences may be living in another country. Thousands of Americans have retired in Mexico, for example, which offers the advantage of having a common border and being close enough to keep in touch with relatives and friends in the U.S. But if moving overseas is on your retirement radar screen, you need to be aware that Uncle Sam has a lot to say about the potential impact on your finances.

“Generally speaking, pensions and annuities that are U.S.-based will be free from tax in a foreign country,” says Jane Bruno, a Fairfax, Virginia, lawyer who worked for the IRS in Germany and who has written a book about U.S. citizens’ overseas tax obligations. “Find out if the country (you are moving to) has a treaty with the U.S. If they don’t, it is more likely that they will tax any sort of income.” You may qualify for a credit on your U.S. taxes for the amount you pay to another country, Bruno says, but there is a catch: “If the other country taxes you at a higher rate than the U.S. would, you will only get a credit up to the (comparable) U.S. rate.”

Robert F. Keats, a financial planner in Phoenix, Arizona, warns that, especially if you have a lot of assets, you should make what he calls a “cross-border plan” to avoid potentially exorbitant or “double” taxation that could result if a U.S. citizen retires and lives permanently outside the country. He points to the example of one couple who realized that, unless they made changes in the legal status of their $3.2 million in assets, if one of them passed away, the surviving spouse could be liable for $4 million in estate taxes, part in the U.S. and part in the foreign country.

Here are some of the basic issues affected by federal laws and policy that you should be aware of before taking off to live on your desert island:

You will, of course, need a U.S. passport as well as a visa from the country in which you want to live. You must apply for the visa before leaving the U.S. When you check with the embassy or consular officials in your future home about a visa, also ask about driver’s license requirements. Once you are living overseas, the 260 U.S. consular offices around the world can help you with serious legal, medical, or financial difficulties that may arise.

travel.state.gov/acs.html

Income Tax

The taxes you must pay will depend on whether your new home is one of the more than fifty countries that have tax treaties with the U.S. According to the IRS, most tax treaties allow you to exempt nongovernment pensions and annuities, and some investment income, from taxes you must pay to the foreign country. Treaties also help you avoid having some or all of your income taxed twice. In many cases you will qualify for the Foreign Tax Credit, which allows you to deduct some or all of the income taxes you have paid in another country from taxes you owe to Uncle Sam. Be aware that some countries require you to pay income tax on your U.S. Social Security benefits.

If you decide to live in a country that does not have a tax treaty with the U.S. you will be subject to that country’s tax laws, so be sure to inform yourself about them before making your final decision on moving.

Call the Internal Revenue Service’s toll-free order line, 1-800-829-3676, to request Publication 54: “Tax Guide for U.S. Citizens and Resident Aliens Abroad.” On the Internet, check the publications list at www.irs.gov for additional guidance on information and forms that address interna­tional tax issues.

Medicare

You will not be covered by Medicare if you live outside the U.S. To get health coverage, you’ll need to seek out a private insurance company. Some Medigap policies offer emergency coverage while you are traveling overseas, but this will not apply to your routine care if you actually live abroad.

Mortgage Deduction

You may deduct the mortgage interest you pay on your overseas home from your U.S. taxes, just as you would if the house were in the U.S.

Social Security

You may collect your Social Security benefit almost anywhere in the world. (Exceptions are countries with which the U.S. has strained relations, such as North Korea or Cuba.) Depending on where you live, you may choose whether to have your benefit deposited in a U.S. account, in a foreign account, or to receive a check in the mail. Many retirees who live overseas have their benefit deposited into a U.S. bank or brokerage account and draw on it using checks or other types of money transfers. While living overseas you must file regular reports to Social Security on your address, changes in family status, and other relevant topics. If you are under seventy and work more than forty-five hours per month, Social Security will withhold your benefit for every month that your earnings are not subject to U.S. Social Security taxes.

Order the free pamphlet “Your Social Security Payments While You are Out of the Country” from their toll-free line: 1-800-772-1213.

As a U.S. citizen, you may vote in federal, state, and local elections even while living outside the country.

Withholding Tax

The IRS requires brokerage houses or other agents to withhold 30 percent of your dividends and interest when they send you the money you’ve earned on investments. You can avoid this withholding, however, by writing a letter to the agent, explaining that you are a U.S. citizen living abroad and are not subject to the withholding rules that apply to nonresident aliens.

Wills and Estates

People who are living overseas or who own property overseas need to consult with a lawyer who specializes in that country’s laws to learn how you can leave your foreign property to heirs in the United States. This may depend on whether the country where you plan to live has signed an international agreement called “Providing a Uniform Law on the Form of an International Will,” which governs these situations.

* * *

Before you retire, your decisions about where to live most often depend on the requirements or options offered by your employment. Other financial, legal, and personal considerations play a role, but they don’t necessarily dominate your decisions.

When you retire, however, the balance among these factors shifts. You’ll probably experience a change in the sources and amount of your income, and you may be concerned about physical limitations you have now or may have in the future. But best of all, if you have adequate retirement savings, you will have new freedom to choose your lifestyle based on what you really want to do, rather than what your job requires you to do. Instead of limiting your choices, start with an open mind and think about the type of environment that would make you happy and allow you to pursue your personal interests and dreams.

Then go to work on your financial plan, which should include a thorough analysis of the tax and other financial implications of government policies that can make a difference in the type and location of a home you can afford. In that plan, be sure you remember and consider the following ways the federal government may affect your options and, ultimately, your decision:

· Uncle Sam has a myriad of tax rules related to your residence, whether you are buying or selling a home, keeping your current home, or moving to a foreign country;

· Federal law protects you against discrimination on the basis of disability, perceived disability, or in securing financing for a home in the U.S.; and

· No decision you make on a residence is irrevocable. However, before making an investment or completely disrupting your current lifestyle, you should inform yourself about the financial problems you could encounter if you change your mind.

INFORMATION BY TELEPHONE:

AARP

Call 1-800-424-3410 to order a free copy of “Housing” (D 15561), a fact sheet, which explains low-cost housing options and tells you where you can find information about them. You may also order “Selecting Retirement Housing” (D 13680), which describes each type of housing, and “Doable, Renewable Home” (D 12470), which lists ways to make your home more comfortable if you have physical limitations. Also ask for these two helpful brochures: “Home Safe Home: How to Prevent Falls in the Home (D16598),” and “How Well Does Your Home Meet Your Needs?” (D12670).

AARP Home Equity Information Center (HEIC)

To request a free copy of the forty-eight-page guidebook “Home-Made Money: Consumer’s Guide to Home Equity Conversion” (No. D 12894), which discusses the risks and benefits of home equity conversion, call the Publication Hotline at 202-434-6042. You can also order the “Reverse Mortgage Kit,” which contains several fact sheets and a current list of reverse mortgage lenders and counselors. HEIC also sells a “Reverse Mortgage Choices Videotape Package” (D 16402), which includes two fifteen-minute, closed-captioned video programs and a resource guide for $5.

American Bar Association Commission on Legal Problems of the Elderly

If you are considering buying or renting a home in a Continuing Care Retirement Community, order a pamphlet, “Retirement Housing Options,” which includes an article on “Consumer Contracts for Continuing Care Facilities,” by Charles Sabatino. The article will help you evaluate the contract you are being asked to sign. The publication costs $5.00. Call 202-662-8690 for ordering information.

Center for Disease Control and Prevention (CDC), National Center for Injury Prevention and Control

This government agency publishes a free brochure, “Check for Safety: A Home Fall Prevention Checklist for Older Adults.” You can order this and other related information from the SAFE USA Hotline, at 1-888-252-7751.

Fannie Mae (FNMA)

To learn about this agency’s two types of reverse mortgages, and get a list of lenders who offer them, call 1-800-732-6643 for these free pamphlets: “Home Keeper: It Pays to Keep You in Your Home” and “Home Keeper for Home Purchase.”

Federal Trade Commission (FTC)

This government agency will send you the brochures “Credit and Older Americans” and “Facts for Consumers: Reverse Mortgages.” Call 202-326-2222.

Internal Revenue Service (IRS)

In addition to Publication 502, “Medical and Dental Expenses,” and Publications 54 and 776 (see the box on page 201 for key references on living overseas), you may also order a free copy of “Tax Guide for U.S. Citizens and Resident Aliens Abroad” (Pub. 54); “Investment Income and Expenses” (Pub. 550) and “Selling Your Home” (Pub. 523) for information on the new tax rules; and “Home Mortgage Interest Deduction” (Pub. 936) by calling the IRS at 1-800-829-3676 (TDD 1-800-829-4059).

Social Security Administration (SSA)

To order the free pamphlet “Your Social Security Payments While You Are Outside the United States (S-10137),” call 1-800-772-1213 (TDD 1-800-325-0778).

U.S. Department of Housing and Urban Development (HUD)

This government agency operates several telephone information lines for people interested in various aspects of federal housing programs.

· HUD-approved housing counseling agencies: For the name of an agency near you that will provide free or low-cost advice, call the HUD Housing Counseling Clearinghouse at 1-800-217-6970 (TDD 1-800-927-9275).

· Reverse mortgages and other HUD-insured mortgages: Call the above number to receive a free “Reverse Mortgage Package,” which includes a fact sheet on reverse mortgages, a list of HUD-approved housing counseling agencies and lenders for your state, and the three fact sheets mentioned above under AARP HEIC, or to request information on lenders and other sources of information about HUD-insured mortgages in your community.

· Senior housing: HUD’s MultiFamily Housing Clearing­house and Complaint Line at 1-800-685-8470 can send you information on “Section 202 housing” for senior citizens and the disabled.

· Fair housing: For a free copy of the brochure, “Fair Housing—It’s Your Right,” which describes illegal housing practices, special protections for people with disabilities, and how to file a charge against someone you believe has discriminated against you, call HUD’s Distribution Center at 1-800-767-7468.

· Other HUD information and programs: Call HUD’s Community Connections, 1-800-998-9999.

INFORMATION BY MAIL:

IRS

You can order the following publications that offer advice to Americans residing abroad by writing to: Assistant IRS Commissioner (Int’l.), Att’n: CP:IN:D:CS, 950 L’Enfant Plaza, South, S.W. Washington, DC 20024. The publications are: Pub. 54, “Tax Guide for U.S. Citizens and Resident Aliens Abroad”; Pub. 514: “Foreign Tax Credit for Individuals”; Pub. 593: “Tax Highlights for U.S. Citizens and Residents Going Abroad.”

U.S. Department of State (DOS)

Two free State Department pamphlets that will help you plan for retirement overseas are available from the Bureau of Consular Affairs: “U.S. Consuls Help Americans Abroad,” which describes services that consular officials can provide while you are traveling or residing abroad; and “The Office of Overseas Citizens Services,” which explains how that agency can help you with problems including processing claims for federal benefits if you live outside the country. To order these publications, contact the U.S. Government Printing Office, Superintendent of Documents, Mailstop SSOP, Washington, DC 20402-4328. Copies are also available from Consular Affairs’ automated fax at 202-647-3000.

INFORMATION ON THE INTERNET:

Check here to read information on how to modify your home to make it safer.

At AARP’s home page, search under the word “housing” to find a variety of useful articles on housing options for retirement.

At AARP’s Home Equity Information Center home page, choose “Basic Facts about Reverse Mortgages,” which describes how to compare the costs of these loans. Clicking on “Home Equity Conversion” at the home page, you can find out about property tax deferral for older homeowners and deferred-­payment loans for repairing or improving your home.

Operated by Fannie Mae, this site provides information on reverse mortgages and other options that could be used to finance or remodel your retirement home.

On the home page of the Department of Housing and Urban Development, click on “senior citizens” to find extensive information about housing for seniors, including housing rights and options for financing purchase or remodeling your home.

This is one of several sites you can refer to if you need to chat with Americans living abroad or seek information about taxes and other rules for retiring overseas. Others are www.expatexchange.com and www.liveabroad.com

This website, sponsored by the National Center for Home Equity Conversion, allows you to calculate and compare the costs of reverse mortgages offered by different lenders.

At the home page of the DOS Bureau of Consular Affairs’ website, click on “Travel Publications” to read “Tips for Americans Residing Abroad,” “U.S. Consuls Help American Abroad,” and other publications with tips on living overseas.

From Bankroll Your Future Retirement with Help from Uncle Sam by Ellen Hoffman. Copyright © 1999, 2001 Ellen Hoffman. Excerpted by arrangement with Newmarket Press. $16.95. Available in local bookstores or call 800-669-3903 or click here .