How to manage your credit utilization

Our credit scores are in the low 800s. We always pay all credit card balances off before the next billing period. We are charging a cruise for us, our daughter and her husband. We’re worried about using too much of our available credit and thus reducing our credit scores. We’re using one credit card and paying half the balance this billing period and the rest on the next billing period. I’ve never been able to calculate the “credit utilization,” but I’m sure we will exceed it for the next two months even though we will pay the amount charged in full. Can you suggest anything else we can do?

Answer:

Your credit utilization is simply the amount of available credit that you’re using. If your card has a $10,000 limit and you make $5,000 in charges, your credit utilization ratio is 50%. (If you’re not sure what your credit limit is, you can check your account online or call the number on the back of your card.)

In general, the less of your available credit you use the better.

The balance that matters for credit scoring purposes is the balance that’s reported to the credit bureaus — and that’s typically what you owe as of your statement closing date.

Making a payment right before the statement closes can help reduce your credit utilization.

If you don’t plan to apply for a new credit card or loan, however, you probably don’t need to worry about a temporary ding to your credit scores. Your scores may still be quite good and rebound once you pay off the balance.

Estate taxes on house bequests

Dear Liz: You recently wrote about the capital gains tax implications when someone sells a house they’ve been given, versus one they’ve inherited. Would you elaborate on the estate ramifications for the donor if that person has a large estate? Would their estate pay tax on the gift?

Answer:

Few people have to worry about either gift or estate taxes, for reasons that will become obvious in a moment. But large gifts can reduce the amount a wealthy donor can pass on to heirs tax free after death.

That’s because the gift and estate tax systems are combined. Gifts over the annual exclusion amount — which in 2023 is $17,000 per recipient — reduce the donor’s lifetime gift and estate tax exemption, which in 2023 is $12,920,000.

Let’s say a donor gives a $1-million house to a friend. The amount in excess of the $17,000 annual limit, or $983,000, is deducted from the donor’s lifetime limit. If the donor died in 2023, the amount of their estate in excess of $11,937,00 would be subject to estate taxes. (Donors owe gift taxes only after they give away so much that they exhaust that lifetime limit.)

Also, the recipient of the gift may face more taxes than if they had inherited the property.

The previous column mentioned that when someone inherits a home, the house’s tax basis is “stepped up” to the current market value. That means the appreciation that occurred during the previous owner’s lifetime isn’t subject to tax.

If someone is given a house by a still-living donor, different rules apply. There’s no step up in value. The recipient gets the donor’s tax basis.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.