Question: I will be receiving a lump-sum payment from my employer when I retire. Can I use the money to pay my house off and not have to pay any tax?

Answer: Paying off the mortgage on your house will have no effect at all on your tax liability for the retirement pay-off.

However, there are a couple of things you can do to ease the tax burden. The first possibility is an individual retirement account rollover. You can transfer all or part of the lump-sum payment into an IRA [in any of a variety of investment media] and defer tax until funds are withdrawn from the IRA.

There are a few restrictions on rollover transactions. These are explained in detail in IRS publication 590.

You must pull out from the total distribution an amount equal to your contributions to the plan [if any]. Employe contributions are not eligible for rollover, but neither are they subject to tax, since tax had been paid when the money originally was earned.

You also may withhold additional sums from the distribution, and only roll over a part of the total. But any amount not rolled over (except your own earlier contributions) is subject to tax.

Funds may be withdrawn (in whole or part) from the IRA any time after you reach age 59 1/2 and must start by the time you are 70 1/2. (There are special provisions in the event of disability.)

Since no tax was imposed on either the rollover funds or subsequent earnings by the account, all funds withdrawn from the IRA are subject to tax in the year received.

The second method for reducing the tax liability on a lump-sum distribution can be used if you wish to retain the money -- either to pay off your mortgage or for any other reason. The IRS has provided a special 10-year averaging method for arriving at the tax on such a distribution.

Although there are some technical differences, essentially you are calculating the tax on the distribution ad if the total amount had been received evenly over a 10-year period. (The calculations are done on Form 4972, which you then attach to your tax return.)

Principal eligibility requirement is that you must have participated in the retirement plan for at least five tax years before the year of the distribution. See IRS Publication 575 for details.

Q: In 1960 I bought 10 shares of Marriott stock. Stock splits and stock dividends have raised this holding to 127 shares. If I sell all or part of these shares now, how do I compute the gain for tax purposes?

A: A stock split or a stock dividend is not taxable income at the time it is received and does not change the overall cost base for your holdings.

So if you sell all the shares now, the capital gain is simply the difference between the cost of the 10 shares in 1960 and the net proceeds from sale of the 127 shares now.

But the per-share cost has changed, so you have to make an additional calculation if you sell less than the entire holding.

Just divide the original cost of the 10 shares by 127 (the number of shares now owned) to get the per-share cost. Then multiply that amount by the number of shares sold, which will give you the cost basis for those shares.

Multiply the same per-share cost by the number of shares you don't sell, to get the cost basis for the shares retained. n

Q: My fiancee was divorced in the State of Texas (a community property state) and receives a monthly community property settlement (not alimony) from her former husband. Is this settlement payment considered taxable income?

A: Yes, but the type of income (that is, where it goes on the tax return) depends on the source of the funds.

Your future wife must include in gross income that part of the payment that represents her part of the "community" income. (Her former spouse similarly reports only his part of that income.)

If the total payments for the year exceed her half of the community income, then the excess is reported by her as alimony; and her former husband may deduct the same amount on his tax return as alimony paid.

This is a much simplified treatment of a complex subject The IRS has a free booklet with more detailed information. Ask for Publication 555.