Question: Please tell me where I can find a list of utility stocks already approved by the IRS to qualify under the new 1982 tax law for $750 in tax-free dividends. After some research at the library I have three lists, each somewhat different than the next. And each source warned that the portion of the dividend returned as capital will not qualify. Can you offer guidance?
Answer: The IRS will not publish a list of utilities whose dividends qualify under the Economic Recovery Tax Act of 1981 (ERTA). Each utility, with the professional guidance of its accounting and legal staff, will determine for itself if it meets the criteria.
Incidentally, the dividends are not "tax-free" but rather "tax-deferred." If held one year or longer, proceeds from sale of the shares will be reported as a long-term capital gain over a zero cost base.
Most brokerage houses have a list of the utility companies that qualify; certainly your broker can find out for you the status of any company you are particularly interested in.
If you don't have a broker, you can get a free copy of Merrill Lynch's latest list by sending your name and address to Mr. Will Lobb, c/o Merrill Lynch at 699 Prince St., Alexandria, Va. 22314.
If you would rather listen to E.F. Hutton, they offer a similar free pamphlet. Write to E.F. Hutton & Co., Attention Mr. John Jennison, 1850 K St. NW, Suite 250, Washington, D.C. 20006.
I don't have a good answer for you on the second part of your question. The IRS has a team working on a set of regulations governing the utility dividend tax break.
It is highly probable that those regulations will cover the handling of any portion of dividends that represents a return of capital, because it is a crucial element of the problem.
But at this point in their work the people handling this effort at IRS may not even tell me whether or not the question will be addressed in the final product. I'll monitor and let you know the answer when the rules come out.
Q: In your column of April 26 you imply it would be wise to roll over money withdrawn from a federal retirement account into an IRA. This money would have been taxed in the year contributions were made. Therefore subsequent withdrawals from the IRA, which are also taxable, would result in double taxation on the rolled-over amount. Since there are a number of federal employes in this area who may be "RIFed" and wish to withdraw their retirement funds, please clarify this point.
A: Not guilty. When answering the question in the April 26 column I never mentioned "rollover." In fact, pre-retirement withdrawals from the federal retirement fund can't be rolled over into an IRA.
Only previously untaxed employer contributions received in a lump sum distribution from a retirement fund are eligible for rollover. Employe contributions may not be transferred to an IRA.
But after separation from government service any or all of your accumulated funds can be withdrawn on request, without tax consequences because--as you point out--income tax had already been paid on that amount.
Now consider an IRA investment as a separate transaction, totally unrelated to the withdrawal from the federal retirement fund except that the latter is the source of the cash to be used for the IRA investment.
If you invest $2,000 in an IRA you get to deduct that amount from your taxable income, saving anywhere from $280 to $1,000 in federal income tax liability (depending on your tax braket).
When you later withdraw money from your IRA, it is subject to tax as ordinary income--but this is just a single tax bite, since it was deducted from your income in the year the deposit was made.
So there is no rollover, and no double taxation. What you get instead is an immediate tax saving and a chance at a better return than you would get by leaving the money in the federal retirement system. Only catch: You must be presently employed and eligible for an IRA. And of course you can only get the tax saving for $2,000 each year ($2,250 if you're married and qualify for a spousal IRA).