Question: My wife and I own 900 shares of stock that cost $4 and are now worth $24, giving us a $20 per share long-term capital gain. We would like to use these shares to finance college expenses for our son, starting in 1984. Are there any restrictions against transferring some of these shares each year to his name for selling, to reduce the capital gains tax? What would we have to report on our Form 1040? What would he report (he will be earning around $2,000 a year in summer work)?
Answer: For the numbers you cite the process is really quite simple. You don't report anything at all on your income tax return. And as long as you keep the annual value of the gift below $10,000, you will have no liability for filing a gift tax return either.
Actually, there is no gift tax liability for up to $20,000 a year if both husband and wife concur in the gift. But if the annual total exceeds $10,000, a gift tax return must be filed to show the concurrence of both spouses.
When your son sells the shares of stock he must report the capital gain on Schedule D as a part of his Form 1040. His cost basis will be the same as yours was, or $4 a share. So his gain will be the same as yours; but the tax bite will be less, since it seems safe to assume that he will be in a lower tax bracket than you.
Q: In your column of May 9 you stated that rollover funds and annual deposits may not be mixed in the same IRA account. Earlier this year, I was advised by the IRS that this was permissible. As one who is not employed but with a working wife, I was told that I could add $250 (spousal IRA) to my rollover account which was established in 1980 when I took a lump-sum payment on retirement. I would appreciate your thoughts on this.
A:. You're right. I was answering in the context of the question, which was asked by someone still in the active work force. I should have qualified my answer to relate it to the specific circumstances.
In fact, the funds from a rollover after a lump-sum distribution and the funds from subsequent IRA deposits can legally be intermixed. In your particular case it is highly unlikely that commingling will make any difference.
But for someone who continues working after the rollover, the two kinds of IRA funds can be mixed, but shouldn't be. That's because at some future date the worker may want to roll the lump-sum distribution back from the IRA to a new employer's retirement fund. And to do that, the payout from the original rollover (plus subsequent earnings) must have been kept segregated from any later IRA deposits.
Q: I have read, probably in your column, that with self-employment income and no other earned income, one can deduct up to $2,000 of that income for an IRA and 15 percent for a Keogh. Thus if self-employment income was $10,000, one could deduct $2,000 (IRA) plus $1,500 (Keogh) for a total of $3,500. Now suppose self-employment income was $1,000. Could one deduct $1,000 (IRA) plus $150 (Keogh) for $1,150, or 115 percent of the self-employment income?
A: No, the combined total of both IRA and Keogh investments may not exceed total earned income. Section 219 of the IRS Code requires that you subtract the amount of any Keogh investment from total income from self--employment first. Only the balance remaining may be used as the governing ceiling on IRA investments.
Incidentally, in the circumstances you describe, the rule on Keogh is less restrictive than you say. If your adjusted gross income is less than $15,000--which it may well be if your only earned income is the $1,000 from self-employment--you can deposit in a Keogh account the lesser of $750 or total self-employment income.
Of course, that means your IRA ceiling drops to $250, since the total still can't exceed $1,000. But Keogh has advantages over IRA, notably the availability of special 10-year averaging if you take a lump-sum distribution of the Keogh account.