Q: Last year, when offering suggestions for reducing 1983 taxes, you suggested sending in the Jan. 15 estimated state income tax payment in December so it could be claimed on the 1983 federal tax return. I have been under the impression that I could include all four estimated state tax payments made for the tax year on the federal return for that year, even though the last payment was made in January of the following year. Is this wrong?
A: Yes, it is. Practically all individual taxpayers are required to operate on a cash basis; that is, you may only deduct on your 1983 federal tax returns those qualifying payments made during 1983.
Assuming you made all your payments of estimated state tax on the due dates, then on Schedule A of your 1983 federal tax return you should have claimed the state income tax deduction paid on Jan. 15, 1983, toward your 1982 estimate, plus the April, June and September installments on your 1983 state tax. The Jan. 15, 1984, payment on your 1983 tax is properly held for inclusion on your 1984 federal return.
Of course, in addition to your payments of estimated tax, you should have included on your 1983 return any state income tax withheld from wages, as shown on your W-2. And you should have reported as income any state tax refund for 1982 you received in 1983 (unless you did not itemize deductions on your 1982 federal return).
If you have been doing it incorrectly up to now, then I suggest you catch up this year. You can avoid having only a three-payment deduction for 1984 by making that Jan. 15, 1985, payment by Dec. 31 of this year, as I suggested in that column of last year.
Q: I inherited shares of stock from my husband after his death in 1973. I recently sold this stock. Do I use as the cost basis the price he paid for the stock or the fair value on the date of his death?
A: If you inherit stock, your cost basis for figuring gain or loss on sale is generally the fair market value on the date of death rather than the original owner's actual cost.
If an estate tax return was filed, then you will use either the appraised value on the date of death or the value on the alternate valuation date (if the executor chose to use an alternate date on the estate tax return).
Q: Four years ago, my company transferred me to California where we bought a home. We kept our residence in Virginia and rented it. I recently accepted a position with another employer here and have reoccupied our Virginia house; we have put the California house on the market. Can the tax on gain of the California house be deferred? My wife is over 55 -- can we take advantage of this factor in our tax?
A: You may not defer tax on the gain on sale of the house in California by virtue of reoccupying your original residence in Virginia. You could defer the tax if you were to buy another residence in Virginia within 24 months before or after sale of the California house (assuming the appropriate dollar figures), even if you keep your original Virginia home as rental property.
Your wife's age makes you eligible to exclude from tax any gain on sale of the California house (up to the $125,000 ceiling). But pause before acting; this is a one-shot deal. If you use the exclusion on this sale, neither you nor your wife may ever use this tax break again.
And there is no "partial" use. Even if you have, say, $25,000 gain on the sale, you may not reserve the remaining $100,000 for another time. Use the exclusion once to cover any amount of gain and it's gone forever. If your gain is relatively small and there is a chance that you may sell your Virginia home later -- perhaps for a larger gain -- you may want to save that once-in-a-lifetime exclusion for later.