Q: In 1984, on the advice of my broker, I sold some bonds at a loss. He advised me that a short-term loss would be 100 percent deductible from income on my tax return. But when I prepared Schedule D, I noted with chagrin that the totals of Part 1 (short-term) and Part 11 (long-term) are consolidated, which mitigates the advantage of the write-off. Combining short- and long-term when there is a net gain in effect makes short-term into long-term. What's the purpose in having two parts if it all ends up as long-term? Am I missing something?
A: In your apparent circumstances -- with a short-term loss and a long-term gain -- your short-term loss does end up having only long-term impact, because the loss must be applied against the gain, so in effect it does end up no better than a long-term loss.
(A net short-term loss may be used 100 percent -- or dollar for dollar -- to offset other income. Only 40 percent of a long-term gain is taxable; so when a short-term loss is applied against a long-term gain -- which is required on Schedule D -- that short-term loss really only offsets 40 percent of taxable income.)
The whole area of capital gains is pretty complex, and there is no single "ideal" solution that fits everybody. As you have learned, what appears to be a 100 percent write-off turns into something less because you had other transactions. (Your broker should have explained the possibilities to you -- especially if he also handled the transactions that resulted in the long-term gain.)
The two parts of Schedule D are needed because things work out differently for different people. If you had not had the compensating long-term gains, your loss on the sale of the bonds would have given you a dollar-for-dollar reduction in other income. Remember in the future that you must consider all your transactions for the year to determine what impact a new transaction will have on your tax liability.
Q: We are quilty of overuse of "instant credit" and have run our charge accounts to the max. We have now torn up all our cards and are in the process of trying to pay them off -- a total of around $5,000. Should we continue to pay the minimum balance (or as much more as we can afford) each month, or should we try to get a loan to consolidate all the accounts?
A: You are probably paying somewhere between 18 and 24 percent interest on the outstanding credit balances. If you are now members or are eligible for membership in a credit union, that would be the best place to apply for a consolidation loan.
If you don't have access to a credit union, try your local bank or savings and loan association. The interest rate at any one of those three places should be lower than that on the cards, saving you money and making it possible to pay the balances down faster.
But be careful. You want a loan large enough to pay off all the balances; otherwise you'll find yourself having to pay both the loan and the remaining card balances at the same time. And be sure to apply the loan proceeds only to paying the credit card balances; don't be tempted to use any of the money for some other purpose.
And finally, don't commit yourself to loan repayment terms that require larger monthly payments than you can afford, after considering all your other monthly expenses. If you find yourself missing payments, the hole you're in will only get deeper.
Q: In your Feb. 4 column on Clifford trusts, you said that none of the earnings from the trust could be used for "support" of the child. Is it within the law to use the earnings to defray part of the tuition cost for the child's attendance at a private school? Could you list what "support" the parents are responsible for in Virginia?
A: I usually avoid giving state-specific information in this column, because The Post is read in a number of states other than Virginia, Maryland and the District of Columbia. I suggest you ask your question in a letter to the Virginia Secretary of State of Richmond; if that doesn't work, contact your local delegate to the state legislature for help.