Q)When one is involuntarily forced out of a stock due to a call or merger, there can be a large capital gain that distorts yearly income. Is there relief in the tax code, other than the "averaging" route?
A)In some cases where there is an exchange of stock due to a merger, the IRS determines that the transaction is a tax-free exchange, and you need only carry your basis for the old stock to the new shares without tax consequences. But if the stock is simply "called" -- that is, bought by the acquiring firm -- you're in trouble. There no provision for relief from tax on the involuntary capital gain and income-averaging is no longer available.
Q)In the last two years, as a part-time notary public in Maryland, I have earned less than $100 and have had expenses of $48. Will I have to file special federal and state income tax forms?
A)Normally business income and expenses are reported on Schedule C. However, there is a provision for reporting notary fees (and similar payments for such things as jury duty) as "other income" on Form 1040. (The 1040A may not be used if you have "other income.") Since the net earnings amount to less than $400, you don't have to file a Form 1040-SE to report the income for Social Security tax purposes. There is no problem with your state return: the amount will be carried over to the Maryland form as part of your adjusted gross income.
Q)Can an estate qualify for the $125,000 tax exclusion on the sale of the home of the deceased who met all the requirements? Or would it be better for the heirs to sell, using the value at the time of death of the owner? (The total estate falls within the $600,000 estate tax floor.)
A)You have no choice. If the residence is sold after the death of the owner, the executor can't exclude any gain realized on the sale, with one exception: the executor may elect to exclude the gain if the residence is sold after death under a binding contract entered into by the deceased before death, and the deceased had "substantially" performed any actions required to complete the contract of sale. So the only way to go is for the heirs to sell, using for the basis -- as you obviously know -- the fair-market value on the date of death.
Q)I am holding several thousand dollars of stock losses and no stock profits (outside of IRAs). Since the tax drops next year, am I correct that it would be better to take the losses this year? Will the limit of $3,000 in losses (over gains) also apply this year?
A)Tax considerations should never override your investment judgment. But if there is no chance that the stocks will recover, then you're right: take the losses this year, both because it gives you a larger tax saving and because you'll save the dollars a year earlier by not waiting. I'm sure you know that the distinction between long- and short-term losses is gone, and all losses are deductible in full this year. However, the $3,000 annual limit (with carryover of remainders) continues unchanged.
Q)I expect to receive about $85,000 in a lump sum from my firm's retirement plan. (I retired on Dec. 31, 1986, and am 70.) My CPA says I must use five-year averaging, as the 1986 Act requires receipt of funds prior to March 16, 1987, to use 10-year averaging. The difference to me between five-year and 10-year averaging is around $2,500. Would you please clarify?
A)I can find nothing to support your accountant's opinion. Anyone who was at least 50 years old on Jan. 1, 1986, may elect to use either five-year averaging (using the current tax rates) or the old 10-year averaging method (using 1986 tax rates) for a single lump sum distribution received after age 59 1/2. As far as I can determine, this is an open-ended option. ::
Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business &Finance News, 1150 15th St. NW, Washington, D.C. 20071.