Tax Tips Q&A for Tax Year 2008 - Recent
Tax Tips Q&A
Read Kevin McCormally's answers to tax questions submitted by NBR's viewers.
Click on a tax topic to explore related questions and answers.
This feature is intended to provide general information and education and should not be considered as investment or tax advice. Each individual should consult his or her own tax, financial, or investment advisor.
Selected Recent Questions
QUESTION: How To Figure Cost Basis Of Inherited Shares?
How can I figure the cost basis of a stock? I had shares of EDS, which was sold to HP last year. I never paid for it, it was spun off from GM stock inherited in 1977, then split several times. I'm afraid the cost basis is $0, but is there a formula to use for tax purposes? Thank you
-- Mary Nelson, Monterey, CA
ANSWER:
No...your basis is not ZERO! But it won't be easy to figure out what it is. Start with the original GM inherited shares. When you inherit shares, your basis is the stock's value on the day the previous owner died. So, you need to start with that figure. Then, when EDS was spun off from GM, part of your basis was spun off with the shares of EDS. The GM website might have help for figuring this, or check with an accountant. There are services that do the historic detective work to figure this out...so you don't overpay your tax.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: What's The Best Use For Substantial Market Losses?
With a substantial loss in the market for year 2008,how
best to utilized these losses :
A, should we average our passed five or six years of income, in 2005,
we sold a building, and reported a large gain, paid tax accordingly. (Fed
tax ~$76,620 State ~$12,483) If it is allowed, ( please state the IRS
code number for it) can we file for an extension now, and do the final
work later, or if the tax form already mailed of, can an amended form
be file after April 15, 2009?
B, If averaging income no longer allowed, should or could we move the
deferred earned from the regular IRA to our Roth IRA.
C, Should neither A or B work, any helpful idea as to utilize these losses
the best possible.
-- K T Close, Alameda, CA
ANSWER:
Sorry, but income averaging is no longer allowed.
On your losses in the market: did you realize the losses, that is, did
you sell the securities that had fallen in value? If you did, then you
report the transaction on Schedule D, offsetting any gains for the year.
Then you can deduct up to $3,000 of excess loss against other kinds of
income. Any leftover loss is carried forward to future years. That's how
you will "benefit" from the loss...by making capital gains realized in
future years effectively tax-free.
As for the IRA question, no more than $3,000 a year of carried over losses
could be used to offset income produced by a conversion of a traditional
IRA to a Roth.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Reporting Income From Mutual Fund Litigation
I recived a small check for less than 250. dollars from my mutual fund for some sort of litigation. Where would I report that on my taxes?
-- Dennis, Ramsey, MN
ANSWER:
That depends on whether you still own the mutual fund shares. If so, you don't report the check; just reduce your tax basis by the amount received. That means you'll have an extra $250 of profit when you ultimately sell the shares. If you have disposed of the shares of the mutual fund, you should report the money received as a capital gain on Schedule D, using a $0 basis and noting that it is a recovery related to a sale reported on an earlier return.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: HSA Clarification Needed
Does the Health saving account has to be offered by the same health insurance company?
-- WS, Dallas, TX
ANSWER:
No, they don't have to be connected. The account can be completely separate from the insurer. Check out HSA Finder: http://hsafinder.com/
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Can I Take 529 Contributions As Tax Loss?
I put $22500 in my grandaughters 529 over 4 years. I sold it for $14000. Can I take that as a tax loss.
-- Gayle Roberts, Berkeley, CA
ANSWER:
My friend and colleague Kim Lankford answered a similar
question in one of her recent columns on Kiplinger.com:
Q. I opened a 529 plan for my daughter two years ago and invested
$10,000. Now the account is worth $7,000. Can I close out the account
and deduct a loss from my income taxes?
A. You ask at a great time. The last time we answered this question, we
had to hedge a bit because the IRS hadn't issued specific guidelines about
writing off 529 losses. But we predicted that they would eventually issue
rules letting you deduct 529 losses much like the way you can with losses
from IRAs.
Sure enough, that's what ended up happening. The IRS just issued the newest
version of Publication
970, Tax Benefits for Higher Education, and included the exact same
529 write-off rules that we anticipated (see page 43 of the IRS publication).
You can deduct only the loss if you close out your account and the amount
you receive is less than the money you invested. The loss is considered
a miscellaneous itemized deduction (like job-search expenses, investment
expenses, employee business expenses and IRA losses), which is deductible
only after the deduction amount exceeds 2% of your adjusted gross income.
You must itemize to write off the loss.
But that could be worthwhile for you. If you earn $50,000, for example,
you can write off only miscellaneous itemized deductions beyond $1,000
–- so you could deduct $2,000 of your $3,000 loss. If you're in the 27%
tax bracket, that can shave $540 off your taxes.
Normally, you'd have to pay income taxes plus a 10% penalty on your earnings
if you used the money for anything other than college costs. But you avoid
the penalty in this case because you don't have any earnings.
To take the loss for the 2002 tax year, you'd have to close out the account
by December 31. Joseph Hurley, founder of Savingforcollege.com recommends
that you wait at least 60 days after closing the account before opening
a new one, because that is the amount of time you typically have to switch
accounts without a tax penalty. If you open a new account before then,
it could look like you transferred the money instead of closed the account.
The move may also be complicated if you had take a state income-tax deduction
for your contribution. The state may want you to repay the benefit if
you close the account.
But you don't have one of the problems that you do with IRAs. The 529
contribution limits are much higher, so you can quickly build your account
back up to where it used to be. In fact, this is a good opportunity to
take your tax savings and add a little extra money.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
