ANSWER:

Sorry, but I don't know. If your father left the shares to you after his death, then your "tax basis" in the shares was "stepped up" to the share's value on the date of his death. You need to determine what that was (a site like Bigcharts http://bigcharts.marketwatch.com/historical/ might help) and subtract the basis from the amount your received on the sale. That's your long term capital gain, taxed at 15%. Sorry I can't be of more help.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

You have to determine if the bonds became worthless in 2008. If so, then you treat them as though you sold them on December 31 for $0 and show your entire tax basis as a loss on your Schedule D. Your broker should be able to help you determine if the bonds are worthless. If not, there is no tax consequence until you sell them. Also, there is no deduction for interest not received. If you received the interest you'd have to pay tax on it, so not receiving it gives you the "break" of avoiding tax on the payment.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

First, sorry about your loss. Unfortunately you've got lots of company these days.

First, on the reverse split: Your basis is simply spread over the fewer number of shares. If you owed 100 shares with a basis of $10 shares and a reverse split left you with 10 shares, your basis would be $100 per share.

As for your loss when you sell, you may use it to offset any capital gains (long or short term) and then up to $3,000 may be used to offset any other kind of income, like salary or interest or rental income. If you have no other gains to offset, then you are restricted to deducting $3,000 a year.

Again, sorry....

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Paying taxes doesn't up your basis....what increases your basis is reinvesting in additional shares. You must pay tax on the distribution whether you take the distribution in cash or have it automatically reinvested in additional shares. When you have it reinvested, you are buying additional shares and thus increasing your investment -- your tax basis -- in the fund. Failing to keep this in mind causes many mutual fund investors to overpay their tax when they later sell their shares.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

It depends on whether the stock is truly worthless. In the year a stock becomes worthless, you can claim a tax loss by treating it as though you sold the stock for $0 on December 31. In that case your entire tax basis becomes your capital loss. The problem with Washington Mutual is that, last time I checked, it was selling for about 3 cents a share on the pink sheets.

One source I trust told me that he believes that if you can show that it would cost you more in brokerage commissions that you would receive from the sale of such a depressed stock, then the stock is worthless and you can claim the loss as noted above. If you can recoup any of your money, though, you should sell the shares and report the transaction...and your loss.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Yes. The way the law works, long-term gains first offset long-term losses....and short-term gains offset short-term losses. If you wind up with net long-term gains and net-short-term losses (or vice versa), then they offset each other dollar for dollar.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Yes. The way the rules work, long-term gains are first offset against long-term losses and short-term gains against short-term losses. If you wind up with net long-term gains and net short-term losses (or vice versa) one offsets the other dollar for dollar.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Boy, this is tough. First, ask for the fund's help. It may have some records. Next, fall back on your records. Do you have anything that can establish what you paid for the shares? If you reinvested dividends to buy additional shares over the years, you should have reported those dividends on your tax year for the year you received them. Any chance you have your old returns? If you can establish a pattern, you can make a good faith estimate.

Depending on the amount of money involved, you might want to check into the Basispro service offered by Wolters Kluwer (www.gainskeeper.com ). If you know when you made investments and how much, this service should be able to track the basis including any reinvested dividends. Sorry I can't be of more help.

On the bright side, for investments purchased at 2010, brokers will be required to keep track of basis for investors.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Good point. The only problem is you have to pay tax on the distribution. If you sell before the payout and buy another, similar fund after its payout, you get that fund for its lower price..and avoid the tax. The dollar amounts involved help determine if the rigmarole is worth it.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Yes, it is true. For 2008, 2009 and 2010, taxpayers in the 10% and 15% bracket (up to $32,500 of taxable income on single returns and $65,100 on joint returns) enjoy a 0% rate on their long-term capital gains. If gains push your taxable income above the threshold, excess gains are taxed at 15%. Sorry I didn't have time to get into this break in my series.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

That's right. For 2008, 2009 and 2010, the tax rate for long-term gains (profits on assets held more than a year before selling) is 0% for taxpayers who are in the 10% and 15% tax brackets. And, if your gains push you into the 25% bracket, only the amount above the 15% cut off would be hit by the regular capital gains rate of.....15%. All this is figured out on a very complicated capital gains worksheet in the instructions.

I recommend tax software and TurboTax is my favorite (disclosure: Kiplinger provides tax advice for the TurboTax program and its website).

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

This is a tricky one. When a stock becomes worthless, you report it on your Schedule D as though you sold it for $0.00 on December 31 of the year it became worthless. Thus, you get to claim a capital loss for everything you had invested in the stock...your entire tax basis.

I just checked and WAMU is still trading...on the pink sheets (WAMUQ.PK) for a whopping 3.3 cents a share. Therefore, the IRS would stay it's not worthless and that to claim a loss, you need to sell your shares to recover what pittance you can to reduce that capital loss. A terrific source of mine once told me that if the brokerage commission on the sale would more than offset the proceeds of the sale, he'd simply declare the stock worthless on his tax return. The safest way, however, would be to try to dump the stock.

Good luck....and sorry for your loss.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

There is no official answer to your question. It's pretty certain that trading one S&P 500 fund for another S&P 500 fund would violate the substantially identical rule. However, I've spoken with several tax experts that say trading a S&P 500 for a total market fund would not. It would be difficult to argue that a fund limited to 500 companies is the same as one that includes thousands. I wouldn't worry about the wash sale rule in the case you present.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Sorry for the confusion. I was suggesting selling your fund before the payout -- so there is no taxable distribution to report on your 2008 return -- and then buying a similar fund or ETF after it makes it's payout so, again, you avoid the taxable distribution. Of course, it's possible you can find a similar fund that will have no 2008 payout. Some managers work to match losses with gains inside their funds to protect investors from taxable payouts in losing years.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

If you can afford to, I would certainly recommend it. Despite how scary this volatile market is, you know you can buy at bargain basement prices compared with a year ago. History tells us that over the long-term that your grandchildren have to invest, today will likely be looked back upon as a great time to buy. That doesn't mean the downdraft is over -- tomorrow may be an even better time to buy -- but over the long-term you can count on a market recovery.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Great question. And it's really even better than you think.

For 2008, taxpayers in the 10% and 15% tax brackets enjoy a 0% rate on long-term capital gains, which are the profits from investments held more than a year before selling.

For 2008, the 15% bracket for joint returns ends at $65,100 of TAXABLE income.

Remember, as a married couple, you deserve at least $7,000 in personal exemptions plus deductions of at least $10,900 (the standard deduction for your filing status). So, you could really have a minimum of $83,000 of tax-free long-term gains, if that was your only income for the year.

That $17,900 could also sop up your short-term gains, so you don't need short-term losses to offset them. (Actually, long-term losses can offset short-term gains dollar for dollar.)

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

You're right, years ago a provision of the law let taxpayers average a big jump in income over several years, and back in 1997, lawmakers created a new special rate for capital gains from property held more than five years. Neither exist today, however. In fact, the five-year gain rule was abolished before it took effect.

The only way I can think of to mitigate your tax bill would be if you have paper losses in your portfolio that you could "harvest", that is, realize the losses to offset part of the big capital gain.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

First, sorry about the loss. If the Stock B truly became worthless in 2008, you can deduct 100% of your basis on your 2008 tax return. You report this on Schedule D as though you sold the stock on December 31, 2008, for $0.

The loss will first be used to wipe out your gain on Stock A. Then you can use up to $3,000 to offset other kinds of income, like your salary, self-employment income or interest income. Then, any excess will be carried over to 2009, when it can be used to offset any gains you realize...and up to $3,000 of other kinds of income. If you still have leftover losses, they carry over to 2010, and so on.

Hope this helps.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

First, don't worry about running afoul of wash sale rule if you buy a security that happened to be in the portfolio of a mutual fund you sold at a loss. The wash sale rule applies to substantially identical securities and there is no way the IRS would compare a single stock to a basket of stocks.

As for your question about options, you're correct: the option premium itself is not reported because the tax treatment depends on whether or not the option i exercised. See IRS Publication 550 -- http://www.irs.gov/publications/p550/ch04.html#d0e12766 -- for details.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

Although banks and brokers don't have to issue 1099 Forms if interest paid is less than $10, there is no minimum amount of interest that triggers a requirement that you report it. Under the law, even a penny of interest earned is supposed to be reported on your tax return. Since the tax tables rise in $50 increments, there's a good chance that reporting a few dollars won't have an impact on your tax bill. Of course, if the few dollars pushes you into the next $50 increment, it could trigger a relatively huge tax bill.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

First, sorry about the losses (aren't we all?) but, sure your short term losses can offset long-term gains. Gains and losses are first netted within the class -- long against long and short against short -- but than any excess of either is matched dollar for dollar against the other type. And, either long- or short-term losses can offset up to $3,000 of other kinds of income.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

You should never let the "tax tail wag the dog", so I can't tell you whether you should sell for tax purposes. I can tell you the tax ramifications. If you sell for a loss, that loss can be used to offset any capital gains you have for the year (including any taxable long-term gains distributed by mutual funds) and up to $3,000 of excess loss can be used to offset other kinds of income, such as your salary or interest income, or an IRA distribution, for example. (Based on your taxable income for the year, it looks like you're in the 25% bracket, so a $3,000 loss would save you $750.) Any loss that you realize that can't be used this year can be carried forward to be used in future years -- first against any capital gains, then up to $3,000 against other kinds of income.

-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors

ANSWER:

It all depends on how "similar" the funds are. The "wash sale" rule prevents taking the loss on the sale of a security if, within 30 days, you buy a "substantially identical" security. Unfortunately, there's no official guidance on what that means. Buying back the same fund, of course, would be a no-no. And, many advisors think trading one S&P 500 fund for another would be too close for comfort, too. (Some advisors think that would be okay if there were some differences in fund management or pricing.) Beyond the index funds, though, it's pretty well agreed that changing one large cap growth fund for another would NOT run afoul of the rules.

And, note that the wash sale rule does not deny the loss...it delays it. The loss you are prevented from deducting on your return is added to basis of the substitute fund. By raising the basis, that means you'll get the "benefit" of the loss by reducing the gain, or increasing the tax-saving loss, when you later sell the new fund.

-- Kevin McCormally, Kiplinger Washington Editors

ANSWER:

Although the IRS unofficially went back an forth on this issue for years, earlier in 2008, the agency issued a revenue ruling holding that the repurchase of shares by an IRA would trigger the wash-sale rule...meaning the loss on the previous sale would not be deductible.

Applying the wash-sale rule to an IRA repurchase is even more harsh than in a taxable account. With a taxable account, the denied loss is added to the basis of the repurchased securities, effectively simply postponing the tax savings until those securities are sold. Within the IRA, however, the basis doesn't matter, since withdrawals from a traditional IRA are fully taxed.

-- Kevin McCormally, Kiplinger Washington Editors