One more question related to the AMT question just sent. In some article about AMT, it says" If you're already paying at least that much because of the "regular" income tax, you don't have to pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax."

My question is: do we have to pay both or one of both? In 1040 form, I saw there is a line to add AMT on top of the regular tax, that means we have to pay both?! Please help in answering this. Many thanks!!

Henry Z
KCTS Seattle, WA

You pay whichever levy is higher. The way it works on the form is you report your regular income tax and the AMT amount you report on the 1040 is the amount by which your AMT bill exceeds your regular bill. So, for example, if you owe $11,000 in AMT and $10,000 under the regular rules, you'll report $10,000 as regular tax and $1,000 as AMT.

Remember, I don't make the rules...I just try to explain them. Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

We bought a Toyota Prius in May of 2006. This should give us a tax credit of $3,150. However, that amount has been reduced by almost $1,000. The "tentative minimum tax" from Form 6251 must be subtracted from the net regular tax (see Form 8910) to arrive at the actual credit granted.

What does this have to do with what should be an incentive for the taxpayer to buy energy efficient vehicles? Is there a way to get around this so that we can get the full $3,150 that we are supposed to be entitled to?? Thanks for your help!

M. Rand
WJCT, Jacksonville, FL

Sorry, but when Congress approved the hybrid credit the lawmakers did not make the credit available to those who are hit by the AMT. The lawmakers knew what they were doing and apparently decided that folks hit by the AMT didn't need the incentive. As you probably know, you're required to figure your tax both ways, under the regular tax rules and under the AMT...and you pay whichever bill is higher. So, the hybrid credit can only be claimed up to the point that it would pull your regular bill down below the AMT liability...since the credit isn't allowed in AMT-land.

You might want to drop your U.S. congressperson and U.S. Senators a note telling them how you feel about this.

As I like to say, I don't make the laws...I just try to explain them.

Good luck...and enjoy your Prius.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My state income tax refund for 2005 was $1440 of which $1080 was alocated to 2005 since last Est. payment made in 2006. What amount goes on line 10 on 1040 if recalculated tax is $44 more than original tax & AMT.

Frank
WHYY Wilmington, DE

If you lost your state income tax deduction to the AMT, then the refund is tax-free -- since you didn't get a benefit from the write-off. See page 26 of IRS Publication 525 for details.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Would you report the tax tips you mentioned on alternative minimum tax?

Joan Burton
KCET Woodland Hills, CA

Sure. Here is a link to the transcript. http://www.pbs.org/nbr/site/onair/transcripts/070312c/

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Is one required by IRS regulations when itemizing deductions to report the full amount of a deduction if that triggers the Alternative Minimum Tax? For example, if one lives in a State with high income taxes, say, $9,000 per year, and simple arithmetic on the AMT worksheet shows that one's income with fully itemized deductions is just over the amount that triggers the AMT, could one instead deduct only $8,500 of the state income tax, changing the arithmetic so the AMT no longer applies? Even though one's W-2 form will show the full State income tax at $9,000? Thank you.

Peter
Washington, DC

The IRS recently challenged a taxpayer for doing exactly what you suggest . . . and won in court, arguing that even if the full state tax was not deducted on the regular tax return, the full amount counted for purposes of the AMT. But according to one expert, the IRS position didn't really cost the taxpayer any extra tax.

Remember, you pay the AMT only when it is more than your regular tax. Put another way, the only way to stay out of the AMT is for your regular tax to be higher than your AMT. If skipping a deduction keeps your regular tax higher than the AMT, what have you gained? Apparently when some credits are involved -- those allowed against the regular tax, but not in AMT-land -- you could come out ahead by skipping deductions to avoid slipping into the AMT. You could, that is, if the IRS hadn't won this case.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I work for a school district. It is mandatory to be enrolled in its medical insurance program to be employed. Is this a tax deduction. They say I pay with pre-tax funds. they call it HEALINGS, HOWEVER, it is cost sharing. Many employees would be eligible for med-i-cal insurance, but are denied because insurance is offered.

ginger
KQED ukiah, CA

If you pay with pre-tax dollars, you can't also deduct the premiums. Going pre-tax is a better deal. It makes sure you get the benefit. If you pay with after-tax dollars you can deduct the premiums, but such medical expenses are deductible only to the extent that your total unreimbursed medical expenses exceed 7.5% of adjusted gross income. This threshold means the vast majority of taxpayer really can NOT deduct medical expenses.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

If the demutualization you talked about on the April 9th show only covers life insurance companies. I have received stock from a health care provider who demutualized and was wondering if the litigation also covers this. What forms do I have to file is it the 1040X or the 1045. Thank you for any help.

Lewis Kurtz
WCET Brookville, Indiana

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors  

Mike Ward
WXXI, Fairport NY

You are allowed, on the Form 1040, a deduction for 50% of the amount of self-employment tax you pay on the Schedule SE.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

May I deduct Medicare and/or retiree health insurance premiums on my schedule C? Both premiums are taken from my monthly patments.

Andrew BLum
WGBH, E Greenwich RI

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Hello,
1. I'd asked for a distribution from my son's 529 to pay for his college expense. The check was made out to me and immediately went to pay for those expenses. I received a 1099-Q from the IRS for that distribution. Do I need to report this non-taxable event or just keep the receipts in case the IRS requires them?
2. In 2005 my federal tax liability was $9,000. In 2006 my tax liability is $14,000 however because of miscalculating my exemptions on the W-4 I only had $10,000 deducted by my employer as income tax. Since, I have reset my exemptions to properly represent my situatation for 2007 however, do I need to send estimated tax payments for 2007 to complement my payroll deductions?

Thank you, sam

The 1099-Q is causing a lot of confusion this year, since we've been trained that 1099 reports generally mean taxable income. But, if you used the 529 payout to pay qualifying college costs, the money is tax free. You can ignore the form.

On the estimated tax question, the IRS will probably send you preprinted vouchers so you can make quarterly payments in 2007. But, if you've adjusted your withholding, you don't need to. Simply toss the vouchers.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

is 529 college funds contribution Tax deductible? If not can I take the gift tax exclusion? How did that work?

thank you

The contribution is not deductible at the federal level, although many states allow their residents to deduct contribution to the state's own 529 on their state income tax returns. The gift tax exclusion allows you to give up to $12,000 a year to any number of people without having to pay the federal gift tax.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

If the 529 money went to pay qualified college expenses, then the distribution is tax free and doesn't need to be reported. It would be a good idea to keep the receipts in the event the IRS audits your return.

As for estimated taxes, if your withholding will cover your '07 bill, no estimated quarterly payments are necessary. The IRS will send you a 1040-ES with vouchers as a "helpful" reminder that you might need to make the payments. But, if you're sure you're having enough withheld, just toss it.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

can the student loans take all your tax return without warning. because i recieved a letter stating that, which put me and my family in a financial hole cause we were so badly depending on that money. and can i ask for it back or atleast a portion. thank you for your attention.

Chris Ortiz
miami,fl

Yes, the IRS can intercept a tax refund owed to someone who has defaulted on federal student loans. The Department of Education collects million in overdue student loan debt this way each year. I'm afraid there's no way for you to get the money back, unless it was diverted in error, that is, you were not behind in your student loan payments.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

If I borrowed to go to graduate school, and still owe $9,000, can I deduct any of this on my taxes?

Georgia
WUNC Durham, NC

Interest on student loan debt is deductible. But there is an income limitation. For 2006, you can deduct up to $2,500 of student loan interest. The deduction is phased out as adjusted gross income rises from $50,000 to $65,000 if you're single or between $105,000 and $135,000 if you're married and file a joint return.

You can claim this deduction whether or not you itemize deductions. See IRS Publication 970 for all the details: http://www.irs.gov/publications/p970/ch04.html#d0e4473

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Hello, can the money contribute to 529 account be deductable for 1040 income tax?

Thanks
Kevin Wei
Ch. 54, San Jose, CA

Sorry, but no. Contributions to 529 college savings plans are not deductible. Uncle Sam's contribution is that earnings grow tax deferred and are tax free if withdrawn to pay qualifying college costs. Many states do allow deductions for residents who contribute to the state's 529. Check your state income tax instructions.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Thanks,
Chris P
KTEH, San Jose

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My father gifted stock to me in 2003 that he bought in 1997. I just sold it. Is my cost basis his original cost basis or it's 2003 value when it became mine?

Confused in Maryland

The basis of gifted property carries over for the donor. So, your basis is the same as your father's was.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Kevin, You mentioned you would send eMail with info concerning pending change in IRS relative to the zero BASIS in a demutualization. My dad's [estate] stock sale from this occured in calender year 2004. Do I [executor] need to file the IRS form(?) NOW to beat the Statute of Limitations, or do I have another year? Thanx!

S. Frost
WFYI, Indianapolis IN

Since your sale was 2004, you don't have to file the protective claim this year. The '04 tax year is open to amendment until April 15, 2008. Perhaps the issue will be settled by then and you'll be able to file an amended return demanding a refund! If things are still up in the air a year from now, a protective refund claim will be necessary.

Here's how my colleagues on the Kiplinger Tax Letter suggests handling the protective refund claim:

If in 2003 you sold stock of an insurer that "demutualized" ... Time is running out to file a protective refund claim with IRS. A court recently refuted IRS' view that the rights policyowners gave up in the conversion have no value. So if you followed the Service's advice to use a zero basis for the stock sold, you may end up being due a refund. But the court won't determine the value before the statute of limitations for amending 2003 returns lapses on April 17 for those who timely filed. To preserve your right to get a refund, fill out Form 1040-X and write "Protective Claim" at the top. IRS should hold it in abeyance.

On your amended return, you'll show reduced AGI and tax due -- reflecting the basis you claim in the insurance stock -- and effectively ask for a refund for the amount of tax you overpaid. In part 2 of the form, "Explanation of Changes", note that this is a "protective claim -- do not process" to protect your right to a refund in the event a favorable ruling in the "Fisher" case (Eugene A. Fisher, Trustee v. U. S. ; Case No.04-1726 T ) regarding a taxpayers basis in stock received in a demutualization.

Here's a link to the court case: http://kiplinger.com/members/taxlinks/121605/FisherOrder-MotforContinuance.pdf

One of the best Web sites I've found that follows this issue is http://demutualization.biz/. Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Does the capital gains exemption apply to joint tenancy (WRS) property if one of the joint tenants (mother) of the property lived in the property for over 30 years and solely paid for the property but recently passed away passing the property on to her two adult children (through the joint tenancy ownership structure)? Assume the joint ownership remains (100% to mother, 0% to the children for purpose of cost basis allocation) and the property is around $350k value. Thank You

Julie
WTTW, Chicago, Illinois

When unmarried people own property jointly, each owner's share of the property -- and therefore the part of the basis that's stepped up when that owner dies -- is based on how much each owner contributed to the purchase price. Assume, for example, that you and your brother buy a cabin, with you contributing 20% of the cost and him paying the remaining 80%. If he dies first, 80% of the basis would be stepped up. Your basis would become your original investment, plus 80% of the cabin's value at the time of his death.

When a survivor can't prove his or her contribution, the IRS assumes the deceased owner provided all of it. This rule works in the IRS's favor as far as estate taxes are concerned because the full value of the property must be included in the estate of the first joint owner to die. But it backfires for the IRS when it comes to the basis because the entire amount is stepped up.

In your case, because your mother provided 100% of the cost of the property, I believe the full value would be stepped up to date-of-death value, thus wiping out the tax bill on all appreciation during her lifetime.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

We live in TX. community property state
Husband bought stock in '97 pd $4000.
Husband deceased in '98 stock worth $400.
Spouse sold stock in 2006 for $5000.
stock purchased in '97 from funds in joint account.
What is basis for Schedule D?

KLRN, San Antonio

In a community property state, the full basis of jointly owned community property is stepped up or stepped down to date of death value. Therefore I believe your basis would be the $400 date-of-death value, leaving the $4,600 as a long-term capital gain.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Several years ago, I invested $5000.00 in an annuity account. For last 5 yrs, I watched it underperform. So, last year I decided to roll it over to my self-directed rollover IRA account. The total distribution was $18592, and I rolled all of it into my roll-over IRA. When I received my 1099-R, it showed the taxable amount as $13562, which means that I should really have rolled-over only $13562. I have already filed my tax return for 2006. What are my options now? I really appreciate your help in this matter. Thank you very much.

Shan Daar
KVIE Ceres CA

You needn't worry about an amended return. After-tax contributions made to a 403(b) plan can be rolled over into an IRA. Be sure the IRA sponsor accounts for the money separately so you're not taxed again when it comes out of the IRA.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

1. Age difference between me and wife is 10 years, 3 days. It is thus more than 10 years. Shall I use unform life expectancy or joint life expectancy table for taking minimum distribiution. (does 3 days over 10 years makes joint life expectancy?)

2. Convesrion from Traditional to Roth IRA: Done in December 2006, if desired (even if AGI is leass than 100,00) can it be recharacterized (back to Traditional) by tax extension date of October 15, 2007 for 2006?

3.One turn s 70 1/2 years of age in mid 2007. Nore spuosal traditional IRS for spouse at 70 1/2. Is it advisable for this person to have spousal IRA placed in tradional deductible or it be placed as ROTH ? What is benifical?

Kindly advise. Thanks.
S. Deshpande

1) Believe it or not, the answer to your first question depends on when your birthdays are. The life expectancy tables are based on your age as of your birthday in a certain year. So unless near the end of the year and the other at the beginning of the year -- so there is an 11 year gap between your ages on December 31, then it doesn't matter which table you use. You'll get the same divisor because in each case you'll be considered ten years apart.

2) Yes, you can recharacterize your Roth to a traditional IRA -- for any reason -- at any time up to the extended due date.

3) Starting with the year you turn 70 1/2, you can't make contributions to a traditional IRA nor, at any age, can you make traditional IRA contributions for a spouse who is 70 1/2 or older. Thus, if I understand your situation correctly, a Roth would be your only choice.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Hello from Montana

I open an IRA in Jan 07 and month later I went back to the bank to up my monthly payroll deduction from 200 to 400. The investment guy asks me again how much I made and I told him 104 k annually. To my surprise he said that I make too much annually and that I can not put more money in the IRA account and that I would need to open a standard investment account. Question is this true?

Note I'm married and also have a 401k with employer matching of 3%. I put 10k annually into this account.

Paul Mitchell
Montana PBS Glasgow, MT

Whoa!

There is NO income limit for making contributions to a traditional IRA, although at your income level, the fact that you also have a retirement plan at work means you make too much to DEDUCT the contributions. But, still, you can have a traditional IRA.

If it's a Roth IRA account, your ability to contribute depends on the income you and your husband report on your 1040. For 2007, the right to contribute to a Roth IRA gradually disappears as income rises between $156,000 and $166,000. (For 2006 contributions, the phase out was between $150,000 and $160,000.)

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

After buying MLP's in my conventional IRA, I learned about the limit of $1000/IRA account for "unrelated business taxable income." In 2006, I sold three MLP stocks and had some capital gains. Does a conventional IRA shelter these capital gains? Are there any limitations on these capital gains?

Ann Baugh
WEDU Sarasota, FL

Your capital gains on the MLP, as other capital gains, are NOT taxed inside the IRA. The unrelated taxable income over $1,000 is a problem, but not the gain. By selling the MLP you'll avoid the tax problem in the future.

--Kevin McCormally
Editorial Director Kiplinger
Washington Editors

Can I buy my first home, using money from my IRA account, with no penalty and/or adding the amount withdrawn to my taxable income?

IRA BUYS FIRST HOME
WTVS Wixom, Michigan

I assume you're talking about a traditional IRA. You can withdraw up to $10,000 (during your lifetime) to pay for a first home for yourself or your child without penalty, but the money would be taxed. Penalty-free, yes. Tax-free, no.

Now, if it's a Roth IRA, you can, at any time withdraw all of your contributions without tax or penalty for any purpose...and you can withdraw up to $10,000 of earnings to buy a first home penalty-free, but the earnings would be taxed.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Is it possible to transfer the minimum distribution requirement from your IRA into your ROTH?

Wilmington NC

No, RMDs may not be coverted to a Roth.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Can independant contractor sole proprietor who earned $20,000 income but realilzed a loss still make a 2006 contribution to his Roth IRA? He is 71 and opened the IRA more than 5 years ago

Juan
KNME Albuquerque, NM

Only if the individual has other compensation. A loss for self-employment does not reduce other compensation (from a job, say) when figuring the IRA contribution, but one must have compensation from work. If the individual has no taxable compensation, then he or she could not contribute to an IRA.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

If you over contribute to a traditional IRA , over 4000 for 2006. Previous fund company had a 2005 contribution coded as 2006, now I have also contributed 4000 to another tradtioanal IRA plan . I found this out when I rolled it to the newer company (plan) . Can you also remove the excess 4000 cotribution for 2006 , is there a penalty befroe April 17,2007 for a traditional IRA. Can you also contribute to both a roth IRA $4000and a Traditional $4000 in the same year . If so could I roll the second $4000 contribution to a Roth IRA . I'm tring to avoid any penalty here , maybe I should contact the present company and tell them the first contribution should have been 2005 ....sooo confused . please email me back . thanks

JB
wxxi Rochester NY

First, you can only contribute $4,000 to an IRA, period...whether you use a traditional or a Roth or a combination. The dollar limit per person under age 50 is $4,000. (Older folks can do $5,000 a year.)

Now, as to the miscoding, I'd suggest contacting the IRA sponsor and asking them to fix thing...so you don't have an excess contribution. If you have evidence to show that you made a 2005 contribution that was miscoded, I wouldn't worry about withdrawing the excess.

Now, if you don't have such evidence, you might want to withdraw the excess. Doing so by April 17 would avoid the 6% excess contribution penalty.

Again, if you put in $4,000 for '05 and another $4,000 for '06, you have not made an excess contribution. If the IRS challenges you on this point, you'd need to show your original forms, your letter to the IRS sponsor asking it to correct its error and any other evidence to show that the sponsor made an error.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Hi: According to yuor sugestion about an IRA gift for you child. My dauther is 45 Y.O. She is working, Can I open an IRA account by the summe of $50,000, It is my after tax monny. Thanks

Houshang
KQAD Channel 9 Danville, Ca.

You are very generous, but the maximum contribution to an IRA for a 45 year old is $4,000. You could put in $4,000 for 2006 (by April 17) and another $4,000 for 2007 any time between now and April 15 of next year.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My 2006 AGI is $156,000 this includes earned income of $10,800, IRA distribution $51,000, Pension $17,000 SSxxxx and other Diidends/Interest also a IRA Rollover to a Roth IRA of $50,000. On tyhis basis can I take a full Roth Contribution ??? Can my IRA / Roth Rollover be deducted from my AGI to lower the phase out max $150K / $160? Thank you

George E Jennings
KCRT

Income that results from the conversion of a traditional IRA to a Roth -- the $50,000 in your example -- does NOT count as modified adjusted gross income for purposes of the $150,000-$160,000 contribution phase-out rule. So, yes, under the facts you present, you may make a full Roth contribution for the year.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Did the individual retirement savings account tax credit end with the 2006 tax year or has it been extended?

Fred
KUHT-Houston

In 2006, Congress made the credit permanent, so it will apply in 2007 and future years.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I have an account with T.Rowe Price that contains a regular mutual fund account and a Roth IRA. I am considereing converting the mutual fund account into a Roth IRA, but I'm affraid of the tax liabitiy. The mutual fund account is worth approximately $11,000. Help...!!! How should I go about this task without incurring a large tax liability?

gabrielle carroll
WETA fayetteville, nc

You can't covert a regular mutual fund to a Roth IRA. You can only convert a traditional IRA to a Roth IRA. If the $11,000 is in a traditional IRA (invested in mutual funds), then you could make the conversion. The full amount converted from a traditional to a Roth IRA is taxed in the year of the conversion. This is the price you pay so that all future withdrawals from the Roth will be tax free. (All withdrawals from the traditional IRA will be taxed.)

One way to hold down the tax bill is to gradually convert...maybe a couple thousand dollars a year for each of the next six years, for example. That would hold down the extra tax bill each year.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

On 10 April 2007 you advised avoiding the 6% penalty on a 2006 Roth Ira contribution made before realization of too much income to contribute to a Roth. If that is a one-time 6% penalty, is it not better to accept it, save the hassle with the brokers of withdrawing the funds (and figuring the "gain") and let those tax sheltered funds stay invested for future years? Thank you, Kevin.

Bill Teter
KQED SUNNYVALE, CA

That might make sense if it were a one-time only penalty....but it's not. It applies every year until the excess funds are removed, or absorbed by future year's contributions not being made.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Hi, The normal deadline for funding SEP-IRA for 2006 is April 16th. Can you please let me know if I take the extension for my 2006 taxes to Sept 15, 07, do I also get additional time to fund my SEP-IRA account for 2006 contribution. Thanks for your time.

Regards, HARI

SEP contributions can be made up to the due date -- including filed-for extensions of your return. So, if you file a Form 4868 pushing the deadline to October 15, that would be the deadline for your 2006 SEP contributions.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I retired as a Delta Air Lines Flight Attendant on November 1, 2001. Before retiring, I consistently contributed to the company's 401(k) Plan. In turn, Delta matched a certain percentage of my contributions. However, Delta's match was not in cash, but rather in Delta Common Stock. After retirement in 2002, I rolled over Delta's 401(k) Common Stock IRA contribution from Fidelity to Vanguard Brokerage Services where it remains today. My question is when Delta comes out of Bankruptcy, I believe in May 2007, what value will my Delta 401(k) Common Stock IRA have? Is there anything I can, or should do at this time, to protect this investment? If I am stuck with a Loss, can I do anything to deduct the Loss on my 2007 IRS Tax Forms? Please let me know if there are any ways to deal with this problem. Thank you.

Dave Holland

According to the Delta Website, the company does not expect the stock to have any value when the firm emerges from bankruptcy. Here's what I found on the site:

What will happen to Delta's common stock during the Chapter 11 process? What value will it have in the future?
Trading in Delta's common stock was suspended by the New York Stock Exchange shortly after Delta's Chapter 11 filing in 2005. The stock was delisted shortly thereafter and now trades in the "over-the-counter" market on the "Pink Sheets" (www.pinksheets.com). The new trading symbol for Delta's common stock is OTC: DALRQ. Under the proposed plan of reorganization, current holders of Delta common stock would receive no distribution, and the securities would be canceled upon the effective date of the plan. Delta has indicated for some time that the company expected its common stock would not have any value under any plan of reorganization the company might propose, which is not uncommon in Chapter 11 proceedings.

Unfortunately, since the stock was contributed to your 401(k) account and later rolled into your IRA, you will not be able to claim a loss. For one thing, losses incurred inside an IRA are not deductible, except in the very rare case in which a taxpayer closes all of his or her IRAs and retrieves less than his or her "tax basis." You have tax basis in an IRA only to the extent that you have made nondeductible contributions. Since you were not taxed on the value of the Delta stock when it was put in your 401(k), you have no tax basis in the stock.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My Rollover IRA (from 403(b)) is in mutual funds. If I transfer these funds into my Roth this volative year, I may be paying taxes on a Roth 403b that may drop in value. The contributions came directly from my paychecks. Shouldn't only that portion be the taxable, rather than its market earnings as well? Will the tax be on the entire balance or just the original contributions? Why would the converted amount push me (joint filing) into a higher tax bracket (lowest now) if I'm making a quick direct transfer and not holding on to this amount for income? What is the process and time restrictions for doing this transfer?

Irene Jones
KQED Aptos, CA

I assume all of your 403(b) contributions were pre-tax, so your IRA created by the rollover has no after-tax money in it, that is, it is made up solely of pre-tax contributions and as-yet untaxed earnings. Any part you convert to a Roth IRA will be taxed in the year of the conversion. The advantage is that after the conversion, all future earnings are indeed tax-free rather than simply tax deferred. There are other advantages to the Roth, as well.

Two potential disadvantages: One is paying taxes sooner rather than later; two is the fact that the converted amount added to your other income could push you up into a higher tax bracket.

I generally believe that conversions will pay off, if you have money outside of the IRA to pay the tax on the conversion.

If the value of your investments decline after the conversion but before you file your tax return for the year and pay tax on the conversion, you can "unconvert" and move the money back to a traditional IRA -- this would let you avoid paying tax on converted amounts that have been lost.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Does converting money from a regular IRA to a Roth IRA satisfy the RMD?

Lyle Konrady
KSIN, Aurelia, IA

No, it does not. You can not convert a required distribution. The RMD must come out of the traditional IRA, then you can convert any or all of the remaining amount. There would be no required distributions form the Roth.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My mutual fund company closed out my regular IRA account and sent me a distribution check. I want to roll over the whole amount in a mutual fund with another company and I need to do this within 60 days according to Pub. 590. Is it necessary to send the original distribution check to the new company to open a regular IRA account to avoid reporting the gain as income for 2007? or could I deposit the distribution check and write a personal check of the same amount to open the IRA account and also not have to report the gain?. Thank you.

Jeffrey Lau
KQED

It's fine to deposit the check and then write another check for the full amount of the distribution to the new IRA. The key is to have the money in the new IRA within 60 days of the time you received the money from the first IRA. Some folks use the 60-day rollover period as a way to get a short-term loan from the IRA...taking the money...using it for some purpose or the other...then getting the dough back in another IRA before 60 days pass.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I made "non-deductible" contributions to my traditional IRA while I was working. What is the correct (and smartest) way to withdraw these contributions after retirement.

Alan Littlewoood
SOPTV, Grants Pass, Oregon.

You really don't have a choice. Once you make nondeductible contributions, all your money is blended together. When you begin withdrawing funds from your IRA, a portion of each withdrawal -- equal to the ratio of your nondeductible contributions to the total amount in your account -- is tax-free. If you have a total in your IRA at the beginning of the year of $100,000 and you have made $40,000 of nondeductible contributions, for example, 40% of your withdrawals that year would be tax-free. You do the figuring on Form 8606, a copy of which you should have filed each year you made a nondeductible contribution.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I changed employers in the middle of 2006. I was enrolled in a 401 k plan via my first employer. But I do not particiapte in my current employer's 401 k and I have not maxed out the 15000 limit on my 401K for 2006. My second employer's plan is not a defined benefit plan either. Can I claim that I am not currently covered by a retirement plan and contribute to a traditional IRA and claim that money as a deduction for 2006?

thanks much,
rv
KCET, Calif

Sorry, but no. If you were covered by an employer's plan at any time of the year, you're covered for the full year as far as the IRA deductibility test goes. If you're not covered in 2007, though, you can make your 2007 contribution now. The sooner the money is in the IRA, the sooner it will be earning tax-deferred money.

I do suggest you think twice before contributing to a traditional IRA, though. I believe the Roth is a better deal for most people. Yes, you give up the immediate deduction, but you gain tax-free income in retirement and a flexibility on withdrawals that's not available with the traditional IRA.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I always send my $5,000 in for my Roth IRA in the first week of January not realizing that our mutual funds and interest would give us around $25,000 which puts us over the $150,000 AGI this year--what do we do now??

Roth Help!
mptv--channel 36, elm grove wisconsin

You have a couple of choices. The easiest thing to do is to ask your IRA sponsor to simply return your contribution, with any earnings accrued from the time you deposited the money. You'll report the earnings on your 2006 return, even though you get the money in '07...and you'll owe the 10% penalty for early withdrawal...on the earnings..if you're younger than 59 1/2.

Another option is to convert the 06 contribution to a traditional IRA; that would allow you to leave the earnings in the account.

Either method will let you avoid the 6% penalty for excess contribution to the Roth.

Contact the Roth sponsor for help getting this done by the tax deadline.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I'm wondering about eligibility for the Retirement Savings Credit. I'm 56, I receive a pension, and my 1099-R has a distribution code of 2. In 2006, I contributed $4,800 to a Roth IRA. My husband is 54 and still working. He contributed a large amount to his 401K and 457 deferred compensation plans at work. This kept our AGI (married filing jointly) under $50,000 so that we would be eligible for the Retirement Savings Credit. We have also taken this credit in previous years. This year we used Turbo Tax, and the program seemed to think that my pension was an early distribution of a retirement account, and it indicated that we were not eligible for the credit. Is it OK for us to claim that credit? Thank You

Betty Mulcrone
WKAR, East Lansing MI

By pension, do you mean a defined benefit pension? If so, the answer to your question is yes, you can qualify for the credit if all the other tests are met. The pension payment should NOT offset your contribution. The offset is for payouts from the same kind of plans for which contributions can earn the credit and, since you can't contribute to a defined benefit plan, payouts from such plans don't come into play.

I hope this helps.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Note: additional message received:

Kevin:
Last week I asked about a SEP deduction for my self-employed son. I also sent an e-mail to the Turbo-Tax folks about it. Anyway, I did rerun the Turbo-Tax program for my son's return, and lo and behold, they did calculate a SEP Deduction on his return this time??!! So we will proceed with his filing. Thanks very much for your response. Great service!!!
Doug Harper

I'm 71 years old retiree. How much my social security income is taxed?

Lev
Jamison, PA

Congress seems determined to make this issue more and more complicated. Not so long ago, the tax rules for social security benefits were the epitome of simplicity: Benefits were tax-free. Period. Now beneficiaries fall into one of three categories:

1. Those whose benefits remain totally tax-free.
2. Those who can have up to 50% of their benefits taxed.
3. Those who can have up to 85% of their benefits taxed.

If you're among the 10 million or so retirees whose benefits are hit, you need to know the rules.

The first step in determining whether or not your benefits are vulnerable is to find your "provisional income." That's basically your adjusted gross income plus any tax-exempt interest plus 50% of your social security benefits.

Your benefits are totally tax-free if your provisional income is less than $25,000 if you file a single or head-of-household return or less than $32,000 if you file a joint return. (Unlike many other thresholds in the tax law, these figures are not indexed to rise with inflation. And, that's not an oversight. Congress did it deliberately so that, over time, more and more beneficiaries would be subject to this tax.)

If your provisional income exceeds the threshold for your filing status, what portion of your benefits can be taxed depends on how high your income is.

If it is between $25,000 and $34,000 on a single or head-of-household return or between $32,000 and $44,000 on a joint return no more than half of your benefits can be taxed. The amount included in taxable income is the lesser of half of your benefits or half of the amount by which provisional income exceeds the trigger point. Assume you and your spouse file a joint return. Your AGI for the year is $30,000, and you have an extra $4,000 of tax-free interest from municipal bonds and $5,000 of social security benefits. Adding your AGI ($30,000), your tax-exempt interest ($4,000) and half of your benefits ($2,500) gives you $36,500. That's $4,500 over the $32,000 threshold for joint returns. Since half of that amount ($2,250) is less than half your benefits ($2,500), the smaller amount is the part of your social security that is taxed. In the 28% bracket, the extra $2,250 of taxable income will cost $630.

The 85% Rule

When provisional income exceeds $34,000 on a single return or $44,000 on a joint return, things get more complicated, but the bottom line is this: In almost all cases, 85% of your benefits are taxed. The IRS has devised an 18-line worksheet for figuring how much of your benefits are taxable. You'll find it in the instructions for your tax return.

What about married couples who file separate returns? They can forget the $25,000/$32,000 and the $34,000/$44,000 thresholds. Their threshold is $0 -- and they can be certain that 85% of their social security benefits are taxable.

My son is in business for himself, in contracting. Turbo-tax sw has too high an incomr in 2006 to have a SEP deduction. Can he still add to his SEP even though he can not have a reduction on his 1040?? He has been putting $$ into his SEP for the last few years and has been able to take a deductoin. But not in 2006 it seems. But he would still like to add to his SEP for 2006. Thanks much. Publication 590 doesn't clearly say what czn be done??

Doug Harper
Kcts -- Seattle

I'm sorry, but I'm not aware of an income limitation that prohibits SEP contributions. A self-employed person can contribute (and deduct) up to 20% of net self employment income, up to a contribution limit of $44,000 in 2006. Can you elaborate, please? Thanks.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

More information provided...

My son is a self-employed contractor who started a SEP a few years ago. This year when doing his 2006 taxes with TurboTax, they said his income was too high for a SEP to be deductable. Question is: can he still add $$ to his SEP for 2006, even if it is not deductable on his tax return? Thank you!

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Made a deposite to my wife's Roth IRA in September 2006 of $2,500. When running taxes with TaxCut found that due to higher than normal income for 2006, basically overfunded the Roth by $1,520. Decided to request a refund of that amount. Fidelity processed in a very timely manner and showed had a loss on the investment which was now worth only $1,506.50. Did receive a check in that amount. Does not appear to me to have a tax consequences due to my mistake. Is this true? Simply shows up on line 15a of my 1040 as $1,507 distribution with no other consequence. DID I DO THAT CORRECTLY! If not please help me understand.

Kerry Kaminski
WTVS Saline, Michigan

Yes, you've got it right. Because you suffered a loss while the money was in the IRA (sorry), you have no taxable income to report. So report the full corrective distribution on 15(a) and nothing on 15(b) and include a statement with your return explaining the distribution.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

If shares of a long-held stock are transferred as part of an RMD from an IRA to a personal account and sold in less than 1 year, is the capital gain or loss realized long term or short term?

Leonard W. Giuliani
WMFE S.Daytona, FL

Your holding period begins on the day the shares come out of the IRA, so you'll need to hold the shares for more than one year in the taxable account before you get long-term gain treatment on your profit. If you sell in one year or less, it's a short-term gain or loss.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Being at an age of 68, in 2006 we converted $22,000 from a traditional IRA to a Roth IRA. Upon calculating our joint tax return for 2006 the AGI is $116,000 which exceeds the IRS $100,000 maximum AGI for eligible traditional to Roth IRA conversion. Thus we have to recharacterize $18,000 of the IRA conversion using form 8606. On page 123 of IRS Publication 17 there is a paragraph entitled "Applying excess contributions" which states that excess Roth IRA contributions can be applied to later years. In 2005 our AGI was $80,000. Can we apply the $18,000 excess IRA conversion to our 2005 tax return? If so, what IRS form do we use and do we issue a revision to our 2005 tax return?

Allan Tomasek
KLRU Georgetown, Texas

Although money you convert from a traditional IRA to a Roth IRA is taxable, it does not count toward the $100,000 income limit that controls whether or not your can convert. As I understand it, the only reason your AGI is over $100,000 is because of the conversion. If that is the case, there is no reason to recharacterize any part of the conversion.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I know that the capital gains in Roth IRA are exempt from tax, does that mean one can not take losses for tax purposes, either?

Sincerely,
H. David Tian

Basically, yes. Both gains and losses are ignored as they occur inside the tax shelter.

There is one way a loss in a Roth is deductible. If you close all of your Roth accounts and the total distribution (including any distributions in previous years) is less than the total of your contributions, then you have a loss for the difference. The loss in this instance is considered a miscellaneous expenses, deductible on Schedule A to the extent that all of your miscellaneous deductions for the year exceed 2% of adjusted gross income.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

iN 1999 I SOLD MY HOME AND RETIRED. I BOUGHT A CONDO IN A COOPERATIVE UNIT. WE WERE REQUIRED TO ASSUME A PORTION OF THE MORTGAGE. AS A RESULT I HAD MONEY LEFT OVER FROM SALE OF HOME. iN 2005 THE cOOP. LAW FOR OUR BUILDING WAS CHANGED AND EACH HOMEOWNER WAS GIVE OPPORTUNITY TO PAY OFF THEIR PORTION OF MORTGAGE. IS THE PAYOFF I MADE FROM INVESTED MONEY FROM SALE OF HOME DEDUCTIBLE FROM 2005 STATE AND FEDERAL INCOME TAXES?

JOHN STORK
TPT, MINNETONKA, MN

Although interest paid on a mortgage is deductible, paying off the debt itself does not qualify to be deducted.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I am self employed senior citizen and earned $5000 in 2006. Am I quilified for $5000 IRA deduction for 2006 or Roth IRA for 2006? If so, what is the deadline to enroll IRA or Roth IRA for 2006?

G. Pan
Pittsburgh, PA

If you were at least 50 by the end of 2006, you can contribute $5,000 to either a traditional IRA or a Roth IRA (or $5,000 total to a combination of the two) as long as you had at least $5,000 of earned income for the year. Your self-employment income counts.

You can open an IRA (either variety) and contribute to it any time before close of business April 17 and qualify for a 2006 contribution. Be sure to tell the IRA sponsor (bank, brokers and mutual funds all offer IRAs) that yours is a 2006 contribution.

If you choose a traditional IRA, the contribution is reported and deducted on your 2006 return.

If you choose a Roth, you don't report it at all. Roth contributions are not deductible, but all withdrawals in retirement can be tax free.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My wife switched jobs in Jan 2006. Contribution to 401K thru employer #1 was $255. Contribution to 401K thru employer #2 was max allowed $15,000. This puts her over the limit - correct? How does she withdraw the excess $255? Does it matter if this withdrawal is from employer #1 or employer #2 account.

Thanks,

Ramesh Parameswaran, Detroit

Your wife should ask one of the employers to make a "corrective" distribution of the excess amount, plus any earnings attributed to it. She can take the money out of either account, but it will probably be easier to do this with employer #2 if she is currently working there. Include the $255 as '06 wages; report earnings withdrawn in '07 on next year's return.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I have to transfer stocks from my IRA account to a regular account to sarisfy the IRS Required Minimum Distribution rule.I know I have to pay taxes because of this distribution but what happens if I sell a stock later that was transferred and on which I have paid the tax because of the RMD? Do I have to pay more tax and if so is the tax promulgated from the sock's date of original purchase or the date of distribution? I feel I may be paying tax twice. Many thanks for your help.

John Madge
WETA, Alexandria VA

You won't pay tax twice . . . if you keep good records.

When the stock comes out of the IRA, the full value will be taxed as part of your required minimum distribution. And, your tax basis of the shares will become the value upon which you pay tax.

Let's say you pull $15,000 worth of stock out of your account as part of your RMD. Regardless of what you actually paid for the shares when they were purchased inside your IRA, your tax basis is now $15,000. If you sell for less, you'll have a tax-saving loss; if you sell for more, you'll have a capital gain . . . but only for appreciation AFTER you pull the stock out of the IRA.

Your holding period begins on the day the shares come out of the IRA, so you'll need to hold the shares for more than one year in the taxable account before you get long-term gain treatment on your profit.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I bought shares of an MLP, which is listed under the NYSE. I bought these shares under my "IRA account". Are there any tax liabilites? I don't think so. Appreciate your comment.

BKATY
Katy Texas

Believe it or not, holding a master limited partnership inside an IRA tax shelter CAN produce taxable income. MLP distributions can be considered "unrelated business taxable income (UBTI) and, if it exceeds $1,000 in a year, it can be taxed.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Re: IRA Distribution December deadline?
When making my IRA withdrawal I try to stay in the 15% tax bracket, but it is impossible to make an accurate tax projection in mid December with incomplete investment fugures. Why is the deadline for IRA distributions Dec 31st, and not the same April 15th as for the IRA contributions? Thank you.

D. Edwards
KCTS, Bellingham, WA

Great question. And, I don't know the answer. You might want to ask your representatives in the House or the Senate. They make the rules.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Can I contribute to a traditional IRA regardless of my Adjusted Gross Income or coverage by an employer 401k plan? My AGI is too high to deduct an IRA contribution and I have 401k coverage through my employer. But, I would still like to take advantage of the tax deferred growth of a traditional IRA.

Jim Ireton
Brighton Michigan

Yes, regardless of your income, you may contribute to a traditional IRA.

The income restrictions determine whether a taxpayer who is covered by a company retirement plan may deduct the contribution. If you are covered by a plan and your income is too high to deduct contributions, you may still make a nondeductible deposit which will, as you note, grow tax-deferred. Nondeductible contributions which are reported on form 8606, establish a basis in the account so a portion of each withdrawal will be tax-free.

The 2006 limit for deductible contributions, for those covered by company plans, prevent deductions if your AGI is over $60,000 on single returns or over $85,000 on joint returns. You have until April 17 to make 2006 IRA contributions.

Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Basically, any nondeductible contribution to a traditional IRA establishes a basis in the IRA that can be recovered tax-free. If, at the time of your 1998 conversion, you converted everything you had in all your traditional IRAs, then that $2,000 contribution (basis) should not have been taxed at the time of the conversion. And, if you made no nondeductible contributions to the IRA you established after that point and from which you made the withdrawal last year, , then you have no basis in the traditional IRA from which you withdrew funds. If that's the case, then the full distribution is taxable. (Roth and traditional IRAs are treated separately.)

Now, if you had more money in IRAs than you converted in 1998, then only a prorated portion of your nondeductible contribution (basis) was converted tax-free, and the remainder of your basis stayed in the traditional IRA. If that's the case, then part of your 2006 distribution would be a nontaxable return of basis. Your 8606 should help you track what's what.

Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Can you write off loss's from stock in an IRA? For example I bought 100 shares of stock in my 2002 IRA at $60 per share and now it's at $8 per share. For a loss of $52 per share. If I sell the stock what happens to this loss? Thank you,

Pete
WTVS, Howell, MI

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Excess Roth contribution:
Due to making money in the stock market in 2006, I had to withdraw some of my roth contribution. I withdrew the roth money and the money (11%) that was made on it. I have not sent in my taxes yet. How and when is it reported and is this a bad thing to happen again next year?

Ed C
KCPT, Parkville, MO

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Even without the credit, contributing to a Roth is a great idea for retirement savings. The Roth has a great escape hatch. You can always withdraw contributions at any time -- tax and penalty free -- if you need the money; and, if you don't decades of tax-deferred earnings and tax-free withdrawals in retirement can go a long way toward providing retirement security.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Turbo Tax has delivered a confusing foreign tax credit based on Form 1116, which gives two locations on the 1040, each with a different credit. The issuer of the dividends, Penn West, a Canadian firm, will not issue a 1099-DIV, nor will Fidelity, the trustee for a Roth IRA. I have only a letter from Fidelity with the amounts for the income and tax paid. I intend to file the 1116 and the letters with my 1040 and use the figures TurboTax has calculated. Is it wise to do this, since the IRS will have no 1099-DIV?

Eugene Buffo
WGCU, Naples, Florida

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Chuck Stanley
WETA,Alexandria, VA

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

The house we own is located in a housing complex. There was a class action law suit due to flooding problems. Each house received compensation depended on amount of damage. We received about $21,000 last year. I received a 1099 early this year. What is the tax consequence of this compensation. For your information, the property tax and interest paid on my mortgage never benefited me in tax reduction in the past.

Thank you for your attention.
Steve Ozad

A tax attorney I checked with told me that if you claimed the flooding damage as a casualty loss, then the payment you received is treated as income, up to the amount you deducted. If you did not claim a loss at the time of the damage, then the insurance settlement is tax free unless the reimbursement exceeds your basis in the house.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

After the divorce in 2005, my low income did not require filing a tax return. In 2006 my income was $35,270. In preparing to file income tax, I'm not sure who gets the tax deductions related to my house. The divorce court awarded me the house; the county assessor records my name as owner; the mortgage is my mother's name. The court ordered my ex-husband to pay the mortgage payments. Which one of us gets the deductions related to the house? Who should utilize deductions for the mortgage interest, mortgage insurance payments, hazard insurance payments, etc?

Thank you,
J.L. Wood
KOZK Springfield, MO

First, you'll have to determine if the mortgage payments made by your ex are taxable alimony or nontaxable support. I can't determine that from the facts you gave. IRS Publication 504 (http://www.irs.gov/pub/irs-pdf/p504.pdf) has more details.

Second, since you are not liable on the mortgage note, you can't claim a deduction for mortgage interest in any event. On the property tax deduction, it goes to you if your ex's payments are alimony. Otherwise, he gets the deduction.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I'm selling a rent property and should make about 50K. I have owned it for 30 months and I make about 100k a year.What are the tax implications? Capital gains 25%? What about amoratized savings over the last two years?

Thanx,
Kellis Chandler
san antonio, tx

Your gain will be taxed two ways. The part of the capital gain attributable to depreciation (depreciation deductions reduce your basis and therefore increase your profit dollar for dollar) is taxed at 25%; the rest is taxed as a long-term capital gain, at 15%.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Can I buy my first home, using money from my IRA account, with no penalty and/or adding the amount withdrawn to my taxable income?

IRA BUYS FIRST HOME
WTVS Wixom, Michigan

I assume you're talking about a traditional IRA. You can withdraw up to $10,000 (during your lifetime) to pay for a first home for yourself or your child without penalty, but the money would be taxed. Penalty-free, yes. Tax-free, no.

Now, if it's a Roth IRA, you can, at any time withdraw all of your contributions without tax or penalty for any purpose...and you can withdraw up to $10,000 of earnings to buy a first home penalty-free, but the earnings would be taxed.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I applied and got a home equity loan in Jan 2006. I live in Florida and was charged $500 in Intangible taxes and $875 in Documentary Stamp Tax. I am trying to figure out where I can enter these taxes on 1040 tax form. My wife was diagnosed with cancer in 2006 and we have extensive medical bills which will mean we will be taking the itemized deductions instead of the standard deduction this year on our taxes and this $1375 in additional deductions will provide additional money to take care of her expenses this year if it will increase our refund. I would really appreciate any assistance or guidance. I am using Taxcut program on my PC to do my own taxes. Thanks in advance for your help.

Warren
WMFE Kissimmee Floirida

I don't believe the stamp tax is deductible, but the intangible tax may be. I suggest you ask an official of the bank where you got the home-equity loan.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

You have a great show!
I put a metal roof on my home in 2005. To get the tax credit it must be "coated with the appropriate pigmented coatings that meet the Energy Star program...and is specifically & primarily designed to reduce heat gain in your home." Question: can I coat it now in 2007 and file a 1040X to receive the tax credit or am I out of luck? Thank you!

KCET

Sorry, but you are out of luck. According to IRS Form 5695, the roof must be installed with the pigmented coating to qualify for the credit.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I have read in Real Estate investing books that passive income from a rental property is taxed at a lower rate than

Station: Name: Douglas

I agree with your tax person. Net rental income -- that is, after all expenses have been deducted -- is taxed as ordinary income, just like your salary (except, of course, Social Security and Medicare taxes don't apply).

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My mother and I split the proceeds of the sale of what had been our family home (never a rental) last August. Purchased in 1974, it had been my mother's main home until 1997. It hadn't been my main home since the 1970's(I had used it as a second home in recent years - I live 70 miles away), but my mother had my name put on the deed in 1990,so that I would inherit the house if she died before sale. My mother wanted the 50-50 split, and I received a 1099S for half. Is my cost basis half the 1974 purchase price plus improvements, or is it half of the value of the property when my name was added to the deed in 1990? I don't have a realtor's appraisal for 1990, but I do have county property tax appraisals.

P. Mack
KOOD Salina KS

It is not half of the value at the time your name was added to the deed. Such a "step up" in basis only occurs upon the death of an owner. In the case of a gift, which is what this sounds like to me, the donors basis carries over to the recipient. That would mean, as you suggest, that you get half of your mother's basis. Since you received half of the proceeds of the sale, that seems to further support this position.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

My two brothers and I own my deceased mother's home. Last year we rented the house during the summer. The deed to the house is in all three of our names. For tax reporting purposes, do we complete one schedule E form with the total income and expenses, or do we submit three individual Schedule E forms with eadh one of us reporting one third of the income and one third of the expenses. Also, how is depreciation on this home to be reported? Do we record depreciation now as we go along, or do we wait until the house is sold?

Gerard Kohut
WNET, Newark, NJ

Technically, you probably should file a partnership return for the rental and issue K-1s for the net rental activity to you and your brothers. But each of you reporting one-third of the profit or loss from the rental shouldn't cause any major tax problems. For depreciation, you should claim it for each year you rent out the propery.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Under home improvements for energy Can you deduct for a new roof?

Luella Verstraete
Grosse Pointe Farms

You can't deduct the cost of a new roof, but certain new roofs are eligible for the 10% energy credit, for a credit up to $500. See the government's EnergyStar website for details: http://www.energystar.gov/index.cfm?c=products.pr_tax_credits#s2

A new roof can also qualify as an addition to your basis, which could save you money when sell your home. The higher the basis, the less profit on the deal. Most home-sale profit is tax free, but if you stand to make more than $250,000 profit on the ultimate sale of the place ($500,000 if you're married filing jointly), then the higher basis will save you money.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Here in "fly-over" country, houses do not have the value of houses on the coasts. This is my first year having home mortgage interest to deduct ($4,800 approximately $80,000 loan at 6.25%) It appears that I have to forgo the $5,150 standard deduction to take the $4,800 itemized deduction (a $350 loss). Is that right? And, if true, do most people realize that only mortgages greater than 90-100K benefit? Or am I missing something?

Don
IPTV, Des Moines, Iowa

You are correct that only when itemized deductions exceed the standard deduction advice does the taxpayer benefit from itemizing. However, I'm not sure you'll "lose" the difference between your $4,800 mortgage deduction and your $5,150 standard deduction. In addition to your mortgage interest, your deductible expenses include any state income or sales taxes you paid during the year (you have to choose one or the other), any property taxes you paid on your home and any charitable contributions. If the total of our itemized deductions exceed your standard deduction amount, you'll come out ahead by itemizing. Go through the instructions for Schedule A to make sure you get all your itemized deductions. The ones I mentioned are the most common, but not the only expenses that qualify.

(By the way, as one who grew up in Kansas and Iowa, I've spent a lot of wonderful time on the ground in "fly-over" country.)

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

If you own a rental property in a state other than your state of residence, in which state do you pay income tax? My home of residence is Colorado. The rental property is is in Arizona.

John R. Kemp
KAET, Mesa, AZ

You probably report the income in both states, and get a credit in Colorado for the taxes paid to Arizona. Here's a pertinent statement from Arizona's tax instructions for nonresidents (with my emphasis):

http://www.revenue.state.az.us/Forms/2006/140NR%20instructions%202D.pdf

Are You Subject to Tax in Arizona?
You are subject to Arizona income tax on all income derived from Arizona sources. If you are in this state for a temporary or transitory purpose or did not live in Arizona but received income from sources within Arizona during 2006, you are subject to Arizona tax. Income from Arizona sources includes wages, rental income, business income, the sale of Arizona real estate, interest and dividends having a taxable or business situs in this state, or any other income from an Arizona source.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Our Homeowners Association is in the process of converting what would have been the rec center into a "lot" to be sold on the open market. The question is, "are the proceeds a capital gain or ordinary income?"

Donna
KUAT, Green Valley, AZ

Most likely, capital gain. From the facts you present, the association does not appear to be in the business of real estate development, that is, it does not subdivide property and hold lots for sale to customers.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Relates to form 5695 and line 52 on form 1040.

For completing form 5695, I had $2265.00 worth of insulation material installed to my home in CY2006. How do I report this on F-5695? For example, does the entire amount go to line 2a on the form, or can I value line 5a with $300.00 (max.) and the balance or $1965.00 to line 2a. Please advise.

Also, if I max. out at $500.00 on line 12 & 31 on F-5695 for CY2006, does that mean I can not take this same credit again next year, i.e. in CY2007 if I have energy efficent work done to my home?I appreciate your assistance.

UNRELATED: I have a (flexible) health care spending account at work. I must use all the dollars by March of the following year or I lose it. Can I claim the amount I place in my health care spending account as a deduction? Archer MSA (line 23 of Form 1040) or HSA (line 25 of Form 1040)? Please advise...

Carmen Musitano
WHYY, Conshohocken, Pa

The instructions for the form (http://www.irs.gov/pub/irs-pdf/f5695.pdf) make it clear that insulation doesn't belong on 5a, so your full expense should go on line 2a. And, yes, the $500 maximum credit covers both '06 and '07. So, if you get the full credit on your '06 return, you can't claim more on your '07, even if you make further energy saving investments in your home (unless, of course, Congress changes the law).

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I purchased a home last year in a Community Development District in Florida.

Definition of a CDD from the Florida statute:
"Community development district" means a local unit of special-purpose government which is created pursuant to this act and limited to the performance of those specialized functions authorized by this act; the boundaries of which are contained wholly within a single county; the governing head of which is a body created, organized, and constituted and authorized to function specifically as prescribed in this act for the delivery of urban community development services; and the formation, powers, governing body, operation, duration, accountability, requirements for disclosure, and termination of which are as required by general law.

The CDD is included on my county tax bill and the officers of the CDD are included on the official voting ballot. I do not live in a gated community. Is my CDD assessment, which is defined as "non ad valorem," deductible on Schedule A?

Kari
WEDU, Wesley Chapel, FL

I can't find a specific ruling on this issue. However, the tax law generally takes a dim view of deducting assessments unless they are for the "general public welfare." Again, I can't find an IRS ruling on whether CDD fees qualify. I suggest you ask members of the CDD board or your neighbors about this matter.

Sorry I can't be of more help.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I had a contract to sell property. The buyer defaulted, I kept his non-refundable deposit. Where do I report the deposit? (or do I report?)

Doris Dent
KUAT, Oro Valley, Arizona

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Can I deduct rent I paid during the year?

Joanne Ross
KVIE, Sacramento, CA

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

we were owners of an insurance company that received stock shares as a result of demutalization. This insurance company was bought by another insurance co.As a result of this sell we were given cash for the shares we held. Is this cash we received taxable completely? Can we deduct our cost of shares we bought and added to the original shares?

jackson
ch.26 wash. d.c.

Since you received cash for your shares in a demutualized insurance firm, you have a taxable sale. IRS says the basis of the shares you sold is zero. A pending court case says those shares may indeed have a basis. (See "protective refund claims." for more details.) Your safest bet is to report the full proceeds as taxable on Schedule D and file for a refund when the court case is completed.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

On the 19th of March while doing "Partial Shares of Stock" , you recommended just setting your cost basis to zero for the payoff on the partial share of stock when a company splits off part of itself and issues new shares of stock in the new company to the shareholders. Because you have to figure the adjusted cost basis on the original stock and your new cost basis on the new stock anyway,why not just go ahead and do it while the information is fresh and available and use that same adjusted cost basis for your fractional share payout. The company provides you with all the informaion you need to accomplish this when they send you your packet. A good example of when this was benificial was the HP/Agilent Split in 2000 and the in 2006 Agilent split off it's semi-conductor business as Verigy. If you didn't do your new HP/Agilent cost basis in 2000, then you would be in big trouble when those Agilent stocks split again to Agilent/Verigy. Thank You.

Joseph Corazzini
OPB in Corvalis, OR

I don't disagree with you. If you have all the info at hand, go ahead and figure the basis of the partial share. I've heard from lots of NBR viewers over the years who are at a loss as to how to figure the basis of the partial share...and, for them, it's more trouble than it's worth.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I had stock issued by 3 life insurance companies that demutulized. I sold 2 not knowing there was a court case assumed cost base was zero. Could you point me to instructions for filing the form required to claim a tax adjustment?

C. Fred Schmitz
WCNY New Hartford, NY

Sure. First recognize that the deadline I was talking about applies to folks who sold life insurance stock in 2003. The statute of limitations for them for filing an amended return claiming a refund of overpaid taxes is April 17. If you sold before 2003, you're out of luck: the deadline for 2002 and earlier years has already passed. If you sold in 2004 or later years, there's no rush. You can wait until this time next year to see if the court has ruled. If so, and if -- as we expect -- the court rules in favor of taxpayers, then you can file an amended return to get your money back rather than a protective refund claim.

Now, if you sold in 2003, here's what you need to know: "protective refund claims."

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

How do you calculate the cost of a stock if receiving dividents on that stock over the years.

Susan Law
KQED San Francisco, Cal.

If you reinvested the dividends in additional shares, then each reinvestment buys new shares, each with their own basis and the total of your tax basis in the shares is the total of your original investment plus all your dividend reinvestments. If you sold all the shares at once, then you would subtract that total basis from the proceeds of the sale to determine gain or loss. If you sold just some of the shares, and did not specifically identify which shares you sold, the IRS's FIFO rule comes into play. That means you use the basis of the shares you have held the longest first. You'll need to review your records to know how much you reinvested; if you don't have reports from the company on 1099-DIV forms, you can check your old tax returns; you would have reported the dividends as income each year, even though you reinvested the money rather than taking it in cash.

Now, if you did not reinvest dividends, then your basis does not change as you own the stock.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Do I add dividends I've paid tax on the past four years (all reinvested) to the basis in reporting various Sharebuilder stocks I sold in 2006? It would change my profit to a loss.

I'm trying to use TurboTax for the first time and it is not letting me simplify over 4 years of monthly deductions to Sharebuilder.

I know you mentioned this problem of paying the taxes twice last year but can't figure out what to do. Thanks so much if you can answer.

mdam999
KLRU Bastrop

Sure, each time you reinvest dividends, you buy additional shares and increase your total tax basis in the stock. If you sold all of your shares -- the original purchase plus all of those shares purchased with reinvested dividends -- then your basis is the total of your original purchase plus all the dividends you reinvested. You probably reported the dividends each year on your tax return, so that should provide a record of the reinvestments. If you are using the Premiere edition of TurboTax, try the BasisPro tool; it should figure your basis, including all reinvested dividends. If you're using a different version of the program, tell it you purchased the shares at various time and enter your total basis.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Is there an IRS form for a "protective refund claim" or do I have to file an amended 2003 return before April 16, 2007? I sold demutualized Met Life with a tax basis of zero in Dec 2003 & reported same on my 2003 return.

JaneP
KOPB Portland, OR

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

i watch NBR every night for the best stock information available and enjoy it very much. it is very professional and precise and easy to understand. can you tell me how i can contact Kevin McCormally to get a copy of his commentary on today's program 4.09.07. regarding cost basis for stock received from insurance policies. i need the information he was giving for my tax return for 2006. thank you very much.

Judith Lynch
Clinton Twp., Micigan

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

L.E.W.
WTTW Lake Bluff, IL

You don't have to worry with a 2006 sale. Tax returns for the 2006 year will be open for amendment until April 15, 2010. Most tax advisors would suggest you pay your tax using zero basis and then be prepared to file an amended return to reclaim your overpaid tax. . . if the court sides with taxpayers on this issue.

FYI, I'll send the response I'm sending to folks who sold in 2003, and risk losing the right to a refund as the clock ticks on the statute of limitations: "protective refund claims."

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

on monday 4.09.07 you talked about stock given when one insurance company buys another, ie. manulife bought john hancock. i have stock from manulife that suppossedly is a zero cost basis when i sell it. you said there was a fed lawsuit in process and i should file an amended return until the outcome of the case. can you explain in more detail. thank you.

Judith Lynch
channel 56 pbs detroit

You have no problem since you haven't sold yet. This issue involves folks who sold and followed the IRS position that the stock had zero basis, and therefore paid tax on 100% of the proceeds of the sale. The lawsuit I mentioned challenges that position and if the taxpayers prevail, at least part of the gain on such sales would be tax free recovery of basis. Since you haven't sold, you don't need to file an amended return, but keep an eye on this issue. It could save you money in the future. Here's a response I'm sending folks who sold in 2003. It has links to the court case and to a great Web site to keep track of the issue: "protective refund claims."

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

On the April 9 program, you talked about a pending court case involving the use of a zero basis when figuring capital gain on sales of stock issued by insurance companies, stating that we should e-mail you for more details. I sold Prudential stock in 2004 and would like some more information about how exactly I can file an amended return for that year telling the IRS I will finalize it when the court case is done. How can I keep track of the case's progress or know when it is decided? Thanks for any help you can give.

Linda Hopp
WCMU Mt. Pleasant, MI

If you sold in 2004, the clock won't run out on a refund claim until April 15, 2008...so you have time to watch this court case. We think it will be decided by this time next year, although if the IRS loses (which we expect), the government may appeal. In any event, although you don't need to rush, here's some details on protective refund claims.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

AmerUS Group demutualized and shares were issued to policy holders in October 2000 with a value of approximately $20 per share. In November 2006, AmerUS Group was acquired by Aviva plc for $69 per share in cash. A 1099 was issued reflecting 100% capital gain. How and/or when will I learn the results of the litigation you discussed in the 04/09/2007 NBR broadcast? Also, when do I have to file a protective amended 1041 for the L/T Capital Gain reported for 2006?

Brooke Cheston
WHYY Berwyn, PA

A return filed for 2006 will be open to amendment for three years after the due date, or until April 15, 2010. By then, we should know the answer to how the court will rule. As for how you'll hear, I can assure you that we'll continue to cover this issue in Kiplinger's Personal Finance magazine and the Kiplinger Tax Letter. And, I'm sure Nightly Business Report will continue to follow the issue, too.

Conservative tax advisors would suggest that you pay tax on your 2006 return following the IRS's zero basis approach and be ready to file for a refund if/when the court rules in taxpayers' favor.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I received a payment from MetLife in connection w/demutualization in 4/2000. Is a possible amendment to Fed Incom Tax too late for me? Thanks for the Info.

Paul Ludwig
WNED, Hamburg, NY

If you paid the tax with your 2000 return then, yes, it's too late for you. The 2000 returns were open to amendment only until April 15, 2004. Sorry.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

In your April 9 broadcast you spoke of the cost basis of shares received when and insurance company demutualized. Does this apply only to life insurance companies or would the Anthem demutualization fall into this category? If so, how do I get the necessary forms to apply for the adjusted cost basis? I sold some shares with a 0 cost basis in 2003 and 2004 and would like to submit an amended tax return to receive a refund on the tax I paid.

Thank you for all the information you've given over the years. I enjoy your segments on Nightly Business Report.

Jan
wfyi, Winchester, IN

Yes, I believe this same issue applies to your medical insurance company demutualizing. I assume you reported a $0 basis when you sold the shares. Here's more information on the protective refund issue.

Here's how my colleagues on the Kiplinger Tax Letter suggests handling the protective refund claim:

If in 2003 you sold stock of an insurer that "demutualized" ... Time is running out to file a protective refund claim with IRS. A court recently refuted IRS' view that the rights policyowners gave up in the conversion have no value. So if you followed the Service's advice to use a zero basis for the stock sold, you may end up being due a refund. But the court won't determine the value before the statute of limitations for amending 2003 returns lapses on April 17 for those who timely filed. To preserve your right to get a refund, fill out Form 1040-X and write "Protective Claim" at the top. IRS should hold it in abeyance.

On your amended return, you'll show reduced AGI and tax due -- reflecting the basis you claim in the insurance stock -- and effectively ask for a refund for the amount of tax you overpaid. In part 2 of the form, "Explanation of Changes", note that this is a "protective claim -- do not process" to protect your right to a refund in the event a favorable ruling in the "Fisher" case (Eugene A. Fisher, Trustee v. U. S. ; Case No.04-1726 T ) regarding a taxpayers basis in stock received in a demutualization.

Here's a link to the court case: http://kiplinger.com/members/taxlinks/121605/FisherOrder-MotforContinuance.pdf

One of the best Web sites I've found that follows this issue is http://demutualization.biz/. Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I would like to find out more info related to the tax tip you had 4/9/07. I rec'd 65 shares of John Hancock and bought 35 more to make 100 shares in 2000 as part of the demutualization. I sold all the shares in 2006 and was told the tax basis was 0. Does the pending legislation affect me? I have already file my tax forms for 2006. Thanks.

Donna City & State:
CET, Cincinnati, OH

It might. However, even without the case going in your favor, I fear you have overpaid your tax. Even if the shares received in the demutulaization had a zero basis (which is what the IRS says and what is being challenged in the court case), the shares you bought to bring your block up to 100 shares definitely had a basis -- the amount you paid for them. If you reported a $0 basis for the full amount when you reported the transaction, you reported too much gain.

If this is the case, you should file an amended return using Form 1040X to take advantage of your basis. You'll get a refund for the amount by which you overpaid your tax. As for the shares received in the demutualization, you can leave that basis as $0 for now. Your '06 return will be open to amended until April 15, 2010. By that time, the case should be settled and we'll know whether you'll need to file another amended return to claim your additional basis.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I sold MET Life shares in 2001 that were given to me because the company went public (Demutilazation). My cost basis was $0.00 for this sale. Can I join the litigation process to amend my 2001 taxes?

PatDB
WHYY, philadelphia, pa

Sorry, but you're one of the losers on this one. The deadline for amending 2001 tax returns was April 15, 2005 -- three years after the returns were due. That means you can't ask for a refund now, even if the court sides with taxpayers and says you did have a basis.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

How do you file a "Protective Refund Claim" as described in your "Tax Tips" broadcast on NBR on 4/9/07? Or where can I find out how to do it or even what forms to use? I file my own tax return and feel comfortable with the process if I know where to look. In 2003 we were effected by the zero basis problem in the case where our insurance company investment was converted from a mutual fund company to a stock company and some stock was sold. A search on the IRS website does not have this term "Protective Refund Claim" come up anywhere and I'm concerned about the statute of limitation closing on 2003.

Michael Munniks
KCTS, Redmond, WA

Here's how my colleagues on the Kiplinger Tax Letter suggests handling the protective refund claim:

If in 2003 you sold stock of an insurer that "demutualized" ... Time is running out to file a protective refund claim with IRS. A court recently refuted IRS' view that the rights policyowners gave up in the conversion have no value. So if you followed the Service's advice to use a zero basis for the stock sold, you may end up being due a refund. But the court won't determine the value before the statute of limitations for amending 2003 returns lapses on April 17 for those who timely filed. To preserve your right to get a refund, fill out Form 1040-X and write "Protective Claim" at the top. IRS should hold it in abeyance.

On your amended return, you'll show reduced AGI and tax due -- reflecting the basis you claim in the insurance stock -- and effectively ask for a refund for the amount of tax you overpaid. In part 2 of the form, "Explanation of Changes", note that this is a "protective claim -- do not process" to protect your right to a refund in the event a favorable ruling in the "Fisher" case (Eugene A. Fisher, Trustee v. U. S. ; Case No.04-1726 T ) regarding a taxpayers basis in stock received in a demutualization.

Here's a link to the court case: http://kiplinger.com/members/taxlinks/121605/FisherOrder-MotforContinuance.pdf

One of the best Web sites I've found that follows this issue is http://demutualization.biz/. Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Regarding filing an amended return for selling stock from a demtualized insurance company, we filed an amended return last year for tax year 2002. Do we have to refile an amended 2002 return each year until the court case is settled or does just that one filing protect us moving forward?

Don
OPB, Hillsboro Oregon

One protective claim is enough. It should keep the statute of limitations open until a decision is reached.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I frequently use schedule D to offset capital gains against losses carried over from prior years. Must I use the $3000 allowed loss against current income from the carryover losses every year even if I do not have any gains? Or, can I "reserve" the losses for large gains in the future? Now in retirement, my tax bracket is 15%; but, large future gains can bump me up to a higher tax bracket where the carryover losses can be more effective tax wise. Thanks, Sidney.

Sidney
MPT Annapolis, MD

The law does not allow you to postpone using the carryover to a year you're in a higher bracket. Basically, if you have taxable income, you must use up to $3,000 of your carryover to offset it. So, if your taxable income for the year exceeds your personal exemption and standard deduction by at least $3,000, then $3,000 of your carryover disappears whether or not you use it.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

On tonight's show the tip was about the cost basis of life insurance stock acquired via demutualization. Where should I look to find out more about this issue, and eventually to find out the results of the pending court case? The shares in question have not been sold yet, I'm just thinking ahead... Thanks!

Elaine
KDFC, San Francisco, CA

Here's a link to the latest decision in the court case: http://kiplinger.com/members/taxlinks/121605/FisherOrder-MotforContinuance.pdf

Also, there's a terrific website on this issue: http://demutualization.biz/

As for keeping up with the case, if you're a subscriber to Kiplinger's Personal Finance magazine or the Kiplinger Tax Letter, I can assure you that we'll be carefully watching this case and reporting on its consequences to investors . . . as we have for the past several years.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Note: See also on this site Kevin's advice on filing a protective refund claim.

Hi Kevin, I liked your programs on NBR. I have a question about my investment in Broadwing, which was bought by Level 3. After the tender offer completed in January, I received both cash and the shares of Level 3. Is the cash received supposed to be treated as capital gain? Or as dividends? However, Level 3 never issues cash dividends. If it is capital gain and later I sell another stock I lose money, can I deduct the loss from the capital gain? I know this question may link directly to next year's tax; but I hope to arrange my investment strategy this year. Thanks.

Jack Qian
Princeton, New Jersey

There ought to be some help on this issue on the Level 3 website. I can't find it, but I bet it's there before next tax season.I commend you for wanting to get a head start for planning purposes.

Basically, you need to know the value of the Level 3 stock at the time of the merger, so you can figure out what you received for your Broadwing shares. Your "consideration" is the total value of the shares received plus the total cash received.

If the total was more than your basis in the Broadwing shares, you'll have a gain to report, but the gain can't be more than the cash you received. If you realized a gain that exceeds the cash, you'll report the amount of cash as a capital gain on Schedule D and your basis in the new Level 3 shares will be your carryover basis from the Broadwing stock, not the value of the Level 3 stock when you received it. This way, the untaxed portion of the gain from the "sale" of Broadwing will be picked up when you sell the Level 3.

Now, if your gain was less than the amount of cash received, you report the actual gain on Schedule D, and reduce your basis in the new Level 3 shares by the excess cash amount...that way the cash that goes untaxed now will be taxed when you sell the Level 3.

And what if this transaction resulted in a loss? That is, your "consideration" was less than your basis. In that case, you recover the cash tax free -- you don't report any gain -- and you reduce your basis in the Level 3 stock -- reducing your carryover basis from the Broadwing by the amount of the cash.

Aren't you happy you asked? And, please remember: I don't make the rules...I just try to explain them. Again, keep an eye on Level 3's web site for more help on this issue.

I'm pleased to know you enjoy the commentaries.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Hi, Kevin:
15% capital gain tax rate is misleading. I redeemed a mutual fund and the proceeds, also a "capital gain," is considered a "collectible" and subject to the 28% rate. Correct me if I'm wrong.

Zhaoping Wang
West Windsor, NJ

I assume your fund must have been an ETF that invests in gold or silver. You are correct that the IRS holds that because gold and silver are classified as collectibles, gold and silver ETF gains are, too....so you're stuck with the 28% rate.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Ordinary dividends are entered on Line 9a and supported by Schedule B Part II Line 5 List name of payer; Qualified dividends are entered on Line 9b (all Form 1040). Where are the payer(s) of qualified dividend payers to be listed?

Viewer on WETA
Reston, Va

The payer of the ordinary dividend IS the payer of the qualified dividend, so it's taken care of on the Schedule B. Qualified dividends are a portion of the ordinary dividends paid by a company.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I am told by a Humberto Cruz (Las Veagas Review Journal 8/21/2005) that in 2008 taxpayers in the two lowest tax brackets (10%& 15%) would not be taxed at all on long term capital gains. This the result of Jobs and Growth Tax Relief Reconciliation Act of 2003. Can you comment? It might also be good to cover the general information on the NBR so it could be planned for by the people who watch each nite.

I WOULD NOT MISS THIS SHOW!!!!!!!!!!!

MICHAEL J SIEGMUND
KLVX HENDERSON NV

As the law stands right now, taxpayers in the 10% and 15% brackets will enjoy tax-free capital gains in 2008, 2009 and 2010....but don't count on it. We expect Congress to eliminate this break before anyone gets to take advantage of it.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I own 2 stocks traded on the NYSE. One pays cash dividends, the other reinvests dividends with the company. Are these considered FOREIGN ACCOUNTS by the IRS? They ask that in Form B. (I have paid the required taxes.)

Viewer on WGBX
Belmont, MA

The Schedule B question is looking for foreign bank or brokerage accounts. If you own foreign stocks in a U.S. account, this does not apply to you. A U.S. based account is covered by reporting requirements to the IRS.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Q1. - I have shares in CVC that has a special dividend of $10 (Capital return stated in my investment statement) in 2006. How do I prepare this info. in the stock investment?

Q2. - I also have about $3000 plus of margin interest over a year of $2.2 million total sales investment. Can this be deducted. If so, how do I go about filing this?

K.C. Lim
Mpls. MN

Assuming your return of capital distribution does not exceed your basis in the stock, you don't report it at all. Instead, you reduce your basis in the stock by the amount of the return of capital dividend.

Investment interest--including margin interest--is deductible if you itemize deduction, but there's a limit. You can deduct such interest only to the extent that you report taxable investment income in the same year. And, in this case, investment income does NOT include long-term capital gains or qualified dividends that enjoy the special 15% rate. If this restriction limits your write-off this year, any excess investment interest can be carried forward and deducted against investment income in future years.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

We live in TX. community property state
Husband bought stock in '97 pd $4000.
Husband deceased in '98 stock worth $400.
Spouse sold stock in 2006 for $5000.
stock purchased in '97 from funds in joint account.
What is basis for Schedule D?

KLRN, San Antonio

In a community property state, the full basis of jointly owned community property is stepped up or stepped down to date of death value. Therefore I believe your basis would be the $400 date-of-death value, leaving the $4,600 as a long-term capital gain.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I understand that interest and capital gains on federal securities are not taxable in State tax. My question is Michigan municipal bond's interest is tax free in Michigan, is Muni capital gains also tax free in states?

Moe
Rochester hills, mi.

I'm afraid I disagree with your premise. Capital gains on municipal bonds is not tax free at the federal level . . . and I doubt that it's tax free in Michigan, either, although I'm not sure about that. The only tax-free capital gains I can think of are gains on the sale of a home (up to $250,000 for singles and $500,000 for married couples) and capital gains inside tax-deferred accounts such as 401(k)s and IRAs.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

What do I do with a foreign tax that has been witheld from a UMC dividend? And is there any way to know if a companies dividend/distributions will be taxed on foreigh soil? If I would have know UMC's dividend was taxed I probably wouldn't have bought it. Thanks

Mike
WFUM Davisburg

I found the following on Edgar, suggesting that Taiwan tax is withheld from UMC dividends:
http://sec.edgar-online.com/2006/06/26/0001193125-06-135432/Section19.asp

Dividends
Dividends, whether in cash or shares, declared by us out of retained earnings and paid out to a holder that is not an ROC resident in respect of shares represented by ADSs are subject to ROC withholding tax at the time of distribution. The current rate of withholding for non-residents is 30% for a non-resident individual and 25% for a non-resident entity of the amount of the distribution in the case of cash dividends or of the par value of the shares distributed in the case of stock dividends.

I hope this is of some help.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

How do I work out the cost basis when a spin off has occured. exp. the old A T&T with Lu ---- Verizon and Idearc.

Joyce Tang
WEDU Sarasota, Fl.

That's tough. Check the ATT Website for help finding your way through this maze.

Or use BasisPro, a service of Wolters Kluwer that accesses a data base of corporate actions -- including spin-offs, splits, mergers, etc.,-- plus dividends to figure the tax basis of securities. At $349 a quarter, the service is primarily used by professionals. But this year, for the first time, it's built into TurboTax Premier tax prep software. Users plug in how many shares of a stock were sold and when they were purchased (not the price) and the software figures the basis...after all corporate actions and dividend reinvestments. It's an amazing tool. See www.turbotax.com.

I have to tell you that Kiplinger has a relationship with TurboTax. We provide expert advice for their program and their Web site. I wish we could claim some credit for BasisPro, too, but we can't.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

In the description of property section of Schedule D is it proper to write, "Cash in lieu of XYZ Corp"?

Paul Molloy
KCET Long Beach, CA

That would be fine or simply partial share of XYZ.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

HELP! I've held up my tax papers since 2005,because I don't understand how to determine what is or isn't ordinary or qualified dividends. Is there a simple way to do this?

THANK YOU.

Joy Neupert
KETC CHANNL 9, ST LOUIS

Start with the 1099-DIV issued by the dividend payor or, if the payout came from a mutual fund, from the fund. The 1099-DIV should show on line 1b the amount of your ordinary dividends reported on line 1a may be qualifying dividends. If you owned the stock or mutual fund for the entire year, you can assume that the full amount that could qualify indeed does qualify for the lower rates applied to qualified dividends, assuming you didn't hedge the securities.

Hedging comes into play because, for dividends to qualify, they must come from a domestic corporation (or certain foreign companies) -- that's the figure on line 1b -- and you must have owned the stock (unhedged) for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date. If the payout came from a fund, the fund must have held the security for that period (if so, it should be included in the 1b amount -- and you must have owned the fund for at least 61 days out of the 121-day period that began 60 days before the fund's ex-dividend date.

In most cases, the amount shown on line 1b of your 1099-DIV qualifies.

I hope this is of some help.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

While it is generally common knowledge that one cannot take an immediate tax loss on a "wash sale," most people might be unaware that buying back the same shares at a later date will allow you to take the loss by adjusting the cost basis. Can this be done within the same year? Could you illustrate how this is reported by using simple round numbers?

Thank you!

Carole M.
Hillsborough, CA

P.S. I am always impressed by the levelheadedness and clarity with which you attack the apparent insanity of the tax code.

Thanks for the compliment. I try!

Here's an example of how the wash sale rule works.

Let's say you buy 100 shares of Company A at $10 a share ($1,000) and later sell it for $5 a share ($500), for a $500 loss.

Then, within 30 days before or after the sale, you buy 100 shares of Company A at $6 a share ($600).

The wash sale rule prohibits the deduction of your $500 loss.

However, that $500 is added to your $600 basis of the newly acquired Company A shares, making your basis $1,100.

If you later sell for $6 a share ($600), what would appear to be break-even actually produces a $500 loss. In other words, the $500 loss suspended by the wash sale rule comes back to life when the new shares are ultimately sold.

I hope this helps.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I made a 1035 exchange from one annuity to another. A surrender fee of several thousand dollars was subtracted from the amount transferred. Is this fee tax deductible or does it change my basis in the annuity?

George Theis
Houston, Texas

I can't find anything that specifically addresses this issue, but I'm assuming you didn't actually lose money on the deal -- that is, the value of the new annuity, after the surrender charge, is not less than your basis in the old one. If you would have had a loss on the old annuity, you would have been better off surrendering it and deducting the loss rather than going for the tax-free exchange.

Next comes the question as to whether the surrender charge affects your basis in the new annuity. I would assume not, if the money surrendered was effectively untaxed gain. Let's assume you invested $50,000 in annuity A, which was wroth $75,000 when you exchanged it for $65,000 annuity B after paying a $10,000 surrender fee. I believe your basis would remain at $50,000. Since the $10,000 surrender fee represents value that would have been taxed when it was paid out of the annuity, its disappearance does not affect your basis.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

How do I calculate the cost basis on stock shares that have been accumulating in a DRIP portfolio? I initially purchased 10 shares of stock in a small savings and loan for $65.00 in 1983, and allowed the dividends to purchase additional shares. After numerous acquisitions and mergers, I now own 140 shares at $40.00 each. I want to take some profits, but have no idea how to calculate my cost basis. Electronic records of my purchases only go back to 2003, and only reflect the shares and partial shares that were purchased since that time.

Jean Fritz
WIPB Indianapolis, IN

This is a tough one. Your basis includes the cost of all the shares purchased through dividend reinvestment, since those dividends were taxed in the year paid even though you never touched the cash. Have you contacted the shareholder services department of the company to see if it can help? If you have your old tax returns, you should be able to find the amount of dividends reported each year and, if you reinvested all dividends form this firm, that would give you a good idea of your growing basis.

In the more likely even that you don't have the old returns, the only thing I can recommend is that you consider using BasisPro, a service of Wolters Kluwer. This powerful tool taps into a data base of all corporate actions (such as mergers, spin offs, splits, reverse splits, etc.) since 1950 and all dividend payments since 1973. You tell BasisPro how many shares you sold and when you purchased the original shares, and it figures your total basis, based on all reinvested dividends. BasisPro costs $349 a quarter and, not surprisingly, is primarily used by professionals who need to look up tax basis information on numerous transactions. However, for the first time this year, it's also included in the Premier edition of TurboTax software, which costs about $75 for the desktop version or $50 for the online version. (Kiplinger has a relationship with TurboTax--we provide expert tax advice for the software and the company's Web site--but we are not associated with BasisPro.)

I hope this helps. Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I bought shares of Natural Resource Partners (NPR on NYSE) because of their good dividend (about 6%). I received my brokerage report on dividends for 2006 but the NPR distributions were not listed as dividends. Later I got a schedule K-1 from NPR saying that the distributions are usually not taxable. Is this is correct and do I just file the K-1 form without listing the distributions elsewhere on my tax return?

Sincerely,
Barrie Taylor, WLRN Miami, Florida

Natural Resource Partners is a limited partnership and the K-1 report includes a cash distribution which is a return of capital. That part is not taxable now because it is a return of part of your investment. You reduce your tax basis in the partnership by the amount of the return of capital distribution; the lower basis will result in a bigger gain (or a smaller loss) when you sell your units. The K-1 may report other types of income or deductions that do need to be reported on your tax return.

You may find the following Q&A, which I found on NRP's website (http://www.nrplp.com/index.cfm?menuitemid=327) helpful.

• How is my basis affected by cash distributions and Partnership net income (loss)? The cash distributions you receive are a return of capital and decrease your basis in the Partnership. At year end your basis is increased or decreased by your share of the Partnership's taxable income or loss allocated to you on your Schedule K-1.
• Do I report any cash distributions I received from the Partnership as my taxable income? No. You should report the income and other items shown on your Schedule K-1 provided to you by the Partnership.
• Why is the amount of cash distributions I received from the Partnership different than the amount I have to report on my individual income tax return? The cash you received is a return of capital and represents your share of the Partnership's available distributable cash. The amount you are required to include in your individual income tax return is your share of the Partnership's income and related items, allocated based on the number of units you owned during the year and reported on your Schedule K-1. These amounts differ due to changes in cash flow, borrowings and repayments, depletion, and depreciation (non-cash expenses).

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Kevin, I consider myself a day trader for the past two years, My tax questions are how and when do i pay tax on all stocks sold and what percentage?

Christopher
Internet Viewer from Dallas Tx

This is a very confusing and controversial area. Considering yourself a day trader does not necessarily make you a day trader in the eyes of the IRS. If you do qualify, very different rules can apply to how your profits, losses and expenses are treated by the tax law. If you qualify as a trader and make the mark-to-market election, you are not bound by the normal $3,000 loss limit nor the wash sale rule, for example. What follows is a discussion of this issue from the IRS Web site. I hope it helps.

--Kevin McCormally
Editorial Director Kiplinger
Washington Editors

Topic 429 - Traders in Securities (Information for Form 1040 Filers)

This tax topic explains whether an individual who buys and sells securities qualifies as a "trader in securities," and how traders must report the income and expenses resulting from the trading business. In order to better understand the special rules that apply to traders in securities, it is helpful to first review the meaning of the term "investor," and the manner in which investors report the income and expenses relating to their investment activities.

Investors typically buy and sell securities and expect income from dividends, interest, or capital appreciation. Sales of these securities result in capital gains and losses that must be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses. Investors are subject to the capital loss limitations described in section 1211(b), in addition to the section 1091 wash sales rules. Investors can generally deduct the expenses of producing taxable investment income. These include expenses for investment counseling and advice, legal and accounting fees, and investment newsletters. These expenses are deductible on Form 1040, Schedule A (PDF), Itemized Deductions, as miscellaneous deductions to the extent that they exceed 2% of adjusted gross income. Interest paid on money to buy or carry investment property that produces taxable income is also deductible on Schedule A, but under section 163(d) the deduction cannot exceed the net investment income. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. An investor is not subject to self-employment tax. For more information on investors, refer to Publication 550, Investment Income and Expenses.

Traders

Special rules apply if you are a trader in securities, in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all of the following conditions:

• You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
• Your activity must be substantial, and
• You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business:

• Typical holding periods for securities bought and sold.
• The frequency and dollar amount of your trades during the year.
• The extent to which you pursue the activity to produce income for a livelihood, and
• The amount of time you devote to the activity.

If the nature of your trading activities does not qualify as a business, you are considered an investor, and not a trader. It does not matter whether you call yourself a trader or a "day trader." Further, a taxpayer may be a trader in some securities and hold other securities for investment. The special rules for traders do not apply to the securities held for investment. A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them.

Traders report their business expenses on Form 1040, Schedule C (PDF), Profit or Loss From Business. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. Gains and losses from selling securities as part of a trading business are not subject to self-employment tax.

The tax treatment of sales of securities held in connection with a trading business depends on whether a trader has previously made an election under section 475(f) to use the mark-to-market method of accounting. If the mark-to-market election was not made, then the gains and losses from sales of securities are treated as capital gains and losses that must be reported on Form 1040, Schedule D (PDF). Both the limitations on capital losses and the wash sale rules continue to apply. However, if the mark-to-market election was timely made, then the gains and losses from sales of securities are treated as ordinary gains and losses (except for securities held for investment -- see above) that must be reported on Part II of Form 4797 (PDF), Sales of Business Property. Further, neither the limitations on capital losses nor the wash sale rules apply to traders using the mark-to-market method of accounting.

In general, the mark-to-market election must be made by the due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective. The election is made by attaching a statement either to your income tax return or to a request for an extension of time to file your return. The statement should include the following information:

1. That you are making an election under section 475(f) of the Internal Revenue Code;
2. The first tax year for which the election is effective; and
3. The trade or business for which you are making the election.

Refer to the Form 1040, Schedule D Instructions for further instructions on how to make the mark to market election.

After making the election to change to the mark-to-market method of accounting, you must change your method of accounting for securities under Revenue Procedure 2002-9, as modified by Revenue Procedure 2002-19. In addition to making the election, you will also be required to file a Form 3115 (PDF), Application for Change in Accounting Method. The procedures for making an election are described in Publication 550 under the section called "Special Rules for Traders in Securities". You may also refer to Revenue Procedure 99-17.

I had a zero coupon municipal utility bond come due in 2005. My accountant declared the gain as federally and state taxable.I explained that I thought they were tax exempt. She said I was wrong. I have the same situation for 2006. I am trying to gather information about their tax exempt status before we meet. You presentation last evening was very timely. I looked at some of the info you provided on-line (very good). What do you think? I have read information from a bond association and that info was as clear as mud. Thank you for your help. You may save me additional tax dollars.

Alex
WPVI, Westmont, NJ

I'm afraid I don't have enough info to answer precisely. It's possible for a zero muni to produce a taxable capital gain...if you sell it for more than your basis. But it's important that you include in your basis all the tax-free interest that accrued while you owned the bond. Here's how I put it in my book, Cut Your Taxes:

Investors can buy tax-free zeros issued by municipalities, an investment that dodges the annual federal tax liability. Because the interest would be tax-free if it were paid periodically, there's no tax problem in having the accruing income assigned to you annually. Even though you face no annual tax bill, the accruing interest does hike your basis in a zero-coupon municipal. You must keep track to hold down the tax bill when you dispose of the bond.

If you redeemed the bond at maturity, it seems to me you should have no taxable gain.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I'm confused about calculating cost basis for the sale of stock. Are the 'typical' quarterly cash dividends that have been paid to the shareholder up to the time of sale of the shares to be included in the cost? Thank you for your help.

John
WHYY, Philadelphia, PA

If, however, you took the dividends in cash, then, no, the dividends are not included in the basis. Many taxpayers overpay their tax on gains because they forget to include reinvested dividends in their basis.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

Check your records. If you can't find 1099-DIVs from the company, check your tax returns for the years you owned the stock. You should have reported each year's dividends on your return.

Depending on how much money is involved, you might want to use TurboTax tax preparation software. Kiplinger provides expert tax advice for the software and the TurboTax Web site, but what I'm recommending that might help you here is a neat feature built into TurboTax Premiere software. It's a feature called BasisPro that connects with a database that includes corporate dividend actions. You tell the software how many shares you sold and when you bought the original shares (or multiple lots) and the software computes your basis, including reinvested dividends.

Good luck.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

I have lost my purchase information on a stock that was bought by another company and therefore a new name. I sold the stock in 2006. How do I figure the purchase price?

Donna Dubinsky
KETC, St. Louis, MO

Here's a press release about the product: https://www.gainskeeper.com/us/articles/WKFSIncludesCostBasi.aspx

By the way, Kiplinger provides expert tax advice to TurboTax.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors