When it comes to taxes, beware of frivolity.

Despite repeated court rulings to the contrary, some people continue to insist there is no law requiring them to pay federal income taxes. Or that wages, tips and other compensation for personal services somehow aren’t really taxable. Or that only foreign-source income is taxable.

Courts long have rejected these and other similar theories as utterly bogus. In addition, judges have imposed stiff fines for what they view to be “frivolous” arguments or delaying tactics.

Thus, even if some tax adviser assures you these theories are solid and you sincerely believe it, forget about it. They simply won’t work, and the Internal Revenue Service “will come after you with a passion,” says JJ MacNab, who is writing a book about the “sovereign citizen” and tax-protest movement. You may also face stiff fines from judges—and possibly criminal prosecution, Ms. MacNab says.

What does the IRS consider to be frivolity? Go to the IRS’s website (www.irs.gov) and type “frivolous” in the search box.

Among other arguments doomed to fail is the contention that the only “employees” subject to the federal income tax are employees of the federal government. Or that someone can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment to the U.S. Constitution. Or that African-Americans are entitled to a special tax credit as reparations for slavery and other oppressive treatment.

“Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe,” the IRS said in a recent reminder pointing readers to its list of bogus theories. “These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.”

The U.S. Tax Court is authorized to impose a penalty of up to $25,000 when it appears that someone has taken a frivolous or groundless position, or is using tactics primarily for delay.

By TOM HERMAN

Article source: Wall Street Journal

 

When should you start taking Social Security benefits?

It is one of the toughest retirement decisions seniors will have to make: whether to take benefits early, wait till their full retirement age or delay them to age 70. Each has its pros and cons, and a mistake can cost thousands of dollars.

Consider Patty Duke. When the former TV star turned 65 years old in December, she appeared in a series of public-service announcements touting how simple it is to apply for benefits online, in your pajamas.

The problem is that Ms. Duke was born in 1946, so for Social Security purposes her full retirement age is 66. By applying one year early, she has reduced her monthly benefit by 6.7%—for life. The announcements don’t mention this.

“The decision about when to collect benefits is a personal one,” says a spokesman for the Social Security Administration. “It is not a video about when to retire, but rather how to apply for retirement benefits online.”

The rules are laid out in detail on the Social Security website (www.socialsecurity.gov), which also offers calculators and tables. If you are helping your parents or other family members wrestle with the issue, here is how a few different scenarios play out.

Taking benefits early. You can begin collecting Social Security at age 62, though the benefits will be reduced if taken before full retirement age: 65 for people born before 1937, and 66 for those born between 1943 and 1954. From 1955 to 1960, full retirement age creeps up in intervals, until it reaches 67 for those born in 1960 and later. For example, if you were born in 1957, it is 66 and six months.

The reduction can be significant. If your full retirement age is 66 and you begin taking benefits at age 62, your payment will be reduced by about 25%.

For some people—generally those who aren’t working and in poor health—taking benefits early makes sense. Although the benefit is reduced, they will be ahead in real dollars until about age 78, says Peter Young, an attorney in Mill Valley, Calif., who specializes in Social Security.

Working and taking benefits early. If you are working and have so-called earned income—earnings from wages or self-employment—it might not make sense to take Social Security early. That is because for every $2 dollars they earn that exceeds a threshold—$14,640 in 2012—you will forfeit $1 in benefits.

For example, if you earn a mere $30,640, you will forfeit $8,000 in benefits. It doesn’t take much income to zero out your benefit for that year altogether.

Taking benefits early and later returning to work. What if you begin taking benefits early and subsequently return to work before your full retirement age?

Yes, your benefit will be cut, but what few people realize is that the earnings reduction isn’t a permanent loss.

The benefit will be recalculated when you reach full retirement age, and any month your benefit was reduced by even $1 is removed from the early retirement reduction calculation, Mr. Young points out.

Say you begin receiving Social Security at age 62, and before you reach full retirement age at 66 you forfeit benefits in 24 months because of the earnings test. At 66, your benefit will be recalculated as though you had begun taking it only two years early, not four.

One strategy for those who expect their earned income will always exceed the earnings threshold is filing for benefits at age 62 but each year submitting an earnings estimate that zeros out your benefit, Mr. Young says.

When you reach full retirement age, your benefit won’t be reduced. Meanwhile, you will have had peace of mind knowing that if you suddenly stopped working, you could begin your benefits immediately, without the typical wait of several months.

Delaying benefits. Still, if you can afford to delay Social Security until past full retirement age, it might make sense to do so. That is because your benefit will increase because of “delayed retirement credits” of 8% for each full year benefits are delayed, up to age 70.

For example, someone born between 1943 and 1954 who delays his benefit until age 70 will have a benefit worth 132% of the benefit he would have had at age 66, thanks to the credits. This increases any spousal survivor benefit as well. (Such benefits are 50% of your benefit at full retirement age.)

If your tax rate is high, it also might make sense to delay benefits: Social Security payments are considered taxable income.

Married couples have additional planning opportunities. When one spouse is receiving benefits and is over full retirement age, he can suspend his benefits at any time up to age 70. When his spouse reaches full retirement age, she can then file for the spousal benefit and delay taking her own benefits, which will increase with delayed retirement credits. She can then switch to her own benefit at age 70, if it is higher.

Changing course. It isn’t too late for Ms. Duke to change her mind. If you have been receiving benefits for less than a year, you are allowed to withdraw your Social Security application, repay all the benefits and reapply at a future date. You do this only once, however.

Write to Ellen E. Schultz at ellen.schultz@wsj.com

A version of this article appeared Mar. 24, 2012, on page B9 in some U.S. editions of The Wall Street Journal, with the headline: How to Time Social Security.

Article source: Wall Street Journal

 

With the economy sluggish, a growing number of Americans are providing financial support to relatives, including so-called boomerang children and aging parents. Come tax day, those who pay a significant portion of the bills on behalf of a relative may be entitled to a tax break.

According to the Census Bureau, 59% of men and 50% of women ages 18 to 24 live with or are supported by their parents, up from 53% and 46%, respectively, in 2005. The same is true for 19% of men and 10% of women ages 25 to 34.

On the other side of the generational divide, 43.5 million Americans look after someone age 50 or older, up 28% from 2004. On average, each spends about $5,534 a year providing that care, according to the National Alliance for Caregiving.

To claim a relative as a dependent on your tax return, you must meet one of two tests. Those who qualify can reduce their taxable income by $3,700 for the 2011 tax year.

The first test applies to children, a category that includes stepchildren and eligible foster children. You must have provided more than half of your child’s financial support in 2011. In addition, he or she must have lived with you for at least six months, although there are exceptions for temporary absences, including attending college.

To qualify, the child must have been under age 19 on Dec. 31, 2011, or between 19 and 24 and a full-time student. (Parents can claim children of any age who are “permanently and totally” disabled, according to the Internal Revenue Service.)

To calculate how much you spent on support, include the costs of college, food, clothes, haircuts, recreation, weddings, and medical and dental care, in addition to the child’s prorated share of your mortgage, utilities and other household expenses, says Melanie Lauridsen, a tax manager at the American Institute of Certified Public Accountants.

If you provide significant financial support to older children or other relatives—including parents—you may be able to claim them as dependents. But you must meet a different set of requirements.

Again, you must provide more than half of the person’s financial support for the year. But under this test, the relative’s gross income for the year, excluding Social Security benefits and tax-exempt income, must be less than $3,700.

You can claim either a relative (living with you or elsewhere) or a nonfamily member who has lived with you for the past year. But he or she must be a U.S. citizen or a legal resident of the U.S., Canada or Mexico. In addition, the person can’t have filed a joint return or claimed himself or herself on a tax return.

If several people in your family together provide more than 50% of the financial support for a relative—but no single person meets the test—the family can file a “multiple support declaration” on Form 2120 from the IRS and designate one person to claim the dependent exemption each year. That individual must cover at least 10% of the care recipient’s annual expenses.

Email: next@wsj.com

Article source: Wall Street Journal

 

By SHEFALI ANAND

Individuals got some income tax breaks in the federal budget on Friday, but its net benefit could be muted because Finance Minister Pranab Mukherjee also raised indirect taxes and took a step to make gold costlier.

Here’s a look at key announcements in the budget which affect individuals:

Income Tax: Mr. Mukherjee gave individuals higher exemption levels from income tax and raised existing tax slabs.

At present, individuals don’t have to pay taxes on annual income of up to 180,000 rupees ($3,600.) Mr. Mukherjee raised this limit to 200,000 rupees ($4,000.)

He also revised the tax slabs thus:

Individuals with an income between 200,000 rupees and 500,000 rupees: 10% tax rate

500,000 rupees to 1 million rupees: 20%

Income of more than 1 million rupees: 30%

Other direct tax breaks: Mr. Mukherjee proposed that interest of up to 10,000 rupees ($200) earned on savings bank accounts would be exempt from income tax.

Also, as much as 5,000 rupees ($100) spent on preventative health check-ups would be exempt from income tax.

Tax-free bonds: Expect a slew of tax-free bonds to come to market. Mr. Mukherjee allowed some infrastructure companies to issue as much as $12 billion-worth of such bonds in the year starting April 1 – double their allowance for the year gone by. They will be issued by entities like the Housing and Urban Development Corp. Ltd. and National Housing Bank. Such bonds issued earlier this year received a good response from wealthy individuals.

Indirect Hit: On the flip side, get ready to pay more indirect taxes and more on services than ever before.

At the moment, 69 categories of services are subject to service tax, but Mr. Mukherjee on Friday expanded this net. He introduced a “negative list” of 17 categories of services which would not be subject to service tax. Social services, such as hospital and education services, public transport, home rentals, and entertainment services will be exempt from service tax.

Everything else – from the services of a lawyer to that of your barber — will be now become taxable.

The tax rate will be higher too, up from 10% to 12%.

These will go into effect from June 1.

Gold: There was another hit for gold lovers, as Mr. Mukherjee doubled the import duty on standard gold (of 99.5% purity) bars and coins to 4%.

—Write to Ms. Anand at shefali.anand@wsj.com, follow Ms. Anand @shefalianand.

Article source: Wall Street Journal

 

As the deadline approaches for taking advantage of the government’s $5 million gift-tax exemption, estate planners are dealing with the fear of “donor’s remorse.” Families are looking to set up so-called irrevocable trusts to pass along assets to their heirs without paying gift tax—but worry they will change their minds later in life or will need to get the money back one day.

An irrevocable trust can’t be undone, making it one of the best ways to move assets out of an estate—and thus avoid estate taxes.

But what if you run out of money later in life? Or have a fight with one of your kids? Or want to change the terms if your son develops a drug problem, or your daughter turns into a shopaholic? If you have an irrevocable trust, you generally are out of luck.

“Irrevocability is a serious proposition,” says Joe McDonald, an attorney who helped found Concord Trust in Concord, N.H. “What it really means is that you can’t get the assets back. It means you can’t amend the trust.”

There are, however, ways to make trusts more flexible, while still technically giving away your assets and lowering your estate’s tax bill down the road.

The gift-tax exemption is a gift horse to many wealthier families. At the beginning of last year, the exemption shot up from $1 million for single filers and $2 million for married couples to $5 million and $10 million, respectively. (Congress changed the rules on estate taxes at the same time, raising that exemption to $5 million and lowering the rate to 35%, also for two years.)

But the exemption lasts only through the end of 2012, after which the old limits will return unless Congress intervenes.

That makes it tempting to give your kids as much as possible now. Here are some tools.

• Self-settled trusts. With a self-settled trust, a type of irrevocable trust, the donor can give the assets away—but also can have a way to tap them in a pinch, Mr. McDonald says.

First, a word about these trusts: They are authorized in only a handful of states, including Alaska, Delaware, New Hampshire and South Dakota. If you don’t live in one of those states, you would transfer the assets you want to give away to a third-party trustee.

To be allowed to use the assets after putting them in such a trust, the donor would be designated as a beneficiary who is “eligible” but not “entitled.” The trustee would decide whether an eligible beneficiary could get a requested distribution. And the trust’s assets generally wouldn’t be subject to the donor’s creditors, Mr. McDonald says.

The problem with self-settled trusts: They haven’t been around long enough to have gone through many legal tests. Private-letter rulings, which are Internal Revenue Service decisions on individual cases that don’t set legal precedent, have found that one transfer into a self-settled trust in Alaska was a completed gift and that another trust there was outside an estate.

Mr. McDonald suggests that donors who want access to some assets, but are worried about the lack of legal precedent, could put the bulk of their gift into a more traditional trust and the rest—maybe one-quarter—into a self-settled one.

• Trust protectors. You can design a trust to have a third-party “trust protector”—often a relative overseeing a professional trustee. The protector can drop a beneficiary, veto distributions, amend the trust’s terms or move it to another state if the laws there turn out to be more advantageous, Mr. McDonald says.

You also can form an investment committee and a distribution committee so that you aren’t leaving all decisions to a corporate trustee, adds David First, a CPA in charge of the trust-and-estates practice at New York accounting firm Marcum. For the investment committee, you could appoint three different investment advisers (who could be replaced by the trust protector). The distribution committee could be a group of family members who work well together, almost like a board of directors, he says.

• Spousal beneficiaries. If you are looking for a strategy that’s less involved than a self-settled trust, but you still are concerned about having access to the assets, you could designate your spouse as a “discretionary” beneficiary of a more traditional trust, says Diana Zeydel, an estate-planning attorney at Greenberg Traurig in Miami. You could draft the trust so that a distribution could be made to your spouse from time to time.

An even easier strategy, she says, would be for each spouse to create a trust for the other. You just have to have enough differences between the two trusts so that they aren’t considered “reciprocal,” or mirror images, Ms. Zeydel says. “That is one of the ways where you give [your assets] away, but they haven’t left the senior generation.”

• “Grantor” trusts. Whichever type of trust you use, make sure it is designated as a grantor trust, meaning the donor pays any income tax or capital-gains tax owed on the assets each year, Mr. McDonald says—so those payments aren’t considered additional gifts.

For example, if you put an asset with an $8 million gain into a trust and you pay more than $100,000 in taxes, the payment isn’t considered a gift because you have a legal obligation to pay it. Estate planners, says Mr. McDonald, are watching a proposal in President Obama’s budget that could eliminate this advantage.

—Email: familyvalue@wsj.com

A version of this article appeared Mar. 17, 2012, on page B8 in some U.S. editions of The Wall Street Journal, with the headline: The Rush to Avoid Gift Taxes.

Article source: Wall Street Journal

 

By TOM HERMAN

It’s understandable that many people will look for almost any excuse to put off the mind-numbing task of figuring out their taxes and filing their returns on time.

But some ultra-procrastinators have fallen several years behind—and now are in danger of losing valuable refunds.

The Internal Revenue Service recently estimated that refunds totaling more than $1 billion may be waiting for nearly 1.1 million people who still haven’t filed their federal income-tax returns for 2008.

To collect, these individuals typically must file their return for 2008 no later than April 17 this year. That is only about one month from now. (The tax-filing deadline this year is April 17 because April 15 falls on a Sunday, and April 16 is a holiday in Washington, D.C.)

“In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund,” according to the Internal Revenue Service. “If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.”

If you need prior years’ tax forms and instructions, go to the IRS website (www.irs.gov). Look on the forms and publications page. Or you can call 800-829-3676.

The IRS says taxpayers seeking a 2008 refund may have their checks held if they haven’t yet filed returns for 2009 and 2010. “In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past due federal debts such as student loans,” the IRS says.

Write to Tom Herman at tom.herman@wsj.com

Send your questions to us at askdowjones.sunday03@wsj.com and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter.

Article source: Wall Street Journal

 

Selling a stock or a mutual fund is getting a lot more complicated.

New tax rules are changing how your brokers report sales of stocks, exchange-traded funds and mutual funds to the Internal Revenue Service and could deny you the full tax benefit on your investment sales.

The upshot: A little preparation now could make a big difference in tax bills later, say experts. “This tax season, I’m spending more time talking about this” than taxes,” says Michael Eisenberg, a Los Angeles accountant.

In the old days—before 2011—you were supposed to keep track of your “cost basis,” or the amount you paid for stocks, bonds and funds. If you bought your holdings over time and sold only part of your investment, you could decide at tax time whether to use the first shares purchased as the cost basis, or, to minimize your tax bills, match the sale to specific purchases.

Starting last year, though, brokerages were required to keep track of what you pay for stocks, and they are now required to report that cost basis when they report your proceeds from selling the stock on your 1099-B tax form.

As a result, investors must decide how they want their cost basis to be calculated before the stock sale is settled, rather than wait until tax time. If they don’t choose, firms will use a first-in, first-out method to stock sales, applying the sales to the oldest shares first.

This year, the rules extend to mutual funds and most ETFs, including dividend reinvestments. Starting next year, cost basis will be reported on bonds and traded options as well.

Getting covered. The new rules apply only to stocks bought in 2011 or later, so your cost basis will be reported to the IRS on your 1099-B only if you bought and sold stock last year. Next year, the forms also will include mutual funds and ETFs bought and sold in 2012. These are called “covered” transactions.

Some firms, including Charles Schwab

and Fidelity Investments, as a courtesy also are including your cost basis for shares bought in previous years, but those numbers aren’t being reported to the IRS. Not sure which is which? Box 6 of the 1099-B form will tell you if a figure has been reported to the IRS.

Consider your choices. Before you sell an investment, you can designate how you want the cost basis to be handled. With mutual funds, you can use the “first in, first out” method; you can use the average cost you paid over time, or you can match each fund sale to specific previous purchases. If you don’t choose, your fund company is likely to use the average-cost method.

When you fill out the form, you might find a dizzying array of choices. Fidelity offers as many as 10 different calculations for the cost basis on stock sales, for example.

If you want to reduce your taxes, you might want to choose the highest-priced shares you own, or even select those for which you will show a loss. If you are donating the shares, you should select your cheapest purchases. You might want to consult with your accountant before you make a decision.

In communications with account holders, Vanguard Group is encouraging investors to make their decisions as early as when they buy their shares, especially if they have automatic withdrawals set up.

One quirk: You can change your cost-basis choice for mutual funds online or in writing, but not over the phone.

Beware of “wash sales.” A wash sale occurs when you sell an investment at a loss and buy back the same or similar shares within 30 days before or after your sale. In that case, you can’t take a tax loss.

If you sell a mutual fund at a loss 30 days before or after a dividend is reinvested, you could inadvertently trigger a wash sale.

Brokerages and mutual fund firms now must notify the IRS on the 1099-B of wash sales that occur in an account involving the same security.

Forms and more forms. Making things even more complicated, the IRS has changed the old Schedule D and added a supplement: Form 8949. Stevie Conlon, tax counsel at Wolters Kluwer Financial Services, says some investors could have to file as many as three 8949 forms—one when the cost basis is reported to the IRS, another one for transactions where the cost basis isn’t reported and a third for transactions that don’t require a 1099-B, such as options.

Try not to rush your return. Investors were supposed to receive the new 1099-Bs by Feb. 15, but a number of firms sought extensions of up to a month to get correct data out to investors. Corrected forms could still arrive in coming weeks. Robert Green, whose accounting firm Green Co. represents active traders, says he has seen numerous errors and discrepancies between 1099-Bs and his clients’ calculations and will be seeking extensions while the differences are sorted out.

Write to Karen Blumenthal at karen.blumenthal@dowjones.com

A version of this article appeared Mar. 10, 2012, on page B8 in some U.S. editions of The Wall Street Journal, with the headline: Dodging a ‘Cost Basis’ Crisis.

Article source: Wall Street Journal

 

The number of companies offering Roth 401(k) plans has grown rapidly since the retirement plan became a permanent part of tax law in 2006. Employees, however, aren’t quite as enamored.

With a Roth 401(k)—a close cousin of the Roth individual retirement account—participants make after-tax contributions, and they can collect that money, plus any investment gains, tax-free once they retire. Conventional 401(k)s, by contrast, are funded with pretax dollars, and withdrawals are taxed at ordinary-income rates.

Although fund companies say they have aggressively marketed Roth 401(k)s, the adoption rate has been slow. Fidelity Investments, which administers retirement plans for 12 million workers, found that only 6% of plan participants with the option of enrolling in a Roth choose to do so. At Charles Schwab

Corp., that figure is 15%, and at Vanguard Group it is 9%.

Part of the problem, experts say, is that while the Roth 401(k) is fairly simple to understand, determining whether one is right for you is often anything but, requiring a careful assessment of both your current and future tax situation.

“It’s both a macro and a micro decision,” says Gil Charney, principal tax researcher at the Tax Institute at HR Block, a division of HR Block Inc.

A Taxing Decision

Who might benefit from a Roth 401(k)? Broadly, it is the same population for whom the Roth IRA is a good fit: those who expect their tax rate to be higher in retirement than it is currently. That may include investors who think the government will raise taxes in the future. By contrast, individuals who expect their tax rate to be lower in retirement are better off with a conventional 401(k) that delays the payment of taxes.

Employees can hedge this bet by putting some of their retirement savings in conventional IRAs and 401(k)s and some in Roth accounts. If an employer offers both types of 401(k) plans, employees could divide their contributions between the two. Few plans allow investors to roll over a regular 401(k) into a Roth 401(k). Any pretax matching contributions from employers by law must be held in an account separate from the Roth 401(k) and are taxable when withdrawn.

Financial adviser Devin Pope says that while none of his clients have opted for a Roth 401(k), he chose one for himself in 2007. Looking at the three sources of dollars he could tap in retirement—taxable, tax-deferred and tax-free—he determined that tax-free was best for him. “It’s easier for me to pay the taxes now on the dollars I earned than in retirement when I don’t have an income,” says Mr. Pope, who works at Albion Financial Group of Salt Lake City.

Plus, he believes the federal government will likely raise taxes in the future to help pay off the U.S.’s large national debt.

When Mr. Pope first switched to a Roth 401(k), however, he took a cut in his take-home pay, and that, he says, is one reason people are wary of the Roth option. Contributions to traditional 401(k)s are made with pretax dollars, so they reduce the amount of pay that is subject to tax, resulting in a larger after-tax paycheck. Roth 401(k)s, on the other hand, are funded with after-tax dollars, so there is no reduction in adjusted gross income—an important figure in determining tax brackets and the deductions and credits individuals can take.

Greg Koltermann successfully lobbied the printing company he works for to add a Roth 401(k)—and signed up immediately, drawn by the prospect of tax-free growth. But last year, one of his financial advisers convinced him he would be better off in a tax-deferred 401(k). “It was tough for me, because I believe taxes are going to go up in the future,” says Mr. Koltermann, who lives in Mukwonago, Wis.

With the Roth 401(k), Mr. Koltermann had to pay more in the alternative minimum tax. His higher adjusted gross income also rendered him ineligible for the American Opportunity Tax Credit, which, with two daughters in college, would cut his federal income tax by $5,000. To take advantage of the credit, he started contributing pretax dollars to a traditional 401(k) again.

Modest Cost for Employers

Because of these complexities, it is wise to consult a financial adviser before deciding whether to switch to a Roth 401(k). Your company also may be able to provide some help. Fidelity, for instance, offers workshops on Roth 401(k)s at the companies where it runs plans, and Schwab offers one-on-one advice over the phone or online. Still, while a lot of companies have made education available, “they haven’t spent hundreds of thousands of dollars helping people determine how to make that tax calculation,” says David Wray, president of the Plan Sponsor Council of America, a trade association supporting employer-sponsored retirement plans.

Whether they contribute to a regular 401(k), a Roth 401(k) or both, employees can contribute up to $17,000 in 2012, plus $5,500 in catch-up contributions if they are 50 or older. Unlike the Roth IRA, employees can contribute to a Roth 401(k) regardless of how high their income is.

Although employees haven’t embraced the Roth 401(k), it continues to grow in popularity with employers. It’s “a way for them to give employees a new benefit at a very modest cost,” says Jean Young, senior research analyst at the Vanguard Center for Retirement Research.

Among companies using 401(k) plans from Vanguard, 46% offered the Roth option in 2011, up from 12% in 2006. At Fidelity, 32% of employers offer the plan, up from 5% over the same period. Schwab’s recent figure is the highest, with 66% of plan sponsors offering the Roth in 2011, up from 30% in 2006.

Ms. Ensign is a reporter for The Wall Street Journal in New York. Email her at rachel.ensign@wsj.com

A version of this article appeared Mar. 5, 2012, on page R3 in some U.S. editions of The Wall Street Journal, with the headline: The Ins and Outs of Roth 401(k) Plans.

Article source: Wall Street Journal

 

Q: My son and I bought a house to remodel and resell. We had it for two years, during which time no one lived in it. We sold it at a loss. Is the loss deductible?

—K.B., Ridgecrest, Calif.

A: The general rule is that you can’t deduct a loss on the sale of your personal residence. But the answer is different in cases such as the one you mentioned.

If the house is “an asset that was purchased for investment purposes only, with the intention of incurring a profit and not used for personal purposes, then the loss would be deductible as a capital loss,” says Brittney Saks, who heads the U.S. Personal Financial Services Practice at PricewaterhouseCoopers.

Based on what our California reader has told us “it would seem that the house was bought purely for investment purposes,” Ms. Saks says.

Mark Luscombe, principal federal tax analyst at CCH, a Wolters Kluwer business, agrees. “Yes, it appears that the home was investment property and not a residence, so it would qualify for capital-loss treatment on sale,” he says.

Here is how those capital-loss rules typically work:

You can use your capital losses to offset your capital gains on a dollar-for-dollar basis.

If your losses exceed your gains, or if you don’t have any gains at all, then you can use your net loss to soak up as much as $3,000 a year ($1,500 if you’re married and filing separately from your spouse) of your wages and other ordinary income. Additional losses are carried over into future years.

For more details, see the Internal Revenue Service website, and type “capital gains and losses” in the search box.

However, Ms. Saks points out that the taxpayer has the burden of proof to show the intention and correct classification of the property.

Q: Has Congress extended the tax break for IRA distributions that are donated directly to a charity?

—E.D., Providence, R.I.

A: Not yet. That law expired at the end of last year.

Most tax advisers I have spoken with predict lawmakers will approve another extension this year of the provision, which lets many people who are 70½ or older transfer as much as $100,000 a year directly from an individual retirement account to one or more qualified charities without having to report any of that money as taxable income.

—Send your questions to us at askdowjones.sunday03@wsj.com and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter.

Article source: Wall Street Journal

 

By ELLEN E. SCHULTZ

How can you check the health of your pension plan?

In the Feb. 11 Conquering Retirement column, we looked at red flags that could show a pension might be at risk. In response, readers concerned about their plan asked for ways to check up on it and ascertain its true value.

Some are simply sorting out their personal finances, while others have lost track of a pension they—or a spouse or retired parent—had earned years before but never collected.

Don’t Panic

Where to get information on your pension plan.

For information on annual funding statements: www.pensionrights.org/issues/legislation/pension-funding-notices

For annual reports: www.efast.dol.gov

For information about your rights: www.dol.gov/ebsa/publications/wyskapr.html#

For help locating a lost pension: www.pbgc.gov/docs/finding_a_lost_pension.pdf

For a list of pension counseling projects: www.pensionrights.org

Funding statements. The most pressing matter readers have: how to tell whether their pension plan is well-funded. This ought to be easy to find out. Your employer or former employer is supposed to send an annual funding statement showing the status of the pension plan. (A healthy funding range is 85% to 100%.)

The statement also should include the plan’s total assets and liabilities over the previous two years, as well as the number of people in the plan who are currently working, the number who are receiving benefits and the number who have left the company but aren’t yet collecting a pension.

In addition, the statement should list any amendments to the plan that may affect its assets and obligations. For example, if the plan was amended to allow severance-like payouts, that might indicate a coming drain on assets; if benefits were cut, that would reduce the obligation and improve funding.

The annual statement must be sent within 120 days of the end of the plan year (or seven months if there are fewer than 100 people in the plan), but employers often obtain extensions, so the information may be a year or more out of date. If your plan’s health is deteriorating rapidly, the annual notice won’t do you much good.

Until 2008, employers also were required to send you the pension plan’s annual report, which includes many more details, including a breakdown of investments. But employers complained about the cost of mailing the annual report or making it available online, so if you want it, you have to request it from the U.S. Department of Labor (see box).

Benefit statements. What about the value of your pension? Every three years your employer is required to send you an individual benefit statement that tells you how much you have earned and whether it is vested—meaning that you have worked long enough to lock it in. The vesting period must be no longer than five years, though it can be shorter.

The amount shown on your benefit statement might not be accurate if you have been at the company a long time and your employer spins off your company or unit. If that happens, you could lose 20% or more of the value of your pension, because the new employer can take advantage of a loophole in the law to rescind the early-retirement subsidy, if the plan offers this additional benefit.

If you aren’t receiving an annual funding statement, but think you are entitled to a pension because you worked at least five years at a company, you will need to do some sleuthing.

A lot of people may not bother, figuring the pension will be too small. But if you can help an elderly relative track down a pension worth a couple of hundred dollars a month—either from their work history or a deceased spouse’s—that could make a significant difference.

If the company still exists, contact it, providing the dates of service. If that gets you nowhere, ask for a copy of the plan summary. This will have the plan rules about who is entitled to a pension. If the employer won’t provide it, contact the U.S. Department of Labor’s Employee Benefits Security Administration for help.

The plan summary also can help you locate and obtain a pension you are entitled to from a multiemployer plan or in other situations.

Getting help. What if you left 20 years ago and can’t find the employer because it merged with another company, closed a unit, moved out of state or went out of business? Contact the Pension Benefit Guaranty Corp., which takes over the administration of failed pension plans. It offers a list of people on its website who are entitled to a pension but can’t be located.

Before you begin your pension quest, take a look at a booklet prepared by the Pension Action Center at the Gerontology Institute of the University of Massachusetts, Boston, in conjunction with the PBGC. This provides a comprehensive step-by-step guide on how to locate a pension.

Help also may be also available from pension counseling projects funded by the U.S. Administration on Aging.

—Email: ellen.schultz@wsj.com

Article source: Wall Street Journal