Friday, March 16, 2012

Reconstruction Work

Q.  I have been reinvesting my dividends in a mutual fund I've held for years. Now that it's sold, someone told me I need to review my basis to reflect not only the original purchase price, but also the reinvested dividends over the years. I've moved several times and no longer have the paper work. What can I do now?

A.  This can be a complicated issue, but first, let's address the obvious. I like to make extreme examples as they can be easier to understand. Given the poor state of the market in recent years, let's say you're in a 10 - 15% tax bracket, and the entire mutual fund when you sold it, was worth only $500.  In this case, I would simply claim a zero cost basis, and be willing to pay the tax on $500, even though you do have a cost basis, & might even have a loss on the sale. It's possible you won't owe any tax, or very little, and you can save yourself lots of work and grief of reconstructing years of paperwork. To my knowledge, there is no law that says you can't overpay your taxes.

Assuming paying tax on the gross proceeds is out of the question, the only choice you have is to try to reconstruct records. Fortunately, most mutual funds are sold by companies that keep such records. If you know the firm you purchased it from, I would start by contacting them and asking them to research your records. Dividends paid in a public company are public records, so if you know the number of shares you held each year, you can reconstruct the dividends. How much time all this will take and what the fees will be for the research is yet another matter, but this may be the only way to resolve your problem. Given we are now in the latter half of March, if the sale took place in 2011 and you need to report the sale on your 2011 tax return, you better consider applying for an extension!

Thursday, March 15, 2012

Joint Ventures between Husband & Wife

Q.  Can a married couple filing a joint return report self-employment income on a Schedule C instead of a partnership return in a community property state?

A.  If the husband & wife elect Joint Venture status, the answer is yes. There are a few conditions, however. The only members of the joint venture can be a husband and wife, they both materially participate in the business, and both spouses must agree to the joint venture. When only one Schedule C is filed, you must allocate the Self-Employment taxes between the husband and wife. It is my understanding  residence in a community property state is only an issue if the material participation rules are not met. Please check with your state of residence to see if this is allowable on the return filed for the state.

Wednesday, March 14, 2012

Reportable but not Taxable

Q.  Honey, I just received a 1099-R and I don't understand why I received this. I rolled over a small 401K plan into an IRA, isn't that a tax free transaction?

A.  Yes, the transaction you descriped is tax free, but it is a reportable transaction. I'm guessing that there is an amount in box 1, no amount in box 2, and a "G" in box 7. This is how a tax free rollover is usually designated. On your tax return, all 1099s need to be reported; but it doesn't mean it's taxable. Here is a link to the Instructions for 1099 Forms. Note the various codes used for Box 7 on page 9 of the instructions. The IRS computers match all 1099 forms. This is why they must be reported on your tax return.

Tuesday, March 13, 2012

Transferring an IRA Account

Q.  My husband and I are on the road & mail is a real hassle. I want to transfer my IRA to a different brokerage house, but my present brokerage house refuses to transfer the funds by wire transfer. Do you have any suggestions?

A.  Your best option may be to contact the brokerage firm you want the IRA transferred to and see if they can affect the wire transfer. Quite often that will work. If not, instruct your current brokerage to send the check via FedEx, UPS, etc. directly to the brokerage house you wish the funds transferred to. Having said that, I would first confirm with the new brokerage house if they will accept this. Any firm wanting your business will figure out a way to receive your funds!

Monday, March 12, 2012

Deductions for Home Schooling

Q.  My husband and I are full time RVers traveling and home-schooling our son. Can we deduct anything other than our interest, such as campground fees, utilities, etc.

A.  Living in an RV is just like living in an apartment or house. Other than "mortgage interest" and property taxes (personal property in the case of an RV) there are no special deductions. Relish in the knowledge you have your freedom, can turn the key and drive almost anywhere you want, and meet new people and have great experiences. Isn't that what RVing is all about!