Tax Q&A

Answers to your tax questions

• Gains on stock splits • Exemption phaseouts • Donations of appreciated stock

By Lawrence Farber, Senior Editor

Q: I paid $10,000 for 200 shares of a stock several years ago. In October 2000, the stock split three for two, and I received an additional 100 shares, which I sold immediately at 45 each. What's my gain, and do I report it as short term?

A: After the split, you owned 300 shares, so your cost per share is $33.33 ($10,000 divided by 300), and the gain on each share you sold is $11.67, minus sales charges. Because you've had the original shares more than a year, you treat the stock dividend as a long-term holding, and you owe 20 percent tax on the gain.

Q:My adjusted gross income for last year hit $240,000, which is unusually high for me. I understand that I'll now lose part of the four exemptions I claim for my family. Can you tell me how much?

A: For 2000, each exemption is worth $2,800, so four would come to $11,200. You lose 2 percent of that for every $2,500 (or fraction) of AGI above $193,400. Your $240,000 AGI exceeds that figure by $46,600, or 18.6 times $2,500. That will cost you 38 percent (19 times 2 percent) of $11,200, or $4,256, reducing your exemption total to $6,944. More bad news: Your itemized deductions will also be trimmed by 3 cents for every dollar of AGI above the threshold of $128,950. So you'll lose $3,332 more.

For single filers, the phase-out threshold for both exemptions and deductions is $128,950.

Q:My uncle left me some stock valued at $4,000 when he died in February 2000. In October, I donated the shares to our church, at which time they were worth $5,300. Can I take a charitable deduction for the appreciated value, even though I didn't own the stock for more than a year?

A: Yes. Normally, you can claim only your tax basis—$4,000 in this case—for a gift of property held short term. But the law treats inherited assets as long-term holdings, regardless of how soon you dispose of them. So you can write off $5,300 and pay no tax on your $1,300 capital gain.

Q: I bought a desktop computer for office use in 1998 and wrote off the entire cost as a first-year expense. In 2000, I replaced the computer with a new model and gave the old one to my son. Do I owe any tax, and, if so, how do I figure it?

A: By converting the computer to personal use, you've "recaptured" part of your deduction. To figure the amount, first add up the regular depreciation you could have claimed on the computer during the time you used it for business. Subtract this total from the first-year write-off you took for 1998. The difference is taxable as ordinary income for 2000. You'll have to report the recapture on Form 4797 and attach it to your return.

Q: My wife, who isn't a retirement plan participant, contributed the maximum $2,000 to a traditional IRA last May. Now she wishes she'd put the money into a Roth IRA instead. Can she change her mind?

A: Yes, if she makes the switch (technically called a "recharacterization") by the due date for your 2000 return, generally April 16. She'd give up her deduction for the contribution, since Roth IRAs don't qualify. But any money previously earned on the contribution would be transferred to the Roth account tax-free.

Q: Because our son paid his college tuition from his own savings last year when he was a freshman, he can claim a Hope education tax credit. But his income is too low for him to benefit from it. Can we claim it instead?

A: Maybe, if your son qualifies as your dependent. For this purpose, the size of his income doesn't matter if he's younger than 19 (or younger than 24 and a full-time student), as long as you provide more than 50 percent of his support. The credit can reach $1,500, but the amount you can claim depends on your adjusted gross income. You can't claim anything if your AGI for 2000 exceeded $100,000 (on a joint return).

Q:While our home was being repaired after a fire damaged it, our insurance reimbursed us for the cost of staying at a hotel and eating out. Do we owe tax on that money?

A: If you recovered more than your excess living costs, the difference is taxable. To figure the tax-free amount, add what you normally would have spent on food, utilities, and services, and subtract the total from the amount you paid for similar items and for staying at the hotel.

Q:I own investment property in another state and made several trips there last year to meet with personnel in the firm managing it for me. Can I deduct my travel costs from the income I get from the property?

A: No, but you can include them with other expenses for which you may be able to claim a miscellaneous itemized deduction. You can then deduct any part of the total that exceeds 2 percent of your adjusted gross income. Keep in mind, though, that the trips must have been made primarily to check on your investments, not for vacation or other personal reasons.

Q:My husband has left me, but he wants us to file a joint return for 2000. I'd rather file as head of household. Can I?

A: Maybe, if you have a dependent living with you for whom you can claim an exemption. The fact that you're married won't bar you from claiming head-of-household status, provided your spouse didn't live in your home during the last six months of 2000 and you paid more than half the full year's cost of maintaining it. That includes expenses for rent, mortgage interest, real estate taxes, insurance on the house, repairs, utilities, and food eaten in the home. But don't count as household upkeep the money you spent on support items for your dependent, such as clothing, education, and the like.

Q:I gave $500 to a charity last year and received some keepsake items, which I'm sure were worth less than $70. Can I claim a deduction for the full amount of my gift?

A: No. Generally, you have to reduce your deduction by the value of any benefits you got in return, if it exceeded either 2 percent of your donation ($10 in your case) or $74, whichever is less.

Because you donated more than $75, the charity is required to give you a written estimate of the benefits' worth. Use this to figure your deduction.

Q:A company I own stock in went bankrupt. According to CCH Capital Changes Reporter, a Commerce Clearing House publication, the stock became worthless in 1996, but I didn't find this out until last year. Can I claim a capital loss on my return for 2000?

A: No. You can do so only on your return for the year the stock became worthless, so you'll have to amend your return for 1996. The normal deadline for filing an amended return to obtain a refund is three years from the due date of your original return, but it stretches to seven years if the claim is based on worthless securities. So you still have plenty of time.

There will be a quiz—and a chance to win $2,001!

Lawrence Farber. Answers to your tax questions.

Medical Economics

2001;3:78.