Another Use for 10-Year Averaging

QUESTION: The company I have worked for for 20 years is shutting down the part of the business where I am employed and dismissing me and several dozen other employees. We will all get our share of the company’s retirement plan, which is a lot of money in my case. I am looking into some tax shelter plans for the money, but if I decide to bite the bullet and pay all of the taxes on the distribution now, how would the Internal Revenue Service treat it?--S.D.

ANSWER: In recent rulings, the IRS has permitted taxpayers in such situations to use 10-year averaging rules. By spreading that one-time boost in your annual income over a 10-year period, your tax bill could be reduced sharply.

One thing to check into before you leave is whether the retirement plan will be terminated upon the operation’s closing. If it will be, make sure you get your distribution before the plan is terminated. Distributions resulting from termination of a plan don’t qualify for the 10-year averaging privilege.

Q: I endorsed a bank loan for my nephew because it was the only way he could get the money to pay off a lot of debts that had piled up during college and a messy divorce. I thought he deserved a second chance. But he blew the money on drugs, among other things, and I haven’t seen him in six months. The bank, meanwhile, hit me up for the repayment. Can I at least recover part of the money by writing off the loss as a bad debt?--R.K.

A: Sorry. If it was strictly a personal matter--that is, a non-business transaction--you aren’t allowed a tax deduction. The best you can do is seek reimbursement from your nephew or his guardian, if he has one.

For future reference, you would be much better off to lend the money yourself. That way, as long as it is a favor for a friend or relative and not for business purposes, you could write it off as a bad debt if you never get repaid. Specifically, the bad debt would be treated as a short-term capital loss.

To protect yourself against any appearance that the loan is really a gift in disguise, handle the transaction just as you would a loan to a stranger. That is, require the friend or relative to sign a note specifying the borrowed sum, the interest rate and the terms of repayment. For further protection, insist that the loan be backed up with a car, property or other asset.

Q: If the IRS, with all of its computer problems, doesn’t process my refund by June 1, how much interest is the government required to pay me?--V.B.

A: The IRS currently is paying 13% interest on late refunds. The rate is scheduled to drop to 11% on July 1. The lower rate will remain in effect through Dec. 31, when it will again be recalculated to reflect any changes in market interest rates.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business Section, The Times, Times Mirror Square, Los Angeles 90053.