Taxes Were Prepaid but Then Came a Windfall
QUESTION: I have made estimated quarterly tax payments throughout 1988 and have basically prepaid an amount equivalent to my total tax obligation in 1987. Now, in the final weeks of the year, I have an unplanned profit of several thousand dollars. What should I do? Do I have to prepay additional tax? Will I penalized if I don’t prepay the taxes on this additional gain?--I. S. D.
ANSWER: Don’t worry. You are a conscientious taxpayer and have done everything the federal and state governments require.
Basically, the Internal Revenue Service and California Franchise Tax Board require taxpayers to prepay at least 90% of their total tax obligation before the end of the calendar year. Penalties are imposed if the requirement is not met.
However, there are some significant exceptions, including one that clearly covers you. Even if you are blessed with a last-minute, taxable windfall, you will not be penalized for failing to prepay tax on it if you have already had withheld (or prepaid) an amount equal to your total tax obligation from the previous year.
Although you are not required to prepay any taxes this year, you might want to consider making an additional estimated tax payment to the state. State taxes are deductible on your federal return, so by paying in advance you will be able to claim that amount on the Form 1040 that you will file by April 15, 1989.
If you wait until next year to settle with the state, you have to wait until you file your return for 1989 with the IRS to claim the deduction. It’s not a big deal, but by paying your state tax a few months early, you’re able to claim the deduction a full year earlier.
Q: My wife died recently and I am considering selling the home we bought in 1961. How do I figure my cost basis and compute my gain? I have gotten conflicting information and am confused.--K. K.
A: Actually the computation is easier than you might think. We’re going to assume that your house was held as community property. Basically, the law allows you to value the entire house--both your wife’s half and yours--as of the date of her death. For the purposes of this computation, what you paid for the house in 1961 is irrelevant. The important number is the fair market value of the house as of your wife’s death. This is the value of your wife’s share, and both the federal government and the state of California (as of January, 1987) allow the surviving spouse to “step up” to this value as well.
So, if your house had a fair market value of $200,000 when your wife died, and you realize $225,000 (after expenses) from the sale, your taxable gain is just $25,000.
Q: In 1984, I bought 400 shares of Gearhart Industries at a total cost of $8,582. Three months ago, Gearhart was merged into Halliburton Co. I received 11 shares of Halliburton, which had a market price of $26.50 on the actual day of the merger, plus $17.70 in cash for a fractional interest in a share. Obviously, I lost money on the deal. Can I declare this as a loss on my income taxes and get a deduction?--A. T. V.
A: Yes, there’s no doubt that the value of your Gearhart shares was far less in 1988 than when you purchased them four years earlier.
But the decline--from the $8,582 you paid to the $309.20 you received in cash and Halliburton stock--was not directly connected to the merger. Instead, Gearhart, an oil services company, had been suffering from the persistent glut on the worldwide oil market.
Nevertheless, your loss would seem to be a real one. And the government recognizes it. However, you may not declare the loss until you actually sell your Halliburton stock. The merger, which was accomplished through a stock swap, is not a taxable exchange in the eyes of the IRS. As far as the government is concerned, your Halliburton shares are worth the $8,582 you paid for the Gearhart shares they were exchanged for, minus the $17.70 you have already received in cash at the time of the exchange.
When you sell the Halliburton shares, their actual value will be set according to the price you receive and any gain or loss is calculated at that time. If you receive less than what you paid, you would subtract your net proceeds from your cost, and that is the actual loss you would report on your tax return. Perhaps, when you sell the shares, they will be worth more than they were at the time of the merger.
Q: What happens when a person who has won the state lottery and is entitled to payments over a 20-year period dies before all the payments are made? Are his heirs entitled to all future payments, or does the money revert to the state?--H. B.
A: Your question is particularly timely, given the recent spate of big-ticket winnings and persistent false rumors about how these winnings are handled in the event the ticket holder dies before the entire kitty has been disbursed.
The fact is that lottery winnings, including future payments, are considered assets of the winner and become a part of that person’s estate if he should die before the payments are completed. In the event of death, the winnings are disbursed on schedule according to the requirements of the probate court, which passes on the will of the deceased. If there is no will, the lottery winnings are handled just like any other asset of the deceased, depending on the court’s ruling.
“In no case do the winnings revert to the state,” says lottery attorney Tim Ford. “We certainly do not take anything away.”
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
