The Taxpayer Must Do the Record-Keeping on Stocks
QUESTION: How does the Internal Revenue Service check up on the buy and sell dates of stocks? Can it really know every transaction in the portfolio of every taxpayer?--M. S. C.
ANSWER: No, they don’t, but it doesn’t really matter, the IRS says. If IRS auditors want to check up on your stock dealings, they have the legal right to get the information they want--or let you pay the financial consequences.
According to an IRS spokesman, brokerage houses are required to report all stock sales to the agency on what is known as a Form 1099-B. You receive copies of these reports and are required to attach them to your income tax return every time you sell shares. The IRS also receives this information and, thanks to the power of computers, routinely cross-checks the data against your tax return to ensure that you have reported exactly what the brokerage house reported. (Similar forms covering interest and dividend payments are completed and filed by brokerages, corporations and financial institutions.)
However, merely reporting the sale of securities on the Form 1099-B isn’t where your obligation as a taxpayer ends. You must also tell the IRS how much money you made--or lost--in the deal. This computation requires you to state what you paid for the shares and calculate your so-called “taxable basis” in the securities. The difference between the basis and the sales price--if the sales price is greater--is the amount on which you are obligated to pay taxes. If the sales price is lower than the taxable basis, you are allowed to deduct the difference between the two amounts as a loss. These computations must be completed on Schedule D of the tax form and filed with your 1040 form. The IRS says it is the obligation of all owners of securities to keep records of their holdings, their original costs and any transactions affecting their taxable bases in these securities.
In most cases, this is where it ends. However, if you are one of those lucky individuals selected for an IRS audit, you may be required to prove how you arrived at the taxable basis for your just-sold securities. If your records can’t satisfy the IRS, you could be liable for taxes on the full amount of the proceeds from the sale.
Q: Several years ago, I started purchasing U.S. Series E Savings Bonds. I am now wondering if I can give these bonds to a minor child as the beginning of a college fund. If I do this, is the interest taxed at the child’s rate?--D. E. J.
A: Yes, interest accumulated after the gift is made would be taxed at the recipient’s rate, regardless of his age. If the recipient is a child under age 14, the first $500 is tax-free. Income from $500 to $1,000 is taxed at 15%, and income over $1,000 per year is taxed at the parents’ highest rate. Children age 14 or older are taxed at their own (generally lower) rates.
However, be advised that as a donor you may not escape taxation on the interest that has already accumulated on the savings bonds you are giving away. This means that before you give these bonds to the child, you must determine how much interest they have earned while you have owned them. You must declare this interest--even though you are not actually pocketing it--as income on your tax return.
A helpful tool in calculating what you owe is the savings bond interest rate report prepared by the Savings Bond division of the Treasury Department. To obtain the report, send a postcard to the U.S. Savings Bond Division, Public Affairs Office, asking for its “guaranteed minimum rate chart.” This list is published monthly and includes the minimum interest rates paid on all outstanding Savings Bonds. The address is 1111-20 St. N.W., Dept. C.L., Washington, D.C. 20226.
You might also be interested in some recent changes affecting savings bonds and college education. Beginning in 1990, interest earned on newly issued Series EE bonds can be free from federal taxation if they are redeemed to pay for college or vocational school.
However, as you might expect, there are several restrictions. Bond buyers must be at least 24 years old, and the tax break will apply only to bond proceeds used for tuition and required school fees--not for books or room and board. In addition, it will apply only to degree programs at colleges, universities and certain vocational schools.
Finally, the tax break can be used only by families and individuals meeting certain income standards. The upper limits are an adjusted gross income of $90,000 for couples filing jointly and $55,000 for individual filers.
Q: A recent column dealing with pension withdrawals and payments said the federal government had only one firm regulation regarding disbursements, namely that pension funds are required to start making disbursements to all participants at age 70 1/2, regardless of whether they are still on the job. I am over age 70 1/2 and still employed by the company in whose pension plan I am fully vested. I asked our corporate benefits manager about my pension payments and he says he doesn’t know what law I am talking about. Can you help?--J. A. M.
A: Yes, but you might not like the answer. According to our pension experts, the regulations covering mandatory pension distributions at age 70 1/2 were contained in the tax reform legislation of 1986 and are now part of Section 401(a)(9) of the Internal Revenue Code. However, this section of the law did not become effective until Jan. 1, 1989, and affects only those people who turn age 70 1/2 on or after Jan. 1, 1988.
People who turned age 70 1/2 before Jan. 1, 1988, are covered by the old law, which basically said that they were eligible to receive pension distributions at age 70 1/2 or when they stop working, whichever occurs later. So, if you turned age 70 1/2 before 1988, you are not eligible to receive any of your pension funds until you retire.
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.
