Most Major Brokerages Insure Accounts
QUESTION: The 190-point market drop on Friday the 13th made me wonder about the safety of my holdings with my local broker. They say our accounts are insured, but do I really have any protection? I can’t afford to start over again. --A. R.
ANSWER: Yes, if your broker is truly insured, you probably do have the protection you need, even if you keep your holdings in your broker’s name and your broker goes out of business.
Most brokerages are members of the Securities Investor Protection Corp., a Washington securities insurance agency that insures each trading account held in the broker’s name for up to $500,000. Further, many large brokerage houses carry additional insurance on their own. So, if you keep your holdings in “street name,”--that is, in the name of the brokerage house--your account is probably covered by SIPC insurance up to a maximum of $500,000 if your brokerage house should fail.
Of course, if you hold your stock certificates in your safe deposit box or other location, you are in no danger of losing your investment if your brokerage goes out of business. You, no doubt, realize that this discussion does not take into account the performance of your stock portfolio. If your investments head south, no amount of insurance if going to be of any help.
When to Put Money Into Tax-Free Funds
Q: On average these days, regular money market funds pay about 3% to 3.5% more interest than California tax-free money market funds, whose interest payments are exempt from both state and federal taxes. At what tax bracket should taxpayers invest in a tax-free rather than a regular money market fund? --H. S.
A: So-called double tax-free, so named because they are exempt from both state and federal income taxes, are the most advantageous, say our advisers, to those taxpayers in the highest tax brackets. According to these experts, a taxpayer should not consider these invest ments unless he is at least in the 28% marginal bracket on the federal return and the 6.7% bracket for state taxes, for a combined marginal rate of 34.7%.
At this combined rate, an 8.9% return from a conventional money market investment (about the best rate available these days) is equal to a 5.78% return after taxes of 34.7%. Using this formula, a double tax-free money market fund paying at least 5.75%, which is about the best rate available these days, becomes a sensible investment.
If you are in a lower tax bracket--and determined to invest in a money market fund--you are probably money ahead investing in a fund whose interest payments are taxable. You will have more after-tax money left than if you invested in a double-tax free fund.
Splitting Up Taxes on Inherited House
Q: Earlier this year, my two brothers and I sold a piece of property we had inherited from our mother, who died four years ago. The escrow company sent me a 1099 form reflecting the full sale price was $250,000, yet I personally received less than $40,000. I tried to tell the escrow company that they were attributing a greater proportion of the sale to me than was correct, but they wouldn’t budge. Do I have to report the full $250,000 proceeds on my tax form? This does not seem right. --R. J.
A: It would seem as though you were the lead partner on this deal and that your Social Security identification number was the one used. So, yes, you will have to report the sale on your tax form. But this does not mean you have to pay taxes on the gains received by your brothers.
According to our experts, here’s what you have to do: First, subtract the amount of the fair market value of your mother’s house on the day she died from your net proceeds on the sale. (You can hire a professional appraiser, who can determine the fair market value value.) Then divide the remainder among you and your two brothers. You should show your one-third share as income.
Here’s how it would work: Let’s say net proceeds from the house sale were $225,000 and its value at your mother’s death was $150,000. You have a total reportable gain of $75,000, or $25,000 for each brother.
You should complete Schedule D with the computations for your one-third share of the gain. Attach a note explaining that the remaining two-thirds of the profit was shared with your brothers. Give their names and Social Security numbers. To be on the safe side, you should as well issue 1099 forms to your brothers, showing their individual share of the profits.
Social Security Taxes, Benefits to Increase
In case you missed the bulletin earlier this week, Social Security payments will increase 4.7% in January, a hike that will boost the average retired worker’s pension by $25 a month. The annual cost-of-living adjustment, the largest in 7 1/2 years, mirrors the inflation rate for urban wage earners and clerical workers from the third quarter of 1988 through the same period this year. The increase will show up in checks delivered Jan. 3, 1990.
The maximum amount of job earnings that a Social Security beneficiary age 65 through 69 can receive without reduction in benefits will increase from $8,880 to $9,360 for 1990. There is no limit above age 69. Beyond $9,360, benefits will be reduced $1 for every $3 earned (instead of the current $1 for every $2 earned). For a beneficiary under 65, the maximum earnings without penalty will increase to $6,840 from $6,480, with a reduction of $1 for every $2 earned.
The Social Security Administration also announced that Social Security taxes paid by wage earners will increase next year. The maximum amount of earnings subject to the tax will rise to $50,400 next year from the current $48,000. At the same time, the tax rate will increase to 7.65% from 7.51%. The total effect of the two increases means the maximum tax paid by workers will jump by $250.80, to $3,855.60. Employers match their workers’ contributions.
Tax rates for the self-employed rise to 15.30% from 13.02%, but half of the taxes paid by the self-employed can be deducted as a business expense. The wage base is the same as for other workers.
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.
