Don’t Bet on Interest on Excess Taxes Withheld

Q: Last April I won $7,400 at the track in Santa Anita. Before paying my winnings, the track withheld 20% for income taxes. I told them I would have no tax liability for the year, even including my track winnings. But they insisted on withholding the tax and told me I could get it back when I filed my tax return for 1990. By the time I get my tax refund, the government will have had my $1,480 for nearly a full year. May I file a claim for 5% interest, the money I would have earned if I had been allowed to take it? --J.M.

A: When withholding laws were stiffened several years ago, Congress made it quite clear that winnings at race tracks and gaming tables were subject to income tax withholding. Congress wanted to make sure taxpayers did not “forget” to include their betting and gaming winnings when filing their tax returns. By taking its share first, the government made sure taxpayers would report those winnings.

This puts the $1,480 withheld from your track winnings in the same category as taxes withheld from wages, investment sales and other income. Taxpayers who, for whatever reason, receive tax refunds are not entitled to receive interest on the money the government has used for the previous year. Delayed Rollover May Escape Penalty by IRS

Q: I invested my $3,470 retirement distribution from my previous employer into my new employer’s individual retirement account rollover program last June. Two weeks ago, I tried to get IRS documentation of the rollover, only to be told they had no record of the investment. I have since determined that my new employer has lost both the retirement rollover check I signed over, as well as all my IRA paperwork. Do I face a penalty from the Internal Revenue Service for exceeding the rollover period? I have copies of the lost paperwork.--A.T.

A: Our legal experts say they have seen similar situations in which the IRS has ruled both in favor and against the taxpayer. So there is no way to predict accurately how the service will react to your situation. However, perhaps there is no reason for the IRS to get involved at all.

Based on the facts you have provided, it would appear that your previous employer still has the retirement funds in question. If so, ask this company to void the uncashed check lost by your present employer and issue you a new one, presumably including any interest accumulated during the past nine months. Then you can deposit the check in your present employer’s IRA rollover program. If you meet the 60-day rollover requirement this time, you should be in complete compliance with the law.

Remember, the key reason this procedure is available to you is that your retirement funds are still in your previous employer’s account. If you had taken control of them, by depositing the distribution check into one of your personal accounts and writing a new check, then you would be held responsible for exceeding the 60-day rollover period and liable for taxes, and possibly a penalty for early withdrawal, on the funds.

Get Second Opinion on Declaring Capital Loss

Q: I’ve lost a substantial sum on subordinated debentures issued by Lincoln Savings & Loan because that institution collapsed. How and when can I declare my loss on this investment on my income tax report? --M.N.

A: The IRS has no set rules on when you can declare a capital loss, such as the one you suffered with your investment in Lincoln S&L; notes. The only guideline aiding taxpayers is that the loss must be declared when it can be “reasonably determined” that the investment is “wholly worthless.” If the investment has any residual value, or if there remains a reasonable chance that the investment could be salvaged, the taxpayer cannot declare a loss.

You would be wise to consult your tax consultant or financial adviser for an opinion on the value of your investment; this is often a tough call for the taxpayer to make unaided. If you are overly pessimistic, the government can force you to refile your tax return and can assess you a penalty for your judgment error. However, if you wait too long to declare your investment worthless, you could lose the writeoff entirely because the IRS imposes a three-year statute of limitations on capital loss deductions. Whatever you decide, you should be prepared to support your conclusion if challenged by the IRS.

How do you make the deduction? This part is quite simple. You are allowed to write off the full extent of any investment gains in a single year with your investment losses. If your losses exceed your gains in that year, your remaining capital losses may offset up to an additional $3,000 of ordinary income in that year. Any remaining capital losses must be held over to following years to be used in the same fashion.

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