Putting Your Dividends to Work Automatically
Q: In a recent column, you mentioned that one of the best perks shareholders can receive from their company is the right to reinvest the dividends they get without paying broker’s fees. Some companies, you said, even discount their stock for their shareholders. Can you tell me which companies offer this? --D.T.
A: More than 1,000 publicly traded firms offer dividend reinvestment plans to their shareholders, a service that has proven immensely popular with small investors looking for quick, easy and inexpensive ways of putting their dividends to work for them.
About 70% of the reinvestment plans charge no service fees to shareholders reinvesting their dividends, and about 15% of the plans offer discounts on the shares purchased with reinvested dividends. Further, nearly half of the companies allow shareholders to make cash purchases of additional shares as well as reinvest their dividends.
For a full listing of all the companies offering dividend reinvestment plans, as well as a detailing of all those offering discounts and optional cash purchases, consult the “Directory of Companies Offering Dividend Reinvestment Plans.” This book may be available in your local library or from your stock broker. Or you may purchase it from its publisher, Evergreen Enterprises, P.O. Box 763, Laurel, Md. 20725-0763. The price of $28.95 includes postage and handling.
Deducting Penalty for Early Withdrawal
Q: Several months ago, I purchased a one-year certificate of deposit. I would like to cash that in and buy a five-year certificate. Can I deduct from my taxes the penalty that I will pay? --B.M.
A: You may deduct the penalty as an “adjustment to gross income” if you file the 1040 long form. The deduction is not available to taxpayers filing forms 1040A or 1040EZ. On last year’s 1040, adjustments to gross income were entered on Line 28.
However, will you permit me one question? Why do you want to lock up your money for five years at today’s prevailing rates for certificates of deposit? It would seem more prudent to wait until rates rise to move into longer-term investments. You may well be better off sticking with your one-year certificate. But the choice is yours.
How Death of Spouse Affects Property
Q: I know that when one spouse dies, the community property the couple held is completely revalued as of that spouse’s date of death. Usually the property is worth more than when it was originally purchased so the revaluation is called a “step up.” But what happens if the asset has lost value since its purchase? Can a loss be declared if the survivor sells that asset? --R.F.B.
A: No such luck. You can’t have it both ways. Just as appreciated community property assets receive a complete step up in value upon the death of one spouse, depreciated community property assets are given a complete “step down.” There is no loss if you sell a depreciated community property asset immediately after the death of a spouse. A loss could be declared only if the asset continued to decline after its post-death revaluation.
However, if the depreciated asset is held in joint tenancy, only the half held by the deceased is revalued as of his date of death. The surviving spouse’s half retains its original tax basis. So, if the asset is sold immediately upon the death of one spouse, a loss could be declared because the half of the surviving spouse would retain its original tax basis.
This is why, our tax advisers say, it is always nice to hold your appreciated assets as community property and your depreciated assets in joint tenancy. However, before you rush out to change title to your holdings, it is not absolutely clear that this approach would be honored by the Internal Revenue Service. Check with a trusted adviser, such as your tax attorney or accountant.
Deducting Estate Taxes on Inherited IRAs
Q: My wife inherited her mother’s three undistributed individual retirement accounts in 1986. The accounts were included in her mother’s estate and were subject to estate taxes. When my wife cashed out the accounts, she had to pay income tax on the entire distribution. Isn’t this double taxation? I can’t get the same answer from all the experts and IRS officials I have contacted. --R.R.D.
A: Despite any appearances to the contrary, our experts say the matter was handled correctly. If your tax return was properly completed, you were not taxed twice.
Here’s what should have happened. When your wife withdrew the funds from her mother’s IRAs, she was also permitted to deduct a portion of the estate taxes paid on those accounts. This deduction is permitted under Section 691 of the Internal Revenue Code. Check your tax returns to see whether you took this deduction. If you failed to take this deduction, you may still be able to file an amended return and claim a refund.
The statute of limitations for amending your return is generally three years after the original return was due or filed, or two years from the date the tax was paid, whichever is later. Failure to file a claim within this time prevents you from receiving a refund, regardless of how valid your claim is.
By the way, the experts you consulted were perhaps confused because individual retirement accounts used to be excluded from the computation of the gross estate. That law was changed in 1984.
