Ask to See Social Security Records
Q: How can a taxpayer find out if all Social Security contributions withheld from his paycheck are properly recorded on his records?-- T.B .
A: There is a fairly easy way to find out whether your Social Security account is at the level it should be. The same procedure will also tell you how much you can expect to receive from Social Security upon retirement. Simply call (800) 772-1213. This toll free number accepts calls from anywhere in the 50 states 7 a.m. to 7 p.m. Monday through Friday, regardless of the caller’s time zone. Ask for Social Security Form SSA-7004, “Personal Earnings and Benefit Estimate.”
When you get the form, which asks your birth date, Social Security number and a few other questions, complete it and mail it back to the enclosed address. The Social Security Administration will then send you back a listing of your Social Security-qualified employment earnings and expected retirement benefits.
Figuring Tax on Sale of ‘Capital Assets’
Q: How do taxpayers figure their tax obligations when they sell personal collections of stamps, coins, pictures and furniture?--T.T.R.
A: The taxable gain from the sale of such “capital assets” as furniture, art work, stamps and coins is calculated by deducting your actual cost of the asset from your sales proceeds. The face value of coins and stamps is completely irrelevant, unless, of course, it happens to correspond to what you paid for the asset. Your profit from the transaction is considered a capital gain, and under current law is subject to a maximum of 28% tax assuming the assets were held for at least a year. Taxpayers in the 15% tax bracket would be subject to a 15% tax on the profits from the sale.
‘Bargain Sale’ Involves Complicated Tax Issues
Q: I purchased a rental 15 years ago for $75,000 and am now considering selling it for that same price to my son. However, the fair market value of the house is about $350,000. Does this deal pose any special problems to either me or my son?-- A.T.R .
A: The transaction you have suggested is what the IRS already knows as a “bargain sale,” or sales for less than full market value. If you enter into such a deal, you will have to follow a set of complicated IRS rules. Because the IRS considers such transactions part sale and part gift, this leaves you liable for taxation both as a seller and donor.
You would be wise to consult a tax attorney or accountant for professional advice before proceeding with your plan.
Amend Tax Return to Rescind Exemption
Q: I am over age 55. When I sold my home last year, I invoked the one-time exclusion of $125,000 in profits. Now I think I may have made a mistake since I did not take full advantage of the entire $125,000 deduction. May I rescind this exclusion, pay any capital gains I owe from the sale and invoke the exclusion at a later time?-- G.F.I .
A: You may amend your tax return within three years of filing it. And IRS rules allow you to revoke your use of this special exclusion within those three years. If you were married at the time you used the exclusion, your spouse must concur in the revocation, whether or not you are still married. However, to be eligible to use the exclusion, you must purchase a new home and live in it for at least three years.
Further, before rescinding your exemption, you should also be sure that any gain you might receive upon its sale will be greater than that you recently realized. Otherwise, you are wasting your time and potentially your full potential benefits.
Your question points up an important feature of the exclusion, and one that anyone over age 55 should consider before using it. The $125,000 profit exclusion is available to an individual over age 55 only once in a lifetime and it is considered used whether or not the full $125,000 is sheltered from tax.
So if you do not have $125,000 to shelter, and you think you might from the sale of another residence in the future, think twice before you invoke the exclusion. Unless you rescind its use within three years of filing your tax return, the exclusion is gone for good.
Deduction Guideline for Home Equity Loans
Q: Does the interest on home-equity loans remain fully tax deductible, or does the interest deduction apply only to first and second mortgages? With all the recent tax law changes, I am thoroughly confused. What’s going on.-- P.B .
A: Under the Revenue Act of 1987, deductible mortgage debt is divided into two categories: acquisition debt and home equity debt. Acquisition debt is simply the mortgage you incur to either purchase, build or substantially improve your primary or second home. This type of debt also includes refinancings of earlier mortgages.
Home equity debt, like mortgage debt, is also secured by your residence. However, the proceeds from the loan need not be used to acquire, build or improve the house in order to remain deductible.
Interest on a home equity loan is fully deductible so long as the loan does not exceed the lesser of $100,000 or the fair market value of your home minus the acquisition debt. In the latter case, you would be allowed to deduct the interest only on a loan of $70,000 if the market value of the home were $140,000 and you already had a $70,000 mortgage on it.
One last note: Uncle Sam limits your acquisition mortgage interest deduction to a total of $1 million in mortgages if the debts were incurred after Oct. 14, 1987. There is no ceiling on the interest deduction for mortgages taken before that date.
