IRA Funds Can Be Out Just 60 Days
Q: I was recently laid off. When I received the proceeds from my 401(k) account, I transferred them to an individual retirement account. Later, I withdrew some of the money and lent it to my husband to invest in the stock market. Do I face any penalties? -- A.D .
A: You should face no problem if the money you lent your husband is repaid into your IRA within 60 days of its withdrawal. The law permits taxpayers to move their IRA accounts once every 12 months, as long as the transfers are completed within 60 days. What the taxpayer does with the money in those 60 days is irrelevant as long as the full amount is replaced in a qualified IRA account within the allotted time.
Some taxpayers use the transfer period to change their IRA investment strategy; others have been known to tap their IRA funds for a short-term emergency loan. In the end, it all comes down to timing: You have 60 days to replace the funds to avoid any early-disbursement penalty or tax assessment on the amount withdrawn.
Using Home Equity to Help the Church
Q: My church needs to borrow $150,000, but it cannot afford the steep interest rates charged for commercial loans. I am thinking about refinancing my home and lending the money to the church. Does this make sense? Do the tax laws permit this?-- F.N.
A: You should have no problem accomplishing your objectives. You would be allowed to deduct all the interest you are paying on your new mortgage as long as the interest payments you are receiving from the church (and declaring as income) are the same or greater than what you are paying the mortgage holder. Under these circumstances, there would be no limit on either the size of the loan you could make to the church or the amount of mortgage interest you would be allowed to deduct.
What does this mean? Let’s say you are paying 6.5% interest on a $150,000 note, or about $9,750 a year, and charging the church the same interest rate or a higher one. You would declare the interest payments you received from the church as part of your income and deduct your interest payments to the bank.
If you charge the church the same rate the bank charges you, the whole thing should largely be a financial wash to you. (Of course, the additional interest income you report could affect any Social Security payments you receive. In addition, the extra interest income will increase the adjusted gross income figure you use to compute medical and miscellaneous expenses.) If you charge the church a higher interest rate than what you are paying on the home loan, the “profit” would become taxable income. If you charge the church less than what you are paying, you might not be able to deduct the full amount of the mortgage interest.
Interest-Free Loan Must Go on Tax Return
Q: We made a no-interest mortgage loan to our daughter. Because of today’s low interest rates, any imputed interest we are forgoing is far less than the $20,000 annual gift we are entitled to make to her. Given this fact, is there any need for us to report this loan on our tax forms?-- R.W.M .
A: Even if there are no gift tax or imputed tax implications, taxpayers must report all loans of more than $10,000 when filing their income taxes. Why report something that apparently doesn’t matter? Because the government is interested in making sure it gets its full share of taxpayers’ investment earnings.
Taxpayers are permitted to make interest-free or low-interest loans of up to $100,000 without having to report the forgone interest as imputed, taxable income. However, if the borrower receives investment income (from interest and dividends) of more than $1,000 annually, the lender must report that amount as imputed interest, and it will be taxed at the lender’s marginal tax rate. Remember, Uncle Sam does not want taxpayers in lower tax brackets to get low-interest or interest-free loans while they are earning investment income that Uncle Sam cannot tax to the fullest extent.
Cashing Bonds Bought in Another’s Name
Q: In a recent column about U.S. Savings Bonds, you said banks offered a form called “Request for Refund of Purchase” to investors wanting to cash in bonds they intended to give to another person. My bank has never heard of this form. Is there some way I can cash in the bonds I bought for my daughter years ago?-- F.F .
A: The “Request for Refund of Purchase” form was available in California until a recent reorganization of the Federal Reserve System. Savings Bond transactions in the West are now processed through the Federal Reserve Bank of Kansas City, and those forms are no longer used. What is an investor to do? You should ask the bank at which you purchased your Savings Bonds to request--on official bank stationery--a refund from the Federal Reserve Bank of Kansas City (925 Grand Blvd., Kansas City, Mo., 64198-0001). If you purchased the bonds through a payroll savings program, you should ask your payroll department to make a similar request on company letterhead. The goal is identical; only the process has changed.
Luxury Tax Applies to ’93 Car Purchases
Q: I recently purchased a new car for $32,000, and the dealer charged me luxury tax on $2,000. I thought the new tax bill set $32,000 as the new luxury tax threshold. The dealer says the tax is still applied to all vehicle purchases above $30,000. Who’s right? Was I cheated? --V.R.
A: The new tax bill did set $32,000 as the new luxury tax threshold when Congress voted this summer to retain the tax on purchases of passenger vehicles, but to index it for inflation in $2,000 increments. You weren’t cheated, however.
Why? A bureaucratic blunder. When Congress passed the new tax bill, the luxury tax inflation adjustment was supposed to take effect Aug. 10. The final language of the law says, however, that the inflation indexing of the tax will begin Jan. 1, 1994. Although efforts are being made to clear up other, similar errors in the tax law, congressional staff members appear content to leave this one alone. The $32,000 threshold starts in January.
