Excess Savings May Still Be Insured

Q: I goofed and allowed more than $100,000 in savings to accumulate in a bank that recently failed.

If the bank’s insurance does not cover the excess and I lose the money, may I write off the loss? Is there anything I can do or place I can appeal to prevent the loss of that money? --E.L.Y .

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A: You should consider any loss a non-business bad debt. You may write it off against any capital gains you have from investments, with any excess deductible against up to $3,000 of ordinary income per year.

Of course, despite the size of your account, you may still qualify for full insurance protection. It all depends on how many accounts you have, the type of accounts and how the accounts are held.

Insurance coverage rules are detailed and complicated. The Federal Deposit Insurance Corp. publishes a free pamphlet explaining the rules to consumers. Send a postcard requesting the pamphlet to the FDIC’s Consumer Affairs Division, 550 17th St. NW, Washington, D.C. 20429. Consumers may also call the FDIC Consumer Hot Line at (800) 934-3342.

Rules on Claiming a Home Profit Exemption

Q: My late husband sold a house prior to our marriage and used his $125,000 profit exemption. Now I am about to sell my house. Am I entitled to use my $125,000 exemption or did I lose it because I married someone who had already used his?

Also, I briefly rented out my house several years ago. Does this ruin my ability to use the exemption? --F.P .

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A: Assuming that you never used a $125,000 exemption in the past, now that you are a widow, you are entitled to claim one. As long as you were married to someone who had already used an exemption--even though it was prior to your marriage--you were not entitled to one.

But now that you are single, and assuming no prior use, you may claim the exemption so long as you meet the qualifying criteria.

You must own the home you are selling; it must be your principal residence, and you must have lived there for three of the last five years.

Community Property Weighs on Trust Value

Q: My wife and I have a revocable trust and have put all of our property into it. Will those assets be revalued as of the date of death of one of us?

These assets are community property, but I am unsure if the fact that they are held in a revocable living trust affects whether they qualify for a step-up in value. Please help.-- B.H.M .

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A: If these assets are truly community property, the fact that they are now in a trust changes nothing. They should be treated to a full step-up in value upon the death of one of the spouses.

Merely establishing a trust for your assets does not change their essential nature. And, in fact, common language used in most trust documents clearly states that the assets in the trust retain the character they had prior to the establishment of the trust.

Gift Tax Limits More Taxing Than They Seem

Q: In a recent column, you discussed the amount a couple could give to their son and his wife without triggering gift tax consequences. I am a single woman without parents or children. How may I take advantage of giving $10,000 to someone?-- S.P .

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A: Any taxpayer, regardless of marital status, may give any other taxpayer up to $10,000 per year without setting off gift tax consequences. There are no limits on the number of people you may shower with your generosity each year, but there is a ceiling on the amount you may give away without tax complications.

But what does this really mean? Contrary to some mistaken beliefs, giving away $10,000 to a family member or friend does not entitle you to a $10,000 tax deduction. These gifts are not charitable contributions.

Rather, they are gifts you make with money on which you have already paid income taxes. The recipient pays no taxes and does not have to report its receipt.

The benefit, such as it is, to the donor is that these annual gifts of up to $10,000 are not considered a part of the $600,000 all of us are allowed to give away over our lifetime (and at death) outside of the grasp of estate taxes.

So, to the extent that your estate will exceed $600,000, you may want to give it away in small chunks before death to keep Uncle Sam from getting a piece of it.

However, giving away more than $10,000 to any one person in any single year is hardly the end of the world. If you do this, you are required only to file a gift tax report to the Internal Revenue Service, which results in the amount over $10,000 simply being deducted from your $600,000 lifetime exemption.

No additional taxes are levied immediately for this burst of generosity. But if you exceed your $600,000 lifetime exemption, the excess in your estate will be subject to estate taxes.

Cut Bond Liability by Staggering Redemption

Q: I have several Series HH savings bonds that will soon mature. Because these bonds were purchased by rolling over proceeds from Series E savings bonds that were never taxed, I face a tax liability on $675 of every $1,000 bond I have.

How can I cash in these bonds and pay the least amount of income tax? --N.N.P .

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A Your only option is to stagger the redemption of the bonds over several years to insure that their proceeds do not push you into a higher income tax bracket or force you to pay more taxes on any Social Security income you receive.