Clocks Ticking on Quake Repairs

Q. Like many victims of the earthquake last January, we stand to receive a large insurance settlement to rebuild our home. However, an attorney recently told us that we must pay taxes on these funds. Is this true? It hardly seems fair. --W.B .

A. Under Internal Revenue Service rules governing casualty losses and insurance reimbursements, settlement funds promptly reinvested are not subject to income taxes.

How much time do you have to spend the money? When an event has been declared a national disaster by the President, as was the case with the Northridge earthquake, a taxpayer has four years to reinvest any insurance proceeds received to repair or replace a personal residence and personal property.

The clock begins ticking at the close of the tax year in which the insurance funds are received.

Ex-Spouse Hits Social Security Snag

Q. I am a 65-year-old divorced woman who was married for more than 20 years. I receive a pension of $1,400 per month. My ex-husband receives about $1,000 per month in Social Security benefits.

When I applied for spousal benefits on his account, I was told that because two-thirds of my pension exceeds 50% of his, I will not get any spousal benefits. Can this be true?-- A.C.K .

A. Yes, it can be true if your pension is from a public agency.

Under federal law, recipients of a government pension are subject to what is called the government pension offset, which can reduce any spousal Social Security benefits you are otherwise entitled to by two-thirds the amount of your pension.

In your case, two-thirds of your $1,400 monthly pension is $924, nearly twice the $500 you would be entitled to receive as spousal benefits on your ex-husband’s Social Security account. (Remember, spousal benefits are half those of the primary wage earner.)

However, all is not lost. Although you will not actually receive any Social Security benefits on your ex-husband’s account, you are technically eligible for them as the ex-spouse of a recipient. As such, you remain entitled to Medicare benefits through that account.

Figuring Capital Loss in Stock Transactions

Q. Over the years I invested about $10,000 in a particular stock. Many of those purchases were made with reinvested dividends.

I recently sold the shares for about $8,000. My loss, including broker’s commissions, will exceed $2,000. How do I figure my capital loss, given the fact that I paid taxes on the reinvested dividends?-- L.C .

A. You figure your losses as you would if you had made the purchases all at once.

Simply add up your total investment in the stock: original purchase plus all reinvested dividends. This is your out-of-pocket cost, or cost basis in the stock--all of it after-tax. Now deduct your proceeds from the sale. Add in your broker’s commissions. The result of this computation is your capital loss.

Mutual Fund Trust: Just Keep a Record

Q. I have opened mutual fund accounts for my grandchildren under the California Uniform Trusts for Minors Act. Over the last few years, these accounts have produced small dividends and capital gains--so small that they do not exceed the $600 amount that minors are allowed to get tax-free each year.

However, in 10 or 15 years, these accounts could have grown substantially. How do I demonstrate to the IRS then the incremental nature of this growth if no tax return is filed? I have been preparing a dummy tax return for each child each year and filing it away. Is this necessary? What else should I do?-- A.C .

A. You are being very conscientious--and perhaps putting yourself to more work than necessary.

According to our experts, it is necessary only for you to keep adequate records demonstrating the gradual increase of these funds. You do not need to prepare dummy returns. Simply recording the value of the funds as of the beginning or end of each calendar year should be sufficient until the time comes when your grandchildren have sufficient taxable income to declare.

Inherited Stock: Calculating Taxes

Q. When my mother-in-law died in 1991, we inherited stocks worth about $200,000. These are now worth $300,000 and we intend to sell them. On what amount do we owe taxes? What form do we use to show that we inherited the stocks and that they were worth $200,000 as of that date?-- L.G.L .

A. You owe taxes on the $100,000 that the stocks appreciated in the three years since your mother-in-law’s death. There is no specific form you must use when you file your taxes to demonstrate your inheritance. Simply list your mother-in-law’s date of death as the acquisition date of the stock on Schedule D.

Should the IRS ask you any questions about that date, you should be prepared to show evidence of your inheritance of the shares and their value as of that date.

If your mother-in-law’s estate went through probate, those records will provide the evidence you need. If the estate was appraised for any reason, those records are ample evidence as well.

In a pinch, you can gather newspaper stock market listings from her date of death to show the value of the shares when you inherited them.