Explaining Overvalued Prize to IRS
Q. My son won round-trip air fare and five nights’ hotel lodging in Hawaii from a radio station last year. The value placed on the package for tax reporting purposes was $2,000. It later turned out that he received only the air fare and no lodging. Can he argue to the Internal Revenue Service that the value of the prize is less than what the radio station is claiming on the 1099 form it sent him? --C.S .
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A. Your son should be able to present his case successfully, providing he follows proper procedure. For starters, he should report the same value of the prize as is listed on the 1099 so as not to send up a red flag to the IRS computers with a mismatched 1099 and tax form entry. Then, he should attach a note to the form explaining why the prize is not worth the value claimed by the radio station. He should offer evidence of comparable air fare prices and hotel accommodations to buttress his computation of the prize’s actual value. He should compute his taxes based on the value he decides to attach to the prize.
Home-Equity Loan Interest Is Deductible
Q. My daughter will be entering college next fall. If we take out a home equity (loan) or second mortgage on our house to pay tuition, will the interest on the loan be deductible? --L.J.L .
A. Interest on either a home-equity loan or a second mortgage is deductible up to limits set by the federal government. You may deduct interest on home-equity loans (including second mortgages) to the extent that the total non-purchase borrowings on your home do not exceed $100,000. Please note, this $100,000 figure does not include the amount of your home purchase debt, your first mortgage. It includes only any debt you have subsequently taken on and for which you are pledging your home as collateral.
What does this mean? If you have a $50,000 second-trust deed on your home already, you are now limited to only an additional $50,000 in borrowing for your daughter’s education if you want the interest on that loan to be fully deductible. If you have no additional debt on your house, you may borrow the full $100,000 and deduct the entire amount of interest.
Put Refinance Cash in State Tax-Free Fund
Q. We have just refinanced our home and are planning on using the money we pulled out to purchase a rental property. We are wondering where we should invest the money until we actually make the purchase to get the highest return with the greatest liquidity. A money market fund? A 90-day certificate of deposit? An ordinary bank account? --A.L .
A. You didn’t say what tax bracket you are in, and that is an important consideration. But assuming that you are in the 28% or higher bracket, our experts say you would be wise to consider a California tax-free money market account operated by a mutual fund. These funds invest in California municipal bonds, and their earnings are free of both state and federal taxes to California residents. This type of account gives you liquidity, tax-free income and relative security.
Selecting a fund shouldn’t be difficult. The financial sections of most newspapers, including this one, regularly run lists of mutual funds and their current returns. Business and investing magazines regularly rank mutual funds according to their types and performances. Virtually all double tax-free funds, as California municipal bond funds are called, charge no initial enrollment fees, or loads. But many do charge so-called 12b-1 fees, and you might want to avoid those funds. The assessments, named after a section of the Securities and Exchange Commission regulations, are used to cover the promotion expenses of a fund. Be sure to inquire about these fees before making any investment.
Account Transfer OK Sans Employer Consent
Q. I participate in a 403(b) plan and am interested in transferring my account to a mutual fund operator that is not included on my employer’s list of approved funds. May I do this? Would the answer be any different for a retired employee? Can the principal be split between two different funds? -- B.W .
A. Internal Revenue Service Revenue Ruling No. 90-24 permits the transfer of all or part of a 403(b) account to another annuity or mutual fund account without the consent of the employer--with one significant exception. Employees participating in the TIAA-CREF retirement plan are not covered by this ruling and are not permitted to make such transfers. This ruling applies to employees and retirees alike. You may split your retirement savings among as many accounts as you wish.
According to Thomas Lancaster, a retirement planning specialist with Capital Resources in Lake Forest, employers and those who operate their retirement plans are not anxious for employees to exercise the full range of choices at their disposal because of the obvious complications and investing problems that could ensue. But if you are determined to act on your own and ignore whatever “professional” retirement advice your employer is providing, you can ask that your account be directly transferred to the fund of your choice.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles CA 90053
