Establishing Tax Basis on Shares
Q: I own shares in General Electric. The stock has split twice on a 2-for-1 basis since I purchased it. To complicate matters further, I have reinvested my quarterly dividends in additional shares. I want to sell about half the shares I now hold. How do I figure the tax basis on these shares? --B.V .
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A: If you can readily identify each block of shares you want to sell, you should have no problem establishing your tax basis in those shares. You simply determine what you paid for them. Your quarterly statements clearly list the price you paid for each set of stock purchased with your reinvested dividends.
If those shares have split, their tax basis is half their purchase amount. Remember, you have paid taxes on the dividends already, so proceeds from shares purchased with those funds are taxable only to the extent that their value has increased since the date of purchase.
If your records are incomplete or, worse yet, nonexistent, the Internal Revenue Service--absent any information from you to the contrary--is likely to take the stance that you are selling the first shares you purchased. This is the “first in, first out” method of accounting.
Working Cuts Down on Social Security Check
Q: I will turn age 65 next year. I have been told that if I begin drawing Social Security benefits in January, the actual amount of my check will be increased when I finally reach my 65th birthday. Is this correct? --P.C.
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A: You may not have understood all of what you were told, so let’s run through the government’s rules. The critical issue in the question you pose is whether you continue to work while drawing benefits.
For the sake of discussion, let’s say your birthday is in July and you elect to begin receiving benefits in January. If you stop working completely, the benefit level you begin receiving in January will be permanently lower than if you had waited until the month you turn age 65 to begin benefits. Why? Simply because you began drawing benefits early.
If, however, you continue to work after filing for benefits six months early, how your Social Security benefits are affected will depend on your annual earnings. Social Security recipients between ages 62 and 65 lose $1 of benefits for each $2 they earn over $8,160 in 1995. Recipients between ages 65 and 70 lose $1 for every $3 they earn over $11,280 in 1995.
If your benefits are additionally reduced because of your earnings, you are entitled to some readjustment at the end of the year, even if you took benefits before your actual birthday. Why? Because you really didn’t receive as much in “early” benefits as you had originally signed up for. Believe it or not, the government does give back what it takes away if it turns out that you never got it anyway.
This complicated subject is explained in greater detail in Social Security Administration pamphlet No. SSA 05-10077. You can order it by calling (800) 772-1213.
Money Is Gone With Bankrupt Contractor
Q: My parents paid a contractor $17,000 as a down payment on a remodeling job. Then he filed for Chapter 7 protection under the Bankruptcy Code. Is there anything they can do to recoup their loss, or are they stuck? --D.P.
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A: The answer, sad but true, is that there is very little your parents can do except to file a creditor’s claim against the contractor with the bankruptcy court and stand in line with his other creditors.
Chances are the contractor has precious few assets to cover his debts. As a result, even after filing a claim, your parents are likely to recover only pennies on the dollar from the bankruptcy court, if that.
Your parents might also file a complaint with the California Contractor’s Licensing Board. However, the board is not empowered to recover funds, and it’s entirely possible that the contractor was not even properly licensed.
If your parents suspect that the contractor’s bankruptcy is fraudulent and that he is hiding assets, they could hire an attorney and challenge the filing. However, this could be costly and time-consuming.
IRA Distributions Are Cast in Stone
Q: I have already started taking the required minimum distribution from my individual retirement account using the single life expectancy tables. If my husband, the primary beneficiary of my IRA, dies, allowing my children, now my secondary beneficiaries, to take that position, may I recalculate my distribution using their life expectancies? --B.S .
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A: Once you have begun taking distributions under any method of payout, you cannot change it. Even if you were taking distributions based on a joint life expectancy of you and your husband and your husband dies, you still cannot recalculate your distribution based on the life expectancy of a new primary beneficiary. In such cases, the distributions automatically are based on the “single life” expectancy of the account holder.
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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
Helpful Tips For Coping With Credit Woes
* Maintaining good credit is as important as maintaining your good name in today’s increasingly cashless economy. If your credit record is a bit blemished, if you’re trying to avoid a credit crunch or if you just want to learn how to build a strong credit record, Times on Demand has compiled answers to some of the most-asked questions about credit from Money Talk readers. To purchase, call (800) 440-3441. Order Item No. 2843. To order by mail, send a check to Times on Demand, P.O. Box 60395, Los Angeles, CA 90060. Cost: $5.00, plus $1.00 delivery. Please allow two weeks for mail delivery.
