Why Sales Tax Can Be Applied Even to Items Offered for Rent
Q: Can you explain why the state charges sales tax on rental items? -- F.V .
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A: This is how the State Board of Equalization explains it: Companies that purchase equipment for rental can either pay sales tax on that purchase or levy sales tax on the rental fees they charge.
The choice is largely up to the business, and its decision is generally dictated by the way it wants to conduct its operations. Does it pay the tax and pass along the charge in the form of higher rental fees, or does it let its customers in effect pay it directly to the state over the duration of the equipment’s rental life? In most cases, as you’ve probably discovered, the company lets the consumer pay it directly at the time of rental.
In cases in which the rental company has no chance to pay sales tax on its rental equipment, or is both an equipment manufacturer and lessor, the state requires that sales tax be levied on the rental charges. Either way, the state wants sales tax paid on the equipment.
Figuring Distributions From Two Accounts
Q: I have both Keogh and individual retirement accounts that I will soon be taking distributions from. Do I figure my distribution on the combined balances in the accounts or in each type of account separately? --R.W.B .
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A: You should calculate the withdrawals separately for each type of account you have. All your IRAs can be treated as a single IRA, and you can calculate that distribution based on that total. But you should not combine your Keogh and IRA balances to calculate a single withdrawal amount. These rules apply no matter how old you are when you make your withdrawals.
Determining Worth of U.S. Savings Bonds
Q: I purchased a $5,000 U.S. Savings Bond in 1987. I paid $2,500 for it. What is it worth today? Should I continue to hold it? Or should I cash it in and reinvest the proceeds in something paying a higher interest rate? --D.P .
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A: Your local bank branch should have Savings Bond redemption tables available for your use. Or you may get your own by calling the Federal Reserve Bank of Kansas City at (800) 333-2919. This number is valid only for residents of the central and western United States; its lines are staffed from 6 a.m. to 3 p.m. Monday through Friday. You may also write for a copy of the table, at the Treasury Department, 200 3rd St., Parkersburg, W.Va. 26101.
That said, your bond is currently worth $3,968 and is due to expire 12 years after you purchased it, in October, 1999. When you purchased your bond, it carried a guarantee that is now paying you a minimum of 6% interest per year.
Can you do better than that? Remember that upon redemption, Savings Bonds are exempt from state and local taxes. In today’s interest rate environment, the 6% you are receiving on an account of that size, security, liquidity and tax status is quite attractive. Unless you have a pressing need for the cash, there’s probably no reason to sell the bond.
401(k)s and Income Averaging
Q: When I retired this year, I rolled my 401(k) account into an individual retirement account. This account is entirely separate from other IRAs I hold. I had intended to take a lump-sum distribution from the account in a few years, but now I am told that you can only take a lump-sum distribution from a 410(k) plan, not an IRA. Is this true? What can I do about it? --G.J.S .
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A: By depositing your 401(k) in an IRA, you basically lost the right to take advantage of the income averaging allowed for pension distributions. However, there may be a way around your problem.
Since your IRA is “pure”--that is, it doesn’t contain any funds other than your pension distribution and the interest it has earned--you may roll the account back into a qualified pension plan, such as a 401(k) or Keogh, and take a lump-sum distribution using income averaging.
You might be eligible to make this transfer if you were employed by a company that offered a 401(k) plan and permitted rollover contributions to it. Or if you have some self-employment income, such as from a consulting business, you could set up a Keogh plan and roll your IRA fund into that. The bottom line is that your lump-sum distribution must be taken from a qualified pension plan to take advantage of the income averaging.
There is one caveat: You are required to keep your funds in the second pension or Keogh account for at least five years to qualify for income averaging.
Your situation underscores the importance of fully understanding the ramifications of the various choices presented to you at retirement. Many companies offer special pre-retirement counseling; if yours is one of them, you should take full advantage of it. If not, there are myriad books available at your local public library or bookstore. A tax specialist or financial planner can also be of great service.
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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 phone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
