To Avoid Tax Bite, Know When to Take Parting Pay for Unused Vacation, Sick Days
Q. I plan to retire early next year, at which time I will receive about $30,000 for unused vacation and sick days. Is there any way to avoid or reduce the tax bite that will be taken out of this money?
--S.O.
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A. Your only recourse is to persuade your employer to pay the $30,000 to you over several years in the expectation that once you are retired, you will be in a lower tax bracket and therefore can stand to lose a smaller portion of this payout to Uncle Sam.
If your employer can’t go along with this, you can at least ask that the funds not be paid until the year following that in which you earn your last full annual salary, again a strategy to take this money in a year when you are more likely to be in a lower tax bracket.
One last bit of advice: You would be wise to collect these funds before receiving any Social Security benefits in order to prevent any aggravation and confusion arising from the payment. Why? You will need to explain that this money was earned while you were still employed, not after your retirement, and is therefore not subject to Social Security limits on retirees’ earnings. You’re completely in the clear on this matter, but unless you explain your situation clearly to Social Security representatives, confusion could arise and put your benefits in jeopardy.
Filing a Tax Form Will Correct Bank Oversight
Q. I have an individual retirement account at my local bank. I receive mandatory distributions, but because my income is so small, I have instructed the bank not to withhold federal income tax from the disbursement. However, because of an oversight, the bank withheld taxes on the last distribution. The Internal Revenue Service says it will not return my money and the bank will not give me a refund. I haven’t filed an income tax return for years because of my small income. How do I get my money back?
--C.G.
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A. You will have to break with tradition and file a 1040 tax return, noting the withholding tax on the IRA disbursement payment and claiming its refund. Unfortunately, you must wait until the beginning of the following calendar year, 1997 in your case, to claim withholding taxes paid in 1996.
Meanwhile, take steps to ensure your bank doesn’t repeat its error. If they pay you by check and it happens again, don’t deposit the check--try to have it reissued.
How to Maintain Your Tax Deferral
Q. I am being offered early retirement at age 50 and am thinking about moving into a smaller home in another state. How much money do I have to spend on a new home in order to continue rolling over my untaxed profit? Here is my situation: In 1974, I purchased a house for $50,000 and sold it for $165,000 in 1991, for a gain of $115,000. I purchased a home in 1991 for $305,000, which will probably sell today for $250,000, a loss of $55,000.
--J.M.
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A. The minimum amount you will have to spend on a new home to continue deferring taxation on your previous gain is the adjusted sales price of the house in which you currently reside, an amount you have estimated at $250,000. If you choose not to spend that amount, you should know that your tax basis in your house is $190,000, a figure arrived at by subtracting the $115,000 gain you deferred from the sale of your first home from the $305,000 you paid for your second home. If you do not purchase an additional home and sell your second house for your expected sales price of $250,000, you would have a taxable gain of $60,000.
Taking Tiny Settlement Is Better Than Nothing
Q. Help! We hold a second trust deed for $14,500 on a duplex we sold in 1993. The buyer was to pay us interest only for five years and repay the entire amount in August 1997. He stopped making interest payments in late 1995 and when we contacted him, he offered to settle the note for a crummy $500. We said his offer was entirely out of the question. The problem is that we cannot foreclose on the borrower because he owes the first lender $116,000 and the property is worth just $90,000 these days. Plus, he’s current on payments on the first trust deed. What can we do to get our money back?
--C.M.
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A. Your choices would appear to be severely, and sadly, limited to whatever amount you can negotiate out of your borrower. Although you may be angry and insulted at his offer of $500 to settle the note, it would have been wiser to respond with a counteroffer instead of an outright rejection.
At this point, take whatever amount you can get and write off the remainder as a bad nonbusiness debt. You can deduct the uncollected debt against any investment gains for the year in which you declare the debt uncollectable, as well as against as much as $3,000 of ordinary income. Undeducted losses may be carried forward to subsequent years and deducted in the same fashion.
By the way, our experts say the debt became uncollectable and your note worthless the day the borrower informed you he had no intention of repaying you its full amount. So unless you’re waiting for real estate to rebound, it would be best to begin the deductions now.
Carla Lazzareschi cannot answer mail but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com
