Q: I hold stock that recently split two for one. The price is now what it was when I first purchased the shares, so in effect I have doubled my money. I want to sell half of my holdings. If I sell half the shares, how do I figure my tax basis? Do I report the full amount I paid for the shares when I initially purchased them?
A: To figure the tax basis of your current holdings, you must divide the total amount you paid for the original purchase by the number of shares you now hold. In effect, your basis is half of what you originally paid.
For example, let's say you originally purchased 100 shares of stock for $1,000, or $10 per share. The shares split, so you hold 200 shares. Your tax basis in the shares, $1,000, is now spread among 200 shares, so the basis is $5 per share. If you sell the shares for $10 each--you say the shares are now worth what you paid for the original lot--you would have a $5 taxable gain per share, or $500 total. If you have held the shares for 18 months, you would be eligible to apply the new long-term capital gains tax rate of 20% to this profit.
When the remaining 100 shares are sold, the tax basis will also be $5 per share.
Q: Does the new capital gains tax rate apply to distributions from a 401(k) plan? Is the 10-year averaging of lump sum distributions from a 401(k) plan still available for taxpayers born before 1936?
A: The new capital gains tax structure does not apply to assets held in tax-favored savings accounts such as 401(k) plans or IRAs. This is the case regardless of the type of assets held by these retirement savings accounts. The tax law simply requires that disbursements from these accounts be treated as ordinary income.
Last year's tax law did not change the tax code provision allowing those born before 1936 to treat lump sum distributions from a 401(k) plan as though they were withdrawn evenly over a 10-year period.
Q: My company was recently acquired, and employees holding options were cashed out for the per-share price that was paid for the company's stock, minus the option price. When I received my cash-out check, I was shocked to find that my proceeds were subjected to all payroll withholding taxes, including Social Security and Medicare. Is that correct? If not, how can I best recover what is due me?
A: Stock options granted as part of an employee's work with a company are usually treated as ordinary wages when the options are exercised or, as in your case, cashed out. This means they are subject to all payroll withholding taxes, including Social Security and Medicare deductions. Why? Because the proceeds from the options are considered the same as your regular compensation. For more information, see IRS Publication 525, "Taxable and Non-Taxable Income," and IRS Publication 550, "Investment Income and Expenses."
By the way, stock options purchased on the open market by investors are governed by the rules for investment income. They are not subject to Social Security or Medicare taxes, and income tax withholding is not absolutely required when they are exercised.
Q: I would like to change the beneficiary of my IRA, now my husband, to my child. Can I?
A: You may change beneficiaries, but your husband will have to sign a paper indicating that he knows of this switch. Why? Because federal law requires that with married couples, spouses are each other's beneficiaries. When that assumption is not met, approval from the affected spouse is required to prevent any potential for deception.
Carla Lazzareschi will respond here to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail firstname.lastname@example.org