Martin Nissenbaum hosted a Q&A session on TheStreet.com's Message Boards on April. 12. Here is the transcript of that event. As with all transcripts, the following text is unedited.
TSC Moderator Laura Poynter
Welcome to the Q&A with Martin Nissenbaum. Martin is here and we'll be starting momentarily. Feel free to continue to post questions while Martin is on the boards. Refresh often to see his responses.
Hi, this is Martin Nissenbaum and I'll try to answer your questions this afternoon. Plenty of time left until Monday!
My wife was fortunate(?) to receive options from her company some of which she exercised. (1000 shares at $70.) We were unable to sell the shares but now owe amt of approximately 17000. If we don't owe any amt next year and we continue to hold the shares will we be able to take a credit for the amt tax we paid this year? The shares are now at approximately $7 and dying.
The AMT you paid will be creditable in a subsequent year against your tax to the extent it exceeds your AMT in that year. The balance can be carried forward and used perpetually. Remember that when you sell the stock your gain (hopefully) will be higher for regular tax purposes than for AMT purposes so you will actually be allowed a negative adjustment in calculating your AMT. So your Amt should be a lot lower than your regular - allowing you to use more of your credit. If this happens in 2000 (you exercise an ISO and the stock goes down) consider disposing of the stock in 2000. That would result in your option being treated as nonqualified so that there would be no AMT consequence.
Are OEX options treated as Section 1256 tranactions? Is the OEX considered by IRS to be equity options or nonequity options? -- Gregor Ralston--no current position.
Any option on broad-based stock indexes (S&P, etc) and options on stock index futures are nonequity options. A nonequity option is a 1256 contract for a dealer or investor. The IRS has specifically ruled taht an option on the High Technology Index of the Pacific exchange is a nonequity option.
Mr. Nissenbaum: Could you please explain how to fill out the Form 3115 for Traders who elected to mark to market last year? The instructions do not specify whether you need to change from cash to accrual or hybrid? They also do not specify what pages & sections you have to fill out. Thank you.
You are changing from cash basis to market basis accounting. The IRS has suggested using Rev. Rul 93-76 as a guide but that ruling is not simple to follow. I would suggest that you refer to www.tradertax.com for more specific information. On that site, you'll find access to "2000 Trader Tax Return Examples Guide" which explains, analyzes and gives you a copy of a sample Form 3115 for traders.
Hi There, Can I please have your help in regards to dividends paid out while I had shorted a stock? Here's the scenario: I shorted a stock. While the stock was short, it had gone ex-dividend. The dividends were taken out of my account by my broker for payment to the actual shareholders. How do I handle these dividends which had been paid out of my account while I had shorted the stocks? Thanks for your time and help. -- Malcolm Lui -- 100% in Cash (for now at least)
It depends on how long the short was open. If it was less than 46 days, you can't deduct the payments, you have to capitalize them. If the cash dividends being reimbursed equal or exceed 10% of the amount realized on the short (an extraordinary dividend) then you have to capitalize the payments unless the short is open for at least 366 days. If the short was open for 46 days (366 for an extraordinary dividend) or more, then the payment is deductible as an expense for the production of income. If you earned income on the collateral you provided in a short, you can deduct the dividend paid to the extent of the income even if the short was open less than 46 days. (This exception does not appply to an extraordinary dividend.)
With a SIMPLE, contributions withheld from the employees' pay must be contributed to their accounts by the end of the following month. For the owner, an unincorporated sole proprietor, must his contribution for 1999 be contributed by January 31, 2000? --
In a SIMPLE IRA where the contribution is nonelective, those contributions can be made up until the filing date for the return for the year (including extensions).
Does anyone have any thoughts on whether is a good/ bad idea to trade in a corporate account (Sub CHAPTER S) as a trading business ? vs sched C type deductions. Arty Lench
You probably do not want to trade in a corporate form, especially when you use margin. You don't get basis for margin debt incurred by the corporation so that your ability to deduct losses may be limited. Also, if you distribute appreciated securities from an S corporation, you'll trigger gain even though you haven't sold the stock. If you're concerned about reporting your activities on a Schedule C on your return, you might want to consider establishing a trading partnership so that all items of income and expense flow through to your return on Schedule E, which is less glaring. Trading entities are generally in the form of a partnership.
I'm trying to determine the cost basis of stocks held in a DRIP plan. Account set up fees, service fees and trading fees are either deducted from the amount invested or listed as paid by the company. Are all of these items then additions to the cost basis of the underlying stock? Do the company paid amounts only count as additions if listed as a dividend on a 1099 div?
You should be able to add your basis any expenses which you incurred directly. Any expenses which were deducted from the reinvested dividends but where you were taxed on the gross dividend should also be added to your cost since they were paid with after tax dollars.
I purchased with after-tax dollars a variable annuity several years ago, not for a retirement account. An online tax program wants me to pay a penalty for cashing it out last year prior to age 59. I thought I should be paying tax just on the gain. How do I correctly report this?
You do have to pay a 10% penalty if you cash out an annuity prior to age 59 1/2 on the amount of income included as a result of the cashout unless an exception applies. You report the penalty in Part I of Form 5329. Exceptions apply for death, disability, and substantially equal periodic payments. The exceptions that apply to IRAs such as higher education, home purchase and medical insurance, don't apply to annuities.
I've got a big problem. OK, I started trading full time in May 99 and I was given bad advise about being able to mark-to-market my trades for 99. So I missed the April 99 mark-to-market deadline and I did not calculate any wash sales. I'm now finding it impossible to calculate wash sales for 1000+ trades in the same 50 stocks! I plan to declare trader status in 99' because I meet those rquirements, I have an office, datafeeds, trade everyday and have no other income. My question is: Will the IRS flag my return if I don't do the wash sales? What if I also claim trader status and take the associated tax benefits? My reason for not calculating wash sales is that I don't believe I have any pratical ability to do them correctly, there are too many and my 1099 will wind up not matching my Scedule D. Also, based on the sales I have calculated, the wash sales have not affected my tax due as I had a winning year and did not repeatly lose money in one stock. Any thoughts or comments would be appreciated, Thanks SC
Remember, as some others have suggested, all of the wash sale losses come out in the "wash" (pun intended)for positions that you had closed by the end of November (even though you technically may report each one incorrectly). So all losses on those transactions would be allowed. So focus on your open positions and match them to loss transactions you had within 30 days prior to see which might still be disallowed. Be careful about reporting the correct amount of allowable losses, the IRS will be a bear on traders who try to cut corners.
My brother who is not a US citizen nor resident and who lives in his home country has over $20,000 in a brokerage acct. with a discount broker through a money manager. The brokerage company has sent the above mentioned form with the following info: Income code 01 (interest paid by US obligors), Gross income paid $442.60, tax rate 30%, US Federal Tax Withheld $132.74 and then it gives the two letter code for my brother's home country. Income code 06 (dividends paid by US corporations), Gross income paid $147.45, tax rate 30%, US Federal Tax Withheld $44.24. What does he need to do with this form? He needs to pay taxes on dividends as I understand, does he need to pay taxes on interest? Rosa Gotcher.
Nonresident aliens are subject to 30% withholding on US source income not connected with a US trade or business. This would include interest and dividends. Your brother doesn't have to do anything unless he believes that the rate for his country sould be lower as a result of a treaty provision. Presumably he can use the US tax as a credit on his native country tax return.
On schedule A, can I include the state taxes I paid during 1998? Also, is there a way to carryover charitable contribution from 1998? I was not able to take that deduction because my itemize deductions were lower than standard. thanks.
You can only deduct state and local taxes in the year paid or withheld. So taxes paid in 1998 can only be deducted in 1998. Charitable contributions can't be carried over from a year in which you took the standard deduction. Sorry.
TSC Moderator, Laura Poynter
Martin Nissenbaum has been with us answering your tax queries. His posts can be seen are on the board. Keep an eye on the site for a transcript of this afternoon's event. Thanks for joining us. TSC Moderator, Laura Poynter.