Today's holiday edition of Tax Forum starts off with a question on transferring your house in the midst of a divorce. We'll also look at yet another wash-sale-rule issue: What happens when only half the position is sold? And we'll discuss why states can no longer hunt you down to levy a tax on your 401(k) withdrawals.
Anything else? Send your questions -- and full name -- to
My ex-wife is buying out my share in the former marital home for $45,000 at the closing, plus $4,000 a year for five years. Can you advise me how to handle this situation? I'm looking at purchasing a home or condominium. I'm a pilgrim when it comes to this sort of tax situation, and do plan on consulting an accountant. -- John O'Neil
We are all pilgrims when it comes to the tax code.
Ask your tax questions on the
Tax Forum board
Divorce is a sticky subject. On a positive note, since the transfer of the property is a result of your divorce, there are no tax consequences, says Martin Nissenbaum, national director of personal income-tax planning at
Ernst & Young
If the transfer to a former spouse occurs less than six years after the end of the marriage, it is treated as a gift for tax purposes, according to the
Research Institute of America
, an information provider to tax professionals. The receiving spouse gets the property at the original cost basis, or purchase price.
You won't need to worry about the $250,000
sale-of-home exclusion either, notes Nissenbaum.
Section 1041 of the tax code for more details.
Half a Wash Sale
I was wondering if it's possible to circumvent the wash sale rule by selling only half your original position in a stock? If I bought 100 shares of IBM (IBM) - Get Report on Nov. 1 and I sell 50 shares on Nov. 30, would I be able to add to my position in December, or would that be violating the wash sale rule? -- Beng Li
First, let me reiterate -- you never can circumvent the wash-sale rule.
If you sell those 50 shares at a loss and buy 50 more shares of IBM within 30 days, you will run afoul of the wash-sale rule, says Rande Spiegelman, a senior manager in
investment advisory-services group in San Francisco.
If, instead, you sold 50 shares at a loss and bought back 100 shares, the buyback of the first 50 would still disallow the loss.
If you need a refresher, here's the
link to our mega wash sale story.
Taxing 401(k) Distributions
I understand that a federal law was passed a couple of years ago that forbids states to tax withdrawals from retirement funds, like 401(k)s, simply because the taxpayer earned money that went into the fund while working or living in the state. Accordingly, state tax on 401(k)s is now determined by a taxpayer's residence at the time money is withdrawn. So, if I withdraw $100,000 per year from my 401(k) I can save $10,000 in taxes by avoiding California state income tax. Aside from Nevada, what states have no state taxes? Also, is it domicile or residence that determines what state's tax will be applicable? Or is it the address I put on my federal return? -- David Darman
, passed in January 1996, says that withdrawals from qualified plans -- i.e., 401(k), pension and profit-sharing plans -- can't be taxed by the state in which you earned them if you don't reside in that state, says Nissenbaum.
So if you spent your whole life working in New York and earned your pension there, New York can't tax your withdrawals if you live in New Jersey. You'll just pay New Jersey state income tax on that money.
Better yet, if you retire to no-state-income-tax Florida, you won't pay a dime on the state tax front on your withdrawals.
This wasn't always the case. States used to hunt you down to claim their money, says Nissenbaum. If you earned your pension in California and moved to Nevada, another no-income-tax state, California would have tried to tax your withdrawals.
If you're thinking of moving, the following states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Each state has different rules concerning domicile, so do some research. These rules should be detailed on each state's tax return
instructions. In general, though, your domicile is where you sleep and get your mail. You can have only one domicile, even though you may have more than one residence.
The length of time spent in one place doesn't always explain the difference between a residence and a domicile. Where you vote and where you have business and social ties also help determine your domicile.
But just because you're domiciled in one state doesn't mean you won't owe taxes to another. For instance, New York requires you to pay state tax if you spend at least 183 days there, regardless of your true domicile, so be sure to read the instructions closely.
Flexible Spending Account Reminder
If you're lucky enough to have an employer who allows you to have a flexible spending account, then you're able to direct a portion of your pay check to special accounts each pay period. That money can be used for nonreimbursed medical or child-care expenses. The best part is that the money in these accounts is not subject to federal income or Social Security taxes, and in almost all states, it skirts state income tax too.
The only downside is that these accounts have a "use-it-or-lose-it" stipulation. Any money left at year-end is forfeited.
Don't let that happen. Get out there and use that money by Dec. 31. Get your eyes checked, buy new glasses, pay for child care, or, as Nissenbaum suggests, go get corrective laser-eye surgery. (Believe it or not, that's not considered a cosmetic procedure, so it's a legitimate medical expense.)
You have to act fast, because in most instances, you have to incur the expense and have the receipt in hand before the year ends.
TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.