This is a week of reminders. These are things you may already know, but with the year almost over, sometimes you just need to hear them again. So we have capital-gains rates, kiddie tax rules, moving rules and a few more Roth IRA conversion tips.
Anything else you'd like to know about our ambiguous tax system? Send your queries and meditations to
firstname.lastname@example.org and please include your full name.
I Want My IRA Deduction and Roth
I currently have a regular IRA with only about $500 in it. I plan to contribute $2,000 for the 1998 tax year and take that deduction on my taxes. I intend to put the money into a LEAP option and hopefully will have substantial gains after a year or so. I then plan to roll it into a Roth IRA and don't want to get hit with the tax bill upon conversion. So I want to roll into the Roth IRA as soon as possible, before my investment starts to appreciate and generate a large tax bill. The reason I'm not setting up the Roth now is because I want to take the IRA deduction and lower this year's tax bill. If I take the deduction for the regular IRA, how soon can I roll into the Roth IRA?-- Tom Stauckas
There is nothing written in all the
Internal Revenue Service
annals that prevents you from contributing $2,000 to your IRA in 1998 and then rolling that traditional IRA to the Roth.
Remember, though, that if you wait until 1999 to convert, you will have to pay all of the taxes due that same year. You won't be able to spread the taxes over four years as you would if you rolled the account in 1998.
So it might be worth it to convert in '98. "That $2,000 deduction pales in comparison to your ability to spread the income out over four years," notes Rande Spiegelman, manager of investment advisory services at
What Are the Capital-Gains Rates?
With all the changes we've had, what is the tax rate on capital gains on stocks for 1998?-- Rick Pallavicini
I don't blame you for being confused. And this is something that we can't reiterate enough: For stocks held at least 12 months and a day, any gains at the time of sale will be taxed at the long-term preferential rate of 20%.
Any gains generated from sales of securities held less than a year will be taxed at your ordinary tax rate.
Fortunately, it's not as complicated as last year, when there were additional interim rates.
More Than One IRA
Can you have a Roth IRA when you have a SEP IRA and a Keogh?-- Chris Gilbert
If you have a SEP IRA, a Keogh or a 401(k), you also can have a Roth IRA as long as your adjusted gross income is below $95,000 if you're single (contributions are phased out up to $110,000); $150,000 if you're married (contributions are phased out up to $160,000); or $10,000 if you're married and filing separately.
I understand the benefit of converting traditional IRAs to Roth IRAs beforeDec. 31 -- you may spread the additional income from the conversion over the next four tax years. However, the benefit of the conversion is diminished in my case because, even with recognition of only 25% of the income, it will move us into a higher tax bracket in each of the next four years.Since retirement is still 20-plus years away, can I do partial conversions over the next 10 to 15 years? That way I can manage the amount converted each year to keep us from jumping tax brackets. I am assuming we will continue to meet the conversion eligibility requirements over that time span.-- Ardell Schaeffer
You can do a partial conversion, rolling a little bit every year to your Roth IRA from your traditional IRA. Just be aware there are no guarantees that Uncle Sam will allow this luxury forever. If it comes to a screeching haltSomeday, you may be left with a balance in your IRA. That's a risk you must be willing to take.
But, assuming your investments are on an upward trend, they are going to be worth more later than they are now, notes Spiegelman. You'll be paying more taxes as you convert. So, the sooner you convert, the sooner your contributions and earnings can grow tax-free. Food for thought.
I Moved and Want to Move Back
I recently moved from Wisconsin to Arizona, and my company (generously) picked up most of the moving expenses -- with a little hitch attached. If I decide to leave the firm within two years, I have to pay back the moving expenses.Now I know that my W-2 this year will have an amount in Box 13 with the letter "L," and I also know that I have to file Form 3903 to do the proper bookkeeping. My question is, of course, what happens if I do decide to leave and pay back the reimbursed expenses? Will my company issue me a revised 1998 W-2? Then I'll have to file an amended 1040X, too, right?-- Steven Weber
First, the two-year "hitch" is your company's policy. As far as the
Internal Revenue Service is concerned, you only have to be in the new location for 39 weeks for your moving expenses to be tax-deductible, says Clarence Kehoe, partner and director of employee benefits at
Anchin Block & Anchin
(full disclosure -- our accountants).
When you incur tax-deductible moving expenses, typically you would submit them to your employer. The employer would then reimburse you or pay the vendors (movers, etc.) directly. In these circumstances, expenses do not have to be added to your W-2, says Kehoe. So you would have no additional income to claim, and you wouldn't get a deduction for those expenses.
But if you incur some of the expenses that are
deductible -- like house-hunting costs or closing costs -- these costs, if reimbursed, would show up in your W-2 as gross wages, says BillFleming, director of personal financial services at
. Again, you would not get a deduction for these costs. Think of the reimbursement as a bonus.
Only when tax-deductible moving expenses are included in Box 13 of your W-2 do you need to file
Form 3903 --
. If you file this form, you'll get to take a deduction on page 1 of your Form 1040.
If this is the case and you later have to pay your company back for these expenses, the company would issue a corrected version of the W-2. You would then have to amend your tax return.
But if you had to reimburse the company for expenses that were included in your gross wages, you could report the reimbursement as negative income on the following year's return on Line 21, Other Income. The IRA sees negative income as a red flag, so the safer way to do it would be to amend your previous year's return.
The Kiddie Tax Returns
In a previous Tax Forum, a reader wrote, "I can put $1,400 into a custodial account at a 15% tax rate or less, but anything more means no taxadvantages." I wanted to know how he came up with the $1,400 amount. How do I put money in my daughter's account so it will get taxed at 15%? -- Kalpesh Parikh
For 1998, if your child is under 14 onJan. 1, 1999 and has unearned income -- interest, dividends, capital gains -- of more than $1,400, that income may be taxed at
income tax rate. That's known as the kiddie tax.
This kiddie tax in intended to prevent parents from sheltering money in their children's accounts, says Spiegelman. The good part is that any unearned income of $1,400 or less will be taxed at the lower rate of 15%.
I Have an Invitation for You! We're Having a Mutual Fund Tax Chat
Still have questions about the taxes surrounding your mutual funds? Thenjoin me for a mutual fund tax chat presented by
Monday night at 9 p.m. EST. (Keyword: Sage) We'll hash out those nastycapital gains distributions, discuss tax-loss selling and make sure thatthe wash-sale rule doesn't get in your way. So come, armed with questions!
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.