I knew the mere
mention last week that you could deduct credit-card interest in some circumstances would prompt a flood of email. So we'll deal with those issues first thing this week.
Then we'll discuss when options on
Nasdaq 100 tracking stock
shares expire, what happens if your 1998 tax return was lost in the mail and what to do with your 401(k) when you change jobs.
And if you're making estimated tax payments, don't forget the second-quarter payment is due by midnight on June 15.
Keep sending your questions, along with your full name, to
Credit-Card Interest, Take Two
Last week I reported that if you borrow from your credit card to buy stocks, you can take the related interest as an investment expense. Reader
wrote in to remind us that "interest on loans to create investment income is deductible only to the extent that it offsets investment income."
That's correct. It all comes back to the "tracing" rules we discussed last week. "What did you use credit-card loan proceeds for? That will determine the character of the interest," reminds Clarence Kehoe, partner and director of employee benefits at
Anchin, Block & Anchin
, a New York accounting firm. So if you can trace investment income back to borrowed money, the interest on that loan will be subject to investment income rules.
Along the same line,
reminds me that "you can also deduct credit-card interest if you are self-employed and the interest is for your business-related expenses." True. If it is for expenses related to your own business, you can report the interest on
- Profit or Loss From Business
. Same goes for landlords. They can deduct rental-related credit-card interest as well. That would be reported on
- Supplemental Income and Loss
Regardless of all this allowable interest expense, please make sure it's cost-effective to borrow off your credit card. Nine times out of ten, it probably is not.
Now on to your questions.
None of the stories done on the QQQ say when the underlying options expire. Is it the second or third Friday or last day of month? -- Peter Gabriel
That's a great point -- and an important one.
A quick refresher: The Nasdaq 100 tracking stock packages all the stocks in the Nasdaq 100 in a single share that trades on the
under the ticker symbol QQQ. See a previous
Fund Forum for more details.
If you trade options on these shares, they expire on the third Friday of the month, just like other equity options, says Jay Baker, vice president of derivatives marketing and research at the
Here's a warning though: The
taxability of your gains and losses on these QQQ options is still up in the air. So keep good records of your buys and sells for now. We'll keep you posted.
Lost in the Mail
I mailed both my federal and state tax returns on April 14. New Jersey received my return with no problem. But just yesterday I received a notice from the Internal Revenue Service saying it did not receive my federal return and that I owe back interest and penalties? What should I do? I'm assuming the post office lost it. -- Christine Marino
"The taxpayer has the burden of proof to show that he mailed something," says Kehoe. But it's hard to prove you stuck a stamp on an envelope and dropped it in the mailbox.
That's why Kehoe and most tax professionals recommend that you send your tax return certified mail and request a return receipt.
Many things could've happened. The notice could be an error. (It happens.) Or at the time the notice was sent, your return could had been received but not processed.
So all is not lost. But before you write the IRS a big check for interest and penalties, call the Service to get more information. (Pour yourself a big cup of coffee and grab the newspaper before you dial because you're bound to be on hold for a month or two.)
There should be a phone number and a notice number on the letter you received. So call it. The notice number will help the IRS identify the problem. If there is no phone number listed on the letter, try 800-829-1040.
Either way, be adamant. The Service may ask you to resend your tax return, but try to get the interest and penalties waived.
And for future reference: The IRS now accepts alternative types of delivery. So if certified mail isn't your thing, try
. Then your bill of lading will count as your proof of filing.
Charitable Trust Distributions
Once assets are deposited in a charitable trust are there specific limits as to how much may be withdrawn for use, and is this tax deductible? -- Ed Higginbotham
First, I am assuming you're referring to a
charitable remainder trust. (A charitable lead trust has no distribution requirements.)
Now let's do a CRT rundown: You can put money or assets into a CRT. It must pay you a 5%
income stream for a limited amount of time. That income stream is taxable to you as ordinary income. That money is not deductible. But you can get a charitable deduction for a portion of the money or assets you put in the CRT.
In the end, the remainder of the trust will go to charity. The only major restriction here is that the amount of the charity's cut must be at least 10% of the present value of the income you expect to receive over the years. Get out your financial calculator to calculate that amount.
I will be leaving my current employer for a one-year fellowship in August. My current employer has a 401(k); I also have a Roth IRA. My fellowship next year does not provide a 401(k). In the fall of 2000, I will likely go back into a corporate setting with a 401(k) plan. I am trying to understand what the tax laws permit me to do with my current 401(k) and what strategy I should use, given my unusual employment situation. I assume I cannot roll it over into my Roth IRA, but can I move it into a rollover IRA or park it in one for a year then move it into a new 401(k) in the fall of 2000? -- Greg Kahn
You have some options, especially since you are planning on rejoining corporate America in a year or so.
If your 401(k) account contains more than $5,000, you are allowed to leave the money right where it is, says Dee Lee, a certified financial planner and author of
The Complete Idiot's Guide to 401(k)s
. Your soon-to-be-former employer is required by law to let you do this.
If the account contains less than $5,000, you might not have this option, but check with your human resources department anyway.
Another option is to immediately roll the account to an IRA -- especially if you don't like your current investment choices. But here's a suggestion: Keep the money in a separate "conduit" rollover IRA in case you decide to roll back into a 401(k) in the future. You don't want to have to worry about commingled funds since you are allowed to roll only previous 401(k) money -- not new IRA contributions -- into a future 401(k) plan.
In addition, if you want all your money to go into your Roth, that's not a problem. First you must transfer the money to an IRA, then you can immediately move it to the Roth. These transactions can happen simultaneously.
Regardless of your decision, just make sure your 401(k) custodians do not cut you a check for the balance in your account, reminds Lee. If you get a check, they are required to automatically withhold 20% of the balance for tax purposes. The bigger kicker, though, is that you then have only 60 days to get the money in a new IRA account or you'll be hit with penalties and tax on the money.