The Tax Forum tackles those confusing
recharacterizations this week, as well as erroneous
and non-equity index options. There's also a follow-up to last week's
story on the tax implications of the
Only 33 days are left until April 15, so if you have questions, send them to
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Excess 401(k) Contributions
As the result of a job change and a little bit of inaccuracy in calculation, I exceeded the 401(k) contribution limit for 1998 ($10,000) by about $250. I called my benefits office to withdraw the excess contribution. But they say they cannot withdraw the money from my 401(k), I will have to do that myself with the IRS. I don't know if I can do that or how to do it. -- Mahesh Patel
You need to take the excess contributions out of your 401(k) before April 15 or the
Internal Revenue Service
will hit you with a 6% excess contribution penalty on the money until it is withdrawn.
As a 401(k) participant, you are allowed to withdraw excess contributions before April 15 of the tax year following the year in which the excess was created, says Dee Lee, a certified financial planner and author of
The Complete Idiot's Guide to 401(k)s
Once you withdraw the money, you must report the excess contribution, as well as any additional earnings, as wages, on line 7 on your
- U.S. Individual Income Tax Return
because you owe federal tax on it. Social Security has already been deducted, says Lee.
But you need to make this withdrawal through your benefits department, not through the IRS, says Lee. Most likely there is paperwork involved in making withdrawals. So find the forms and get going. It could take a few weeks, depending on the reaction time of your benefits group.
Too Much Roth Activity
I converted my IRAs to Roths in 1998 with T. Rowe Price, then I switched them back to IRAs the same year. I then moved my IRAs to Vanguard in 1998 and again converted them to Roths. I recently received 1099Rs from T. Rowe Price showing my Roth conversions for 1998. I also received 1099Rs from Vanguard showing my Roth conversions for 1998. To me, this indicates the IRS will assume I did two conversions and not one, thereby doubling the amount of money that will be reported to the IRS as distributions from my IRAs. T. Rowe Price has been no help at all and insists it has to send me these 1099Rs even though I converted back to a regular IRA with them in the same year. -- Eileen Findlay
Because you got two
- Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
noting two different distributions, you must report both numbers on Line 15a of your Form 1040. But that does not mean both amounts are taxable.
You must file
- Nondeductible IRAs
when you convert a traditional IRA to a Roth or when you recharacterize a Roth back into an IRA. This form will help you determine the amount subject to tax. In addition, you must include an explanatory statement with this form. So when you attach this statement, be very explicit about what happened, says Maggie Doedtman, tax research and training specialist at
in Kansas City, Mo.
Try doing a timetable. Show the basis of the amount originally converted, its recharacterization and all the corresponding earnings for the T. Rowe Price Roth, suggests Alan Kufeld, tax manager at
American Express Tax & Business Services
in New York. Then do it again for the Vanguard Roth. This way, you will hold the IRS' hand, so to speak, as you walk it through all your different transactions.
Correcting an Incorrect 1099
I have received a 1099-MISC, which I believe to be totally incorrect. I have asked the entity that issued the 1099 to issue a corrected version. The 1099 may or may not be corrected. What is the best way to deal with the IRS when you have received a 1099 you believe to be totally erroneous? -- C.B. Neftin
It's important that you try to rectify this incorrect
- Miscellaneous Income
before your return gets to the IRS. You should go back to the issuer of the 1099-MISC and clear this up, urges Clarence Kehoe, partner and director of employee benefits at
Anchin, Block & Anchin
Granted, it can be a major headache for the issuer because it'll have to give you an amended 1099-MISC. But if you are confident about the error and know your facts, you should be able to prove the form is wrong. The company then has no choice but to amend it for you.
If, by chance, your return does get mailed without the amended form, the IRS has a program that matches the 1099s it's received with the numbers on your tax return. If any of the 1099 numbers are different, you will automatically get a notice from the IRS.
Reporting a Section 1256 Transaction
Is this true you must mark to market Section 1256 contracts? Or is it possible to take advantage of the 60/40 rule in Section 1256(a)(3) for index options without marking to market? -- Jim Fink
First some short definitions: Mark to market means treating a security as though it was sold for its fair market value on the last business day of the tax year. A
Section 1256 contract is any regulated futures contract, foreign currency contract or non-equity option.
A longer definition for Section 1256 would include language requiring that these contracts be marked to market, says Ted Tesser, a certified public accountant in Boca Raton, Fla., and author of
The Trader's Tax Survival Guide
. So there's no way around it. Sorry.
Telebras Tax Follow-Up
Any idea where I can find the tax allocation basis for the companies that were split off from Telebras? I have searched everywhere, and I have no idea how to allocate my cost basis for the original Telebras shares. Also, is the distribution of Baby Bras shares a taxable event if shares of Telebras were purchased after May 22, 1998? My shares were purchased at 55 1/8 on Sept. 11, 1998. Does this mean I will be able to take a short-term capital loss based on the 110 5/16 price on May 11, 1998? -- Stephen Cronk
See our previous
story on the tax implications of the breakup of Brazil's national phone carrier. At the time of the breakup, Telebras' American Depositary Receipts were the most widely held ADRs, so the tax consequences are of wide interest here.
Unlike some U.S. corporate spinoffs, the Telebras breakup was a taxable event. That is, under U.S. tax law, you will be treated as if you sold your Telebras shares and bought shares in each of the 12 new companies that were created.
As far as U.S. tax law is concerned, the breakup occurred on May 22, 1998, even though Telebras ADRs continued to trade until Nov. 17. The next day, shares of the new companies began trading.
If you bought Telebras shares after May 22, the breakup was not a taxable event for you.
The bigger issue is whether you held Telebras ADRs on Nov. 13, the record date. If so, you must figure out your cost basis in the 12 new pieces of the old phone company.
If you bought your shares after May 22, you must allocate your cost basis (your original purchase price) in the Telebras shares based on the percentages listed below. Let's assume your original basis in a Telebras share was 100. Now let's look at
, one of your new pieces. Your cost basis is now 22.9% of the original share price, or 22 29/32.
Now let's assume you are a long-time holder of Telebras, and you bought your shares before May 22. Your new basis became the 110 5/16 per share, the closing price on May 22. Assuming you still were holding those shares at the time of distribution in November, you would split the 110 5/16 by the percentages below. In this case, your basis in Tele Norte-Leste would be 25 1/4.
The Telebras breakup was a complicated transaction, and that has created even more complicated tax predicaments. Please check with your tax advisor for additional help.
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. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.