Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 4, 1994 TAG: 9404010105
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
Q: My wife and I have a daughter in California who for nearly a year has been involved in a divorce proceeding. As divorce attorneys in her area are costly - more than $100 per hour - and as our daughter and her children needed protection that was far beyond her salary as a nurse, it was necessary for us to transfer a large amount of funds from our retirement savings.
Is there are way that these costs could be tax-deductible? If they are not tax-deductible, it means that the same funds are taxed by the IRS three times. Tax was paid on these funds as placed in the retirement account, tax paid when transferred to our daughter and tax paid by the attorney when it became part of her income.
Also, we have had to pick up her monthly mortgage payment on her house pending court-ordered sale of their real property. As they have built very little equity on a very expensive house, about 90 percent of the payments are in interest. It is unrealistic in the depressed real-estate market in her area for her to recover more than enough to barely cover the mortgage obligation. Is the mortgage payment (or the interest portion) deductible?
A: The funds you advanced to your daughter for living expenses and divorce costs are not deductible for tax purposes. They are personal in nature.
Yes, the funds were taxable to you as earned, and the portion paid to an attorney will again be subject to taxation by the attorney; but they are not taxable a third time when given to your daughter.
Mortgage interest paid for someone else is not deductible for tax purposes. But if the gift is properly structured, the interest as paid by your daughter will be tax-deductible by her even if paid from funds furnished by you.
Answered by Robert K. Flynn of Foti, Flynn, Lowen & Co.
Selling the farm
Q: My wife and I are selling a farm that we've owned for 33 years. We didn't live on the property but rented a small house on it. On $500,000, how much capital gains tax are we required to pay? Do our ages, being over 70, help with any deduction? Also, do we have to pay state taxes along with the capital gains tax?
A: The capital gain tax you have to pay depends on the calculation of your capital gain. Your capital gain would be the proceeds of the sale reduced by your basis and depreciation recapture.
Your basis is your original cost (or inherited or gifted basis) plus any improvements, less any depreciation claimed on farm equipment or buildings.
To the extent any of the sales price is allocated to buildings or equipment that have been depreciated, these proceeds will be ordinary income to the extent of the recapture of the amount of depreciation claimed on the assets.
Capital gain that does result from the sale is taxed at your federal marginal tax rate, but can be no more than 28 percent. You would also owe state tax on the gain. Your age does not help with any special treatment on the sale of the farm.
Answered by F. Fulton Galer of McLeod & Co.
Death and taxes
Q: My wife died Dec. 24, 1992. For 1992, I filed my federal income tax as a surviving spouse, taking all of the exemptions and deductions available for a married couple.
Is there any provision in the federal tax law under which I can file for the 1993 tax year other than as single? It seems to be a cruel, harsh and expensive step for me to go from married to single tax-wise in a year's time, costing me double in taxes.
A: If your spouse died in 1992 and you had not remarried in 1993, there are three filing statuses which you may be eligible to use.
The first, which would allow you to use the favorable married filing joint tax rate and standard deduction (if you do not itemize) is qualifying widower with dependent child. This status is available for the two tax years following the year of a spouse's death.
To qualify, you must have been entitled to file a joint return for the year of death, remain unmarried, and pay over half the cost of maintenance of your home, which was the principal residence of your dependent child for the entire tax year.
If you cannot file as qualifying widower with dependent child, you may be able to file using head of household status, which would give you a lower tax rate and a higher standard deduction than the single status.
The head of household status is available to an unmarried person who pays over half the cost of keeping up a home for certain qualifying people for more than half the tax year.
This qualifying person could be an unmarried child or grandchild (who does not have to be a dependent) or a dependent married child or other dependent relative who lived with you at least half the tax year.
A dependent parent does not need to live in the same household at any time during the tax year to qualify, as long as you paid over half the cost of maintaining his or her residence, which includes living quarters in a nursing or retirement home.
You should consult the instructions for Form 1040 to determine if a person qualifies you for this filing status.
You must use the single status if you cannot file as qualifying widow(er) with a dependent child or head of household.
Answered by J. Patrick Budd of Budd, Ammen & Co.
Down for the count
Q: How do we report the capital gain or loss on Norfolk Southern Corp. stock purchased each pay period over a period of years if we sell the stock? The price was different each time we purchased from about 1970 to 1976.
A: The basis in the NS stock is the price you paid for the stock. NS may be able to provide you a statement of the amount of payroll deduction that went toward the purchase of the stock. If they are unable to provide this statement, you will have to search your records to determine the amount you had deducted from your pay to purchase the stock.
If you also had the dividends reinvested to purchase additional stock, you can count the dividends as part of your basis. Finally, on Oct. 26, 1976, the stock of the Norfolk & Western Railway Co. split 3-1 for the stockholders of record on Oct. 1, 1976. If you received the additional shares from this stock split, you will need to account for the additional shares.
Since you purchased the stock at various times and quantities, and if you cannot identify the shares that you sold, you must use the "first-in, first-out" rule. You may not use the average price per share to figure the gain or loss on the sales of the shares.
Answered by Gary Duerk of Brown, Edwards & Co.
by CNB