QUESTION: I lost a total of $36,000 in American Continental Corp. — more than twice my annual income! May I spread this loss over two or three years, or am I entitled to apply it against my annual income only in the year during which the loss occurred. I don't want to lose any opportunity I might have to write off these losses.--M. N.
ANSWER: The American Continental Corp. and Lincoln Savings debacle obviously hit many of our readers very hard. So although we have addressed how to handle capital losses on your tax filings in previous columns, we'll do it one more time.
Your losses are fully deductible, although it may take you several years to take full advantage of the deduction. Here's how it works: In any given tax year, capital losses may be used to offset the full extent of any capital gains you receive from other investments. So, if you had generated gains of $36,000 this year from other investments, the two would cancel each other out.
But if your losses exceed your gains, as is your situation, the unused portion can offset only up to $3,000 per year of ordinary income. You may save the unused portion of the capital losses and deduct it in future years from either capital gains or ordinary income.
For example, if you have capital gains from investments this year of $10,000, you would be able to offset those, plus deduct an additional $3,000 from your other income. The remaining $23,000 in losses could be carried forward to the next tax year. On that tax return, you could use those losses to offset capital gains income of as much as $23,000. Or, if you have less than $23,000 in capital gains income, you can offset that income and deduct up to $3,000 against ordinary income.
Over the years, any remaining capital loss can be similarly used and carried forward until the entire $36,000 loss is used up. Use Schedule D of the tax form to report capital gains and losses.
How Taxes Work on First IRA Distribution
Q: My wife turned age 70 1/2 last year. Her individual retirement account matures next month. She plans to withdraw all the funds in the account on its maturity date. Will she have to pay income taxes on the amount for the 1989 tax year, since that is the year she turned age 70 1/2, or may she pay the tax when we file our forms for the 1990 tax year?--A. G. N.
A: The law requires that your wife take the first minimum distribution from her IRA by April 1 of the year following the one in which she turned 70 1/2. Taxes are due by April 15 of the year following that in which the distribution is taken. So, your wife may indeed take her distribution by withdrawing all her funds from the account in February, 1990, and pay taxes on it by April 15, 1991.
But will your wife be making further annual minimum withdrawals from her IRAs? If so, she will have to take the 1990 distribution by Dec. 31. It is only the initial withdrawal that may be delayed until April 1 of the following year. So if she has a second withdrawal to make, taxes on both distributions taken in 1990 will due by April 15, 1991.
Heir Is Responsible for Taxes on Sale
Q: I recently inherited from my mother funds held in a double tax-free municipal bond fund and I immediately cashed out the account. Do I need to report all this to the IRS, and, if so, will I owe any taxes? I know my mother opened the account about two years ago, and I believe that the interest accrued on the account is not taxable, since it is a double tax-free account. But am I liable for any gains in the value of the holdings? Does it matter that my mother put my name on the account as well as her own? No estate tax was paid at the time of her death.--B. P. W.
A: Basically, you should figure that whenever you do just about anything with money, the tax man wants to know about it. In this case you must report the proceeds you received from the sale of the bond fund. Of course, interest generated by the fund is tax free. But if the fund has appreciated since you inherited it from your mother, you are liable for taxes on that increased value. This is true whether the inheritance is real property or a double tax-free municipal fund.
You should calculate the appreciation by subtracting the value of the fund on the date your mother died from the fund's value when you disposed of it. If you sold it immediately after inheriting it, chances are your tax liability is quite small.
By the way, just because your mother put your name on the account does not mean that you are liable for only half the taxes on any increase in the fund's value after your mother's death. The IRS says that a partial sharing of assets is not a gift until the assets are completely conveyed to the beneficiary.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053