Advanced Personal Finance

Every year, I make my ‘tax document checklist.’  It’s crude but effective.

I take out a blank sheet of paper, write ‘Tax stuff’ at the top, then write down all the documents I expect to come my way that I’ll need to file and hope I don’t leave something out.

I should probably have a better system, so this is my effort to improve.  Below I’ve listed the things that are typically on my tax document list.  Yours may be longer or shorter.  If you find it useful, here’s the list in PDF format.

Income

I break the list down into two, not very original sublists.  Income’s the first one.  (Bonus points if you can guess the second.)

• W-2s - Think hard about any second job’s you’ve had during the year.  If you’ve changed primary employment, you’ll be getting a couple as well.
• Bank interest 1099-INTs - This one can be tough if you have accounts all over the place trying to ‘optimize’ your banking.  Me, I just do everything at USAA.
• Stock dividend 1099-DIVs.  Whether through a mutual fund, or by owning individual stocks.  You get one from each fund company or brokerage house.  What a pain.
• 1099G for state/local income tax refund
• Miscellaneous income - Again, tricky.  It’s easy to forget some of these.  Just a few: prizes, scholarships, jury duty pay, unemployment benefits.

Expenses

• Mortgage interest statement
• Real estate tax statement
• Student loan interest paid
• Gifts to charity
• Education expenses (post-secondary education)
• Child care expenses
• Miscellaneous expenses - Could include moving expenses, expenses related to looking for employment, volunteer work, tax prep, home office (if you’re taking that deduction)

I’ve left off stuff from this list because it’s my list.  But since I’m a regular kind of guy, I think it suffices for many people.  Besides, if you’re claiming farm income or trust income, you probably aren’t doing your own taxes anyway.  That said, if there are any glaring omissions, please leave a comment and let me know.

Share This

Here’s a topic I’m sure to never face - inheriting an IRA. But for those people who might find it of some use, here’s a run-down on how to inherit an IRA.

Step 1: Have a relative wealthy enough to leave money to you.
Step 2: Help that relative set up an IRA naming you as beneficiary.
Step 3: Wait until relative dies.
Step 4: Decide what to do with inherited IRA.

Inherited IRAs really fall into two categories - spousal and non-spousal. Non-spouses can take all the cash out of the IRA immediately, establish a beneficiary IRA and begin taking annual distributions, or wait up to five years and then take the lump sum. Spouses have the additional option of making the IRA their own.

Cash-out option. Any beneficiary can use the cash-out option. This simply involves taking a lump sum and paying the tax on it as ordinary income.

Establish a beneficiary IRA. Going this route means taking annual distributions. The IRS publishes tables with life expectancy based on sex and age. Your annual distribution is based on how much longer the IRS says you’ll live. Since the IRS is always right, these tables come in handy for all sorts of things. I myself base my borrowing decisions on them. I try to arrange repayment beginning the year after the IRS says I’ll die. At any time, you can also take a lump sum.

Deferral cash-out. You can also do nothing for up to five years, then take the lump sum.

Roll-over option (spouses only). Spouses have the additional option of rolling over the IRA into one with their name. This also allows them to continue making contributions. Using this option, the spouse doesn’t have to begin distributions right away. Deferring taxes is nearly always preferable to paying them right now, so this is most likely the smartest move for the surviving spouse.

Share This

A friend was depositing birthday money into his kids’ savings accounts the other day and asked me about taxes. I’m not a tax attorney by a long shot, so I did some investigating. I wanted to write about what I found so I’d kind of have it in my own ‘archives’ in case it ever comes up for me and my children.

The Kiddie Tax

There are basically three rules regarding children’s savings taxes:

1. Only unearned income is taxed this way. Unearned income is capital gains, dividends, and interest earned. Any earned income is taxed like an adult’s income.
2. It affects children under age 18. On the year of the child’s eighteenth birthday, the Kiddie tax no longer applies.
3. It only matters for unearned income above a certain threshold. In 2007, that number is $1,700. Kids don’t have to report unearned income under $1,700.

Filing Forms

The IRS form for the Kiddie tax is Form 8615 (Tax year 2006 form here). You use that to add to the child’s 1040 if it applies. You can also pay the tax on the parents’ return by filing Form 8814 (2006 form here), as long as the child’s unearned income is less than $8,500 (as of 2006).

‘Getting Around’ the Kiddie Tax

It’s possible to minimize the effects of the Kiddie tax.

First, the child can invest in stocks that pay little or no dividend income. He or she can also use municipal bond funds. The tax effect is the same. The capital gain at sale is the only thing to be concerned about.

Second, your kid doesn’t actually have to be eighteen for the tax treatment to change. It only has to be the year he or she turns eighteen. At that point, he or she is an adult for IRS purposes. This could come into play when paying for college.

Share This

I’ve written before about financial records and what to keep and what to toss. Squarely in the ‘keep’ category is documentation on the purchase of stocks and mutual funds.

Why it’s critical to keep buy order documentation

Keeping buy order documentation is critical because it provides two key pieces of information - date of purchase and purchase price. When you eventually sell the fund or stock, you must know these two things.

Date of purchase is used to determine whether gains are long- or short-term. There are different tax consequences for each. Purchase price, or cost basis, is also necessary to calculate the actual gain (or loss).

What if I don’t have it?

If you don’t have your cost basis, the IRS assumes it to be zero. That’s right. If you can’t provide documentation, the tax man will assume you got the security for nothing. As a result, you tax bill on sale could be much, much bigger than it needs to be.

But there’s a but. If you know the date of the purchase, you can look up the closing price on that day and the IRS will allow it. And if you don’t know the exact date, from what I can tell by reading their site, the IRS will likely allow you to make an ‘estimate.’

This actually happened to me. I lost/threw away/ate a buy order for a stock I owned. I knew from bank records the day I bought it, though. I went back and did some research on pricing and used the closing price that day as my basis. So far no audit.

Share This