How to minimize tax when you rebalance fund holdings, Claiming a home-sale exclusion after one spouse has died, A way to beat the limit on tax-free annual gifts, If you change your mind about a Roth conversion
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QI allocate equal amounts of money to four mutual funds that represent four different economic sectors. But one fund did so well last year that it now accounts for half the value of my holdings. Rather than sell shares to rebalance my portfolio, can I avoid having a taxable capital gain by exchanging them for shares in other funds with the same sponsor?
A No. The law treats exchanges of shares in the same fund family as taxable sales.
The simplest way to minimize tax when rebalancing is to beef up the percentages of the underrepresented sectors by investing new money in them. If you must also sell some shares of the top-performing fund, you can usually reduce the taxable gain by specifying the ones you paid the most for, assuming you bought shares at various prices.
But if the highest-priced shares are less than a year old, you may do better by selling lower-priced shares held longer than a year, instead. The gain on them is taxed at only 20 percent, whereas your top tax rate applies to short-term gains.
QWe'd like to give our widowed daughter $60,000 to pay off her debts and start fresh, but if we make the entire gift this year, only $20,000 will be tax-free. Could we get around that limit by giving $20,000 to each of her two children, which they could then turn over to her?
A No. You and your spouse can each give $10,000 annually tax-free to as many individuals as you please, but the gifts must have no strings attached. If you have an understanding with your grandchildren that the money is intended for their mother, the IRS would say you and your spouse gave your daughter $30,000 apiece instead of $10,000. Accordingly, your respective lifetime gift tax credits would be reduced by $20,000, though you wouldn't owe any immediate tax unless you'd already made taxable gifts totaling $675,000 or more.
QMy adjusted gross income won't top $100,000 this year, so I'm eligible to convert my traditional IRA to a Roth account. I'd like to do it right away, before my depressed IRA stock portfolio recovers and the taxable conversion amount increases. But I'm wondering whether I can cancel the conversion if my stocks continue to slide after I transfer them to the Roth account. Also, if the market then takes a turn for the better, can I convert again?
A You have until the due date (including extensions) of your return for 2001 to change your mind about the conversion. This is called a "recharacterization" and can be accomplished only by a trustee-to-trustee transfer of the stocks from the Roth account either to the traditional IRA from which they came or to a different one. If you recharacterize before Dec. 1, 2001, you can reconvert to a Roth anytime in 2002. But you must wait at least 30 days to reconvert if you recharacterize during December, and if you do so after that, you can't reconvert until 2003.
QMy father died last January, and my mother is thinking about selling the home they owned and lived in for years. Would all of her expected $350,000 profit be tax-free?
A Yes, if the sale occurs before the end of 2001. A surviving spouse is allowed to file a joint return with the deceased spouse for the year of death, so your mother can claim the $500,000 home-sale exclusion available to married couples. But if she sells next year, only the $250,000 exclusion for a single owner will apply.
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management. Medical Economics 2001;20:84.