Passing up a deduction for a home office; If a rental applicant flunks a credit check; How funds avoid tax problems of short sales; Whether a youngster can have a Roth IRA; Can you make up a loss in your pension plan? Getting an insurance agent to toe the line; Who owes what when you divorce; Minimize the cost of a home loan; Shifting college savings from one plan to another.
Q: Some of our employees feel that our profit-sharing plan's large investment losses were partly our corporation's fault, so the board of directors intends to make a restorative payment to the plan. Will that lower the regular deductible contributions the corporation is allowed to make?
A: Not if the corporation repays plan losses because it faces a "reasonable risk" of being sued for a violation of fiduciary duty. In that case, the IRS recently ruled, it can write off the repayment as a business expense. But if the payment is made simply to reimburse the plan for losses due to market fluctuations and not to mismanagement, it counts as a contribution.
Q: My wife and I are formally separated and have decided to divorce amicably. What's a fair way to divide our debts?
A: Debts one of you contracted before you married or since you separated should be assumed by that person, even if the other spouse got the benefit. Legally, you're equally responsible for debts incurred during the marriage. If you intend to divide jointly owned property rather than sell it, split any debt associated with it accordingly. If that isn't feasible, one of you might pay off the debt in return for a larger share of the property.
Finally, make sure the divorce settlement spells all this out, to forestall future disputes.
Q: I've started using part of our home as an office for a sideline business. I understand that I'll have to reduce the home's cost basis by any depreciation I claim and later pay 25 percent tax on a portion of the write-off if I sell the house at a profit. Can I avoid that by not taking depreciation deductions?
A: No. The IRS says you must decrease your basis by the amount of depreciation you're allowed to write off, whether you claim it or not. However, no depreciation is allowable for any year in which the other expenses attributable to the home office equal or exceed your income from the business.
You can avoid the problem altogether by not claiming any expenses connected with the business use of your home. Then the home sale exclusion would cover your entire gain, up to $500,000.
Q: As a new landlord, I'm wondering what my legal obligations will be if I reject a prospective tenant because of a bad credit record. What will I have to tell him?
A: If your source of information was a report from a credit reporting agency, such as a credit bureau or tenant screening service, the federal Fair Credit Reporting Act (FCRA) requires you to identify the source, tell the tenant how to contact it to obtain a free copy of the report, and inform him of his right to dispute its accuracy or completeness. This "adverse action notice" is required even if you accept the tenant's application but insist on a co-signer of the lease or an increased deposit or rent.
Intentional violation of the rules may expose you to suit by individual tenants or government agencies. If you have questions about the FCRA or would like a copy of the Act, call 877-382-4357 or go to www.ftc.gov and click on "Business Guidance."
Q: There was much food for thought in your article on funds that use short-selling and related techniques to hedge against investment risks ["What's a hedge fund, anyway?" Aug. 23, 2002]. But my accountant says protective short sales can result in sizable tax costs. How do the funds deal with that?
A: One way they get around the tough tax rules on a short sale of stock they already own is by shorting the stock of a different company in the same industry (Ford rather than General Motors, say), assuming that the two are apt to react to market conditions similarly. Hedge fund managers also employ an array of sophisticated strategies such as straddles, collars, and index options. The Chicago Board Options Exchange provides insight into some of these techniques at www.cboe.com/LearnCenter/cboeeducation/index.html .
Q: My teenage son took a part-time job this year. Is he eligible for a Roth IRA?
A: Yes. Even if he's a minor, you can set one up for him and contribute an amount equal to his earnings, up to $3,000, for 2003. (You have until the due date of your 2003 return to contribute for that year.) If your son is at least 18, wasn't a full-time student, and you don't claim him as a dependent, he may be entitled to a tax credit for as much as 50 percent of the contribution, depending on his adjusted gross income.
Q: I intend to buy a substantial amount of life insurance through an agent. What can I do to make certain he's looking out for my interests and will continue to do so after I've signed up?
A: Ask your agent to agree to a service contract that spells out both his presale and his postsale responsibilities and penalizes him if he falls down on the job. For example, he should inform you about available policy improvements as well as changes in the company's financial strength ratings, investment performance, dividend scales, and other matters significant to you as a client and policyholder. For a sample service contract, visit www.glenndaily.com/service.htm.
Q: I've been putting money into my state's 529 college-savings plan, but I'm not satisfied with the way the plan's investments are performing. Can I transfer the funds to another state's plan without penalty?
A: Possibly. Assuming your state program allows the switch, one such rollover a year for the same beneficiary isn't considered a taxable distribution under federal law. Before you commit yourself, though, make sure that the new state's plan won't restrict your choice of an educational institution when the time comes, and that your state doesn't tax withdrawals from out-of-state plans.
Q: If I refinance my home mortgage directly with a bank instead of going through a mortgage broker, won't I save by cutting out the middleman?
A: Not necessarily. You'll be dealing with the bank's retail loan department, so you can't expect to be offered the wholesale rate a broker would get. The difference might be more than enough to cover the broker's markup. If you can find a broker who'll shop various lenders for you and charge a fee fixed in advance, that may be your best solution. You could do the shopping yourself, of course, but remember, it's a jungle out there.
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to email@example.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management Q&As. Medical Economics May 9, 2003;80:123.