Money Management

How the new tax law speeds up depreciation

Q I bought $50,000 worth of office equipment in May, and I'm planning to deduct as much of the cost as permitted on my tax return for 2002. Can I also claim the extra 30 percent depreciation allowed under the new law enacted this year?

A Yes. You can deduct $24,000 as a first-year expense, plus 30 percent of the $26,000 balance—$7,800—as extra depreciation. In addition, you can claim regular depreciation equal to 20 percent of the remaining $18,200, which is $3,640. So your total writeoff for 2002 comes to $35,440. That leaves $14,560 of your $50,000 cost to be depreciated in future years

Keeping your executor out of a family fight

QTo avoid getting involved in family arguments after I die, my oldest son, who's the executor of my will, would like me to give him written instructions about how to distribute my personal possessions. What's the best way to do this?

A If you or your son want the instructions to be legally binding, put them in a memorandum and mention the memo's existence in your will or in a codicil. To be on the safe side, you should sign and date the memo. However, if you subsequently make any changes, your son won't be bound to carry them out and could encounter flak no matter what he does.

All things considered, you may do better to discuss the matter beforehand with the family members affected, and then give your son an informal letter reflecting your wishes. Either way, though, the value of the possessions counts as part of your estate.

When you sell a gift received long ago

QI recently sold a painting that we got 30 years ago as a wedding gift from my parents. It was worth about $30,000 at the time, and they paid a gift tax of $2,500. They had bought it for $20,000 several years earlier. I got $90,000 for the painting. How do I figure the tax on my profit?

A Since you received the painting before 1977, your tax basis is the original cost ($20,000) plus the gift tax paid ($2,500), which comes to $22,500. If the total had exceeded the fair market value when the gift was made ($30,000), your basis would be $30,000. As things stand, your gain is $67,500, ($90,000 minus $22,500). You'll owe 28 percent of that ($18,900), the special tax rate on profits from the sale of collectibles.

For gifts made after 1976, the recipient's basis is the donor's original cost plus the portion of the gift tax due to the net increase in value while the item was in the donor's hands. The portion attributable to original cost is ignored.

Making a Roth conversion from a SEP IRA

QCan I convert an IRA set up under my Simplified Employee Pension plan (SEP) to a Roth account, pay tax on the converted amount, and continue to take a deduction for my future SEP contributions to the Roth?

A No. If you continue with the SEP, contributions to it must go into a traditional IRA. But you can then have as much as you like transferred into a separate Roth IRA, provided your adjusted gross income for the year isn't more than $100,000. The transferred amount will be taxable, but you can ignore it in determining whether your income exceeds the $100,000 AGI limit.

Is a 529 college-savings plan an effective tax shelter?

QI expect to have ample resources to pay my son's college expenses when the time comes. But I'm thinking about putting money into a 529 savings program anyway, because the investments will grow tax-free, even though the earnings will eventually be taxable if they're not used for education purposes. Is this a good idea?

A Possibly, but you should weigh the drawbacks before you go ahead. For one thing, your investment choices will be restricted and may not be a good fit with your other holdings. For another, a 10-percent penalty will be imposed in addition to the regular tax on withdrawn earnings, unless they're applied to qualified higher-education costs.

In theory, several years of sustained tax-sheltered growth may more than offset the penalty, but your state plan might require you to close the account before this happens, if it's not being used to fund your son's schooling. Finally, there's a risk of unfavorable changes in existing rules, to prevent savings programs from being misused to avoid taxes rather than promote education.

Financing a home purchase with a pension plan loan

QAn employee wants to get a $150,000 home loan from our pension plan. Since a first mortgage on the property would secure the loan, can the fund agree to it, even though it exceeds the $50,000 legal limit on participant loans?

A Yes, if the plan makes a residential mortgage loan program available to qualified nonparticipants as well. The program must commit a specified portion of plan funds this way, and it may not call loans to plan participants if their employment terminates. In short, the program must operate as a bona fide investment vehicle, not just as a way to circumvent the rules on borrowing by pension plan participants.

How checks may be cashed at light speed

QWhen I wrote a check to pay for some merchandise at a local store recently, the clerk processed it through an electronic system and handed the check back to me marked "cashed." What happened?

A The system—which an increasing number of retailers are using—accessed your bank account and instantly transferred the money to the store. You should have been asked to authorize the electronic conversion beforehand.

Hang onto your check, because the transaction may not appear separately on your bank statement. And don't agree to an electronic transaction if you're not sure your account contains enough money to cover not only that check but others outstanding as well. Otherwise, a check could "bounce" and cost you a fee, unless you have overdraft protection.

Whether you can postpone your initial IRA distribution

QI'll be 70 1/2 this year, so I have to start taking distributions from my IRA. I've heard that I can postpone the initial withdrawal until next April 1. Is this true?

A Yes, but you'll still have to make a second withdrawal by Dec. 31, 2003, and its amount will be increased if you don't make the first one in 2002. That's because your required distribution for 2003 will be a percentage of your IRA balance at year-end 2002. Present rules would let you reduce that balance by deducting the postponed first withdrawal from it. But a new regulation going into effect next January will no longer allow that.

A smoother ride from airport to town

QI'd like to ease the stress of family travel by hiring private transportation to take us from our arrival airport into town. How expensive would that be, and can I book in advance?

A The vehicle size, type, and the distance to your destination affect the price. For example, one company charges $65 for a sedan ride from Kennedy Airport in Queens to Manhattan, and $110 for a six-passenger limousine. From LaGuardia Airport, which is closer to Manhattan, the charges are $45 and $95, respectively. In comparison, a taxi from Kennedy to Manhattan costs $35; from LaGuardia, about $25. Tolls and tip are extra in all cases.

You can get quotes and make reservations for service from most major airports via their Web sites. If your trip involves several stops, try a directory service like www.limousinedirectory.com or www.airportservice.com.

Edited by Lawrence Farber,
Contributing Writer

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 memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

 

Lawrence Farber. Money Management. Medical Economics 2002;22:93.