Q&A: Too many credit accounts; social security after a divorce; splitting the homebuyer tax credit; tracking 'basis' on stock purchases; claiming a spouse's capital losses

October 23, 2009

Too much available credit can hurt your credit score.

Q: I keep several credit card accounts open solely for "emergency" purposes, in addition to the credit card that I regularly use. In light of recent laws governing credit cards, am I now at risk for accruing annual fees on these unused cards, even though I never did before?

Having too much available credit can hurt your credit score. A creditor can look at your available credit and have a concern that you'll run all of your cards to the maximum and declare bankruptcy. With disclosure, an issuer can charge an annual fee for a credit card; they can prospectively impose a new fee even if they did not previously charge one, so you are at some risk. Your safest bet is to close any accounts that aren't necessary.

Q: Many years ago I divorced, but have recently married. Will my former wife be entitled to social security benefits based upon my working years? How will this affect my wife today?

A: If your former wife has not remarried and was married to you for at least 10 years, she can decide to claim social security benefits based on your work record if they are greater than benefits based upon her own work record. However, this will have no effect on your wife or the benefits that you receive. Your former wife can make a claim for benefits when you reach age 62, even if you have not filed for social security yourself, as long as you have been divorced from her for at least two years.

SPLITTING THE HOMEBUYER TAX CREDIT

Q: I read the May 22, 2009, Your Money article ["Not a first-time homebuyer? You can still save $8,000"] addressing the new tax credit for first-time homeowners. If my two sons together purchase a home that costs at least $160,000, can they each claim an $8,000 tax credit on their individual tax returns?

A: No. The instructions for line 1 of IRS Form 5405 states that the maximum credit that can be taken per residence is $8,000, regardless of the number of owners. Your two sons could each take a $4,000 credit, sharing the $8,000 total benefit. Of course, they would have to satisfy the other requirements to qualify.

TRACKING "BASIS" ON STOCK PURCHASES

Q: I have owned 2,000 shares of Microsoft stock for the past 14 years and sold it earlier this year. Although I don't have a record of my initial purchase price, do I pay capital gains tax on the difference between my sale price and my initial purchase price?

A: No. Your initial sales price or "tax basis" must be increased or decreased based upon dividends of shares of stock, splits, reverse splits or other events. Although you have owned it for many years, you are obligated to track your adjusted stock basis and properly report any applicable gain or loss in the year of disposition. Since the IRS takes the position that if you cannot document basis your basis is zero and you would pay tax on all of your proceeds, it is incumbent upon you to track your basis. Starting after 2010, your brokerage house must track your basis for all newly acquired stock. Most mutual fund companies already provide this information with your annual 1099 form.