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An audit by the Internal Revenue Ser- VlCe (IRS) is not my idea of fun, yet 1 was audited three times for the same thing— Moving expenses.
The first time was in 1977, after the avy moved my family and me in 1976 ^°m Mayport, Florida, to Washington, • C- I came up short in documenting my jnoving expenses and had to pay an addi- $176, plus a penalty fee.
audit was conducted in
by an IRS agent in Naples, Italy. e agent was satisfied with my docu- station for our move to Naples, but et'ords. Again, I owed additional taxes nu had to pay a penalty.
The third (and 1 hope my last) audit ds in 1980 after our return to the United ates from Italy. This time I was prePared for any eventuality, including doc- .^ntation in Italian for the boarding and ^ 'Pping of our pet beagle! After my arely adequate translation, the IRS ac- _cPted this, and I faced no additional Payments. Having suffered three audits, I 'nally had mastered the first command- °nt for taxpayers: keep accurate and oniplete records.
IRS Publication 17, “Your Federal Income Tax,” contains a list of record retention requirements. This should stay in your files as a ready reference to preclude premature destruction of records that may be required for an audit. Even though you may have a simple tax return at present, get in the habit of maintaining records. Look at IRS Form 1040 to determine what your documentation should include, especially for the areas of investments, home ownership, and deductible items. By keeping good records, you will be able to claim every exclusion, deduction, and other tax break you are entitled to, and defend them in an audit.
The Tax Reform Act of 1986 reduced tax rates, but it also eliminated or phased out many deductions and established certain minimum thresholds, including those for miscellaneous deductions. You most likely were pleasantly surprised when you calculated your net worth and found that your assets were far more valuable than you suspected.* You also may be surprised to find that by itemizing deductions you will be able to reduce your taxes. For example, many expenses associated with investing can be claimed as miscellaneous itemized deductions. These include set-up and custodial fees for Individual Retirement Accounts (IRAs), Simplified Employee Pension plans (SEPs), and Keogh pension plans, if paid from outside funds; safe-deposit boxes, if used for storage of any asset related to investing; the cost of investment publications such as books, newspapers devoted to investment news, investment counseling and advisory fees; tax preparation and advisory fees; and postage and telephone expenses associated with investing. To make certain that an expense item qualifies for a tax deduction, contact either the IRS or a qualified tax advisor.
Under the terms of the Tax Reform Act of 1986, treatment of capital gains and losses has changed considerably. The
*See the February 1988 “Money Matters’’ column.
60% exclusion for net long-term capital gains has been eliminated. There no longer is a differentiation between short- and long-term capital gains. Now, all capital gains are taxed at the same rate as ordinary income. While in most cases this has raised the rate at which capital gains are taxed, there is a benefit for investors: decisions to take a profit on an investment are no longer clouded by the question of whether or not to delay until long-term capital gains apply. Capital losses in excess of gains can be used up to a maximum $3,000 in any taxable year to offset ordinary income on a dollar-for- dollar basis. Net capital losses exceeding the $3,000 allowable can be carried forward to future years. Capital gains and losses from all investments, including art and real estate, can be combined when calculating net capital gains or losses.
When calculating capital gains and losses, you must include brokerage commissions and other transaction expenses. When buying stocks, calculate your cost basis by adding your investment costs to the cost of the stock. When selling, deduct investment costs from the price of the stock to calculate the net proceeds. When buying or selling bonds, do not include accrued interest in the cost basis or net proceeds calculations. The trade date, which is the day you place the order to sell, determines the tax year for capital gains or losses, even if you do not receive the net proceeds until the following tax year. If you have accumulated several different blocks of the same stock over time and wish to sell part of your holdings, consider the cost basis for each block to determine which block is to your tax advantage and advise your broker which block you are selling; otherwise, the sale may be considered the sale of stock you first acquired. Knowing your investment costs and when the transaction is effective will prove to be to your tax advantage.
I will offer more tax-saving ideas in my next “Money Matters” column.
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r<>ceedings / February 1989
125