I’ve received emails from accountants on how to craft responses to questions from clients. I’ve edited and condensed the questions for clarity and brevity.
Q. I know that the tax rules stop me from claiming a loss on the sale of stocks, collectibles or other investments when the sale is made to my spouse or my children, brothers, sisters or parents. Is there some legitimate way to claim a loss and still keep the property in the family?
A. The rules don’t apply in the case of sales to in-laws. Thus, you can deduct the loss incurred on a bona fide sale made, say, to your son-in-law, instead of your daughter.
Q. I recently purchased some bonds that give me the option to exchange them for common stock. How do the tax rules work in the event that I exercise my conversion option?
A. You don’t have to report any gain or loss on conversion. To figure gain or loss on a later sale of the stock and whether the sale is long or short term, use your cost basis for the bonds; count as part of your holding period the time you held the bonds. For instance, if you reap a profit on the sale of stock held less than 12 months, but the combined holding period for the bonds and stock runs to more than12 months, your gain is long term.
Q. Am I allowed to deduct premiums on my life insurance?
A. Nyet, say IRS apparatchiks. They’re nondeductible personal expenses.
Q. I recently cashed in a life insurance policy. Can I take a capital-loss deduction for the difference between the premium payments and the cash value?
A. No. Your "loss" reflects what you paid for insurance protection.
Q. Can I take an immediate deduction for the sales commission paid for a mutual fund investment?
A. No. But the commission does count as part of the cost of your investment for purposes of figuring gain or loss on a later sale.
Q. Will my wife have to report a settlement she receives from the children of my first marriage for agreeing not to contest my will?
A. Settlements escape income taxes, just like inheritances.
Q. To save on estate taxes, I plan to transfer ownership rights in a life insurance policy to my daughter. Can I retain the right to use the policy as security for a loan?
A. No. To insulate insurance proceeds from estate taxes, you have to relinquish all policy rights to the new owner. That includes the right to borrow against or collect its cash surrender value.
Q. A close friend wants me to serve as executor of his will. Are there any drawbacks?
A. Possibly. You’re personally liable as an executor or administrator of an estate, even if you rely on an attorney who handles all the details and paperwork.
Consider, for example, what happened when Kenneth Leigh, an executive of a dress business, became administrator of the estate of his boss. Although he was familiar with the business, Leigh had difficulty with estate documents and blindly relied on the lawyer. Both overlooked the payment of $27,000 in estate taxes, until after all the assets were distributed to heirs. The Tax Court concluded that this executive and would-be administrator should be personally liable for the $27,000.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 200 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.