JANICE GRACE, LOS OSOS, CALIF.
First, congratulations to your brainy daughter! She rode off with a ‘96 Chevy, two Honda motorcycles, a living-room set and eight other prizes, including three gold bars. As for the downside of winning prizes on TV, I know it well. Years ago, my husband went on a show called ““Three on a Match.’’ As he was heading for the stage, I hissed, ““Do not win those three rooms of Mediterranean furniture.’’ Guess whose beach cottage wound up with a Mediterranean theme? We had to sell it to get rid of the stuff.
Game-show promoters want the highest possible price tags on their prizes to make viewers oooh and aaah. They use the manufacturers’ suggested retail price, says Sally Daynes of CBS’s prize department. No matter that those items sell at substantial discounts in every mall. No matter that, as a private seller, you wind up with even less. (You parted with those Honda bikes, valued at $6,600 by the show, for just $1,500 each.)
Your daughter could have declined the prizes she didn’t want. But in the excitement, she accepted everything. Nevertheless, you may be able to whittle down the actual tax, says Thomas Ochsenschlager of the consulting firm Grant Thornton.
Do it, he says, by proving what the goods were really worth. For things you sold new, the value should be the price you got minus selling expenses, such as ads. Document your sales efforts, to show that you tried to get the highest possible price. For the prizes you kept, go to the mall, camera in hand, and record what each item actually sells for. If you can’t find your exact sofa or chair, get three or four comparable items and take the average price.
Report the $38,000 on the tax return (the IRS will look for it). Then subtract the overvaluation and pay a tax on the prizes’ actual worth, Ochsenschlager says. Attach a note explaining all.
You’ll probably get a letter from the IRS. Respond with detailed documentation. That might settle it or lead to a satisfactory negotiation. If not, there’s always tax court. If you lose, however, you will owe back taxes plus interest that accumulates as time drags on.
QUESTION: I want to make a nondeductible contribution to my Individual Retirement Account. Is that a good deal? How much hassle will there be when I start withdrawing the money?
VIVIAN BOKASH, LEBANON, IND.
There’s a long list of rules explaining who’s eligible for a tax-deductible IRA. When you’re ruled out, a nondeductible IRA sometimes makes good sense. Those with a paycheck or alimony can contribute up to $2,000 a year. Starting this year, stay-at-home spouses can put in $2,000, too.
Here’s what the paperwork amounts to:
You report nondeductible contributions on Form 8606 and file it with your tax return. Keep a copy, to prove how much you put away. You don’t want to be taxed again when you draw the principal out. The only taxes due will be on the money you earned.
Any withdrawal is treated as coming partly from your deductible IRA (if you have one) and partly from the nondeductible IRA. As an example, say you have a deductible IRA that accounts for 80 percent of your total IRA stash. You’ll be taxed on 80 percent of the money you withdraw, no matter which IRA you choose to take it from.
Set up a separate IRA for your nondeductible contributions. That makes it easy to calculate the percentages. At tax time, hand over the mess to a competent tax accountant. How much easier can it get?
Now for the real question: when is a nondeductible IRA smart? All withdrawals are taxed in your regular income bracket. So you’ll do well with an IRA invested in bonds or certificates of deposit, which are taxed in that bracket anyway. Ditto if you buy stocks and expect to be taxed at 15 or 28 percent (you’d pay the same rate on gains outside the IRA and couldn’t claim a tax deferral). Capital gains are taxed at either the 28 percent capital-gains rate or your regular rate, whichever is less. But if you’re in a higher bracket, don’t buy stocks in a nondeductible IRA. Outside, you’d pay 28 percent. Inside, you pay at your rate, which means the IRA (shudder) raises your tax.
QUESTION: I’m a retired police officer with health insurance through the Los Angeles Police Relief Association. Years ago the association canceled my policy right after my wife had a mastectomy. She still had the bandages on and we had to worry about substitute coverage. This association has changed policies at other times, too. Is it legal to cancel my insurance without my consent?
ROBERT HAYS, ALHAMBRA, CALIF.
Associations aren’t obliged to bring a new insurer in. If they do, every member will be technically eligible for replacement coverage. The new group policy, however, may not pay for everything the old one did. Eligible illnesses should be covered right away, with no further waiting period. But if the policy excludes your particular condition, you may be on your own (unless special arrangements are made on your behalf).
There is a rule to help people like your wife. Your original carrier was probably obligated to offer you an individual policy–which, oops, would probably cost more–as long as she was midstream in the treatment of an illness. They’re supposed to be around to take the bandages off.
Besides outright cancellation, there are two ways of losing association coverage: (1) when you’re no longer eligible to belong to the group; (2) when you turn 65 and go on Medicare. In the latter case, some groups offer Medigap insurance.
QUESTION: What are my rights to a fully vested profit-sharing plan? I worked for a small consulting firm for nine years. The last statement I have shows that my account was worth $30,158. I have tried to talk to my ex-boss, to no avail. My letters aren’t answered, and I don’t have the money to sue. Does the government have loopholes that let employers get away without paying a loyal employee?
NAME WITHHELD, GREENBRAE, CALIF.
But gosh, Name Withheld. You knew other workers who left the firm weren’t getting their profit-sharing money, either. You suspected your boss was taking deductions while funding the plan improperly. You also knew he was lying to clients about his credentials. So why are you surprised?
You should complain to the Pension and Welfare Benefits Administration in Washington (202-219-8776) or its regional office where your employer is headquartered, in your case Dallas (214-767-6831). It’s best to write, clearly stating your problem and including all correspondence with the employer, your age, your dates of employment and your daytime phone number and address. Get your fellow workers to write, too; the more complaints, the better your chance that the government will get on the case. But there are a lot of creeps to chase. Any worker lucky enough to learn that her pension plan may be a fraud should do her best to find employment somewhere else.
Send your questions to Jane Bryant Quinn, NEWSWEEK Focus: On Your Money, 251 West 57th Street, New York, N.Y. 10019. Letters can be answered only in the column.
