Monday, March 27, 2000
Shortcuts added to tax forms
Investor options simplified
BY GARY KLOTT
Gannett News Service
Figuring the tax on investment income has long been one of the most complicated aspects of filling out income tax returns.
But in recent years, the IRS and Congress have taken
steps to ease some paperwork burdens for investors. There are now simplified options for writing off foreign taxes paid on overseas investments and for reporting the investment income of a young child.
This year, the IRS created a shortcut that will allow many mutual fund investors to avoid the hassle of filling out Schedule D.
Investors who received only capital gains distributions from their mutual funds but who have no other capital gains or losses to report can now skip Schedule D. Instead, they can fill out a much shorter worksheet and report the fund distributions on the front of Form 1040.
The shortcut option should make life easier for many investors, as well as the IRS.
Before skipping Schedule D, read through the three-point checklist in the IRS instructions to make sure you're eligible to take advantage of the shortcut.
If you are eligible, fill out the worksheet in the instruction booklet to ensure that you don't end up paying regular rates on gains that are eligible for the lower, long-term capital gain rate of 20 percent (10 percent for taxpayers in the 15 percent tax bracket).
• Foreign investments: In recent years, a growing number of investors have poured money into foreign stocks, bonds and mutual funds.
When you invest abroad, you usually get hit with taxes from foreign governments on your overseas investment income.
But the U.S. tax law allows you to write off any foreign taxes paid on your investment income on your federal income tax return.
There are two ways to do it. You can claim a foreign tax credit on Form 1040, or you can claim an itemized deduction on Schedule A.
• Reporting a young child's investment income: Most parents have a couple of options for reporting the investment income of a son or daughter under age 14.
You can fill out a separate return for the child, or you can include your youngster's income on your own return and attach Form 8814.
Including your child's income on your return will save you time, but you may be able to save some taxes by filing a separate return.
Whichever method you choose, the first $700 of the child's investment income will be tax-free, and the next $700 will be taxed at the child's 15 percent tax rate. Additional income is taxed at the parents' rate, which may be higher than 15 percent.
But including your child's income on your return can result in a bigger overall tax bite. That's because your child's income will increase your “adjusted gross income,” which in turn can reduce some of your tax benefits.
• Minimizing the tax bite on mutual fund sales: Investors who hedged their bets on the stock market and sold off part of their holdings in a particular mutual fund last year may be able to save some tax by taking advantage of the “average cost” method to figure taxable gain.
Unless you instructed the fund manager to unload specific shares at the time of you redemption, the IRS generally makes you assume on your tax return that the first shares you acquired were the first shares sold. If your fund has steadily risen in value, this first-in, first-out method could result in the biggest taxable gain possible. That's because the shares presumed sold were those purchased at the lowest price.
But most fund investors are eligible to use the average-cost method instead. Under this formula, your gain is based on the average cost of all shares in your account. As a result, the average-cost method can produce a smaller tax than the first-in, first-out method.
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