In 1995, the markets made you richer. Your mutual funds zoomed, and you sold stocks and bonds at huge gains. Now, brace yourself for tax season.
Since Congress didn't get around to passing the capital-gains tax cut that its leaders promised, you owe 28% on the difference between your selling price and your cost basis on all transactions. Plus you owe 28% on all mutual-fund capital-gains distributions. All those gains could make the income reported on the W-2 from your job look downright skimpy.
If these profits were a big chunk of your total income in 1995, you should have been making estimated tax payments on a quarterly basis. If you paid in at least 90% of your actual 1995 tax due by Jan. 16, 1996, or you paid in 100% of your 1994 tax due--110% if your 1994 adjusted gross income (AGI) was more than $150,000--then Apr. 15 should not be so stressful. But if you haven't protected yourself, there's nothing you can do now except figure your interest (9% per annum) and penalties (.5% a month) and pay those in addition to your tax.
HELP WITH HISTORY. Even if you have been estimating your taxes quarterly, you may not have made exact computations. As a result, you may still have a big data collection job ahead of you. If you sold any mutual-fund shares or switched within fund families, then you have to determine the cost basis of the shares you sold. An increasing number of mutual-fund companies are providing cost data on their yearend statements. But if you have owned the fund for a long time, you may have to call the fund company to get cost records going back many years. Allow four to six weeks for delivery.
It's simpler to obtain cost data for individual stocks and bonds. Your broker should be able to supply that information if the firm is truly full-service. If not, call the issuing company's investor-relations department to obtain the price histories. Be sure to take stock splits into account: A stock currently selling at $100 may appear to have a cost basis of $30 in 1990. But if the stock split 2-for-1 in 1992, then its adjusted basis is really $15.
If you have sold only part of your position in a stock or a mutual fund, then you've got a bit more work to do. Let's say you sold 25 shares of XYZ Corp. stock in 1995 for $10 per share. You bought 25 shares in 1991 for $2, 25 in 1992 for $4, 25 in 1993 for $6, and 25 in 1994 for $8. Which shares did you sell? You're allowed to choose--and typically you would pick the $8 shares, since they would yield the lowest capital gain.
In contrast, if these were shares in a mutual fund, you could only use the "specific identification" method if you had notified your fund company at the time of the transaction which shares you wished to sell. Otherwise, you would either use the first-in, first-out method or take an average cost. The FIFO method assumes that the shares you sold in 1995 came from your earliest purchase way back when. Average cost is the total number of shares you own divided into your total dollars invested, regardless of the timing of the purchase.
Your mutual fund's yearend statement, the 1099-B, will summarize all of your purchases and sales for the year. Your mutual fund will also issue you a 1099-DIV, which tells you how much you earned in ordinary dividends and capital gains. The capital-gains distribution is the gain that the mutual fund's portfolio manager realized from stock and bond transactions.
NEW STANDARD. After you get done reporting all your income, see how much you can offset with expenses. Here, the pickings are slim. Your medical expenses must exceed 7.5% of your adjusted gross income before you get any tax benefit. That means you need to have paid out of pocket more than $7,500 in medical bills on $100,000 of AGI. You can deduct state income taxes, home mortgage interest, and home-equity-line interest but not credit-card debt. Your charitable contributions over $250 must be accompanied by a receipt from the charity that says you didn't receive anything of value. (No more writing off the painting that you bought at a charity auction.) Finally, there's a catch-all category, miscellaneous itemized deductions, that includes unreimbursed employee expenses and tax-prep fees. These must exceed 2% of your AGI to count.
Don't forget exemptions for you, your spouse, and your dependents. Exemptions reduce your income by $2,500 per person. This year, you have a new standard to meet. "You're required to have a Social Security number for all dependents you claim on your return," says Mark Dow, a partner with Coopers & Lybrand in St. Louis. "That rule came into effect because people were claiming individuals who weren't dependents--and living things that weren't individuals."