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Tax Talk with George Saenz

Ask the tax adviser

Capital losses and IRA distributions

Dear Tax Talk:
My wife and I are 70½ this year. We also have a large short-term loss this year. Can we cash out the amount of the loss from our IRA accounts?
Jerry

Dear Jerry:
If I understand correctly, you want to offset your IRA minimum distributions (or more if possible) with a short-term capital loss that you sustained in accounts or transactions that are not retirement accounts.

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Funds withdrawn from IRAs are considered ordinary income, not capital gain income.

Within the IRA you may realize a capital gain on the sale of an appreciated security. However, when the money from that security sale is withdrawn, it is taxed as ordinary income to you individually (or to your wife in the case of her IRA), not as capital gain.

Capital gain within the IRAs does not in any way affect your capital losses outside your IRAs. Capital losses in excess of capital gains outside your IRAs are only deductible up to $3,000 against ordinary income, which includes dividends, interest, pension income, taxable Social Security benefits and your IRA withdrawals.

This Bankrate table shows how much money must be taken from retirement accounts each year under the Internal Revenue Service's new minimum distribution rules.

Taxability of employer-provided vehicle

Dear Tax Talk:
I am currently given the usage of a company vehicle, for which I am responsible for all maintenance and consumables. I now have been offered to return the vehicle and, in exchange, be given an "allowance" of $500 per month. How should this payment be classified to be most beneficial to me?

I am hoping that the tax rate for vehicle allowance is far lower than personal tax. Would it be possible for the company to directly pay monies into a vehicle loan account on my behalf as a company expense? Eighty-eight percent of my mileage is commuting to work.

Also, what taxation rate should I expect on this amount? I work in South Carolina, but am a resident of Georgia.

I appreciate your help.
Erwin

Dear Erwin:
You don't say if the company is including the value of the vehicle in your paycheck. If 88 percent of your use of the car is for commuting to and from home, then at least 88 percent of the lease value of the vehicle should be taxed to you as wages.

If the other 12 percent is business (such as visiting customers) and you pay the consumables, then you should be able to offset some of the value included in your paycheck with these expenses as long as you account to your employer for these expenses.

If you don't use the car at all in business, the vehicle's full value should be considered additional wages and you would not have an offset.

When an employer includes the value of a vehicle in your paycheck, taxes relating to this inclusion are deducted from your other pay.

For example, if you earned $5,000 a month and had no vehicle inclusion, your net paycheck after federal and state income tax and FICA and Medicare taxes may be $3,750 after accounting for 25 percent in payroll deductions.

If the inclusion of the vehicle is $500, then your total pay for tax purposes is $5,500 a month. Assuming the tax is the same 25 percent, your net pay goes down to $3,625. This amount represents the $125 in tax relating to the auto inclusion that comes from your cash wages of $5,000 less the $1,250 you owed anyhow.

If you accept the $500 allowance, then most likely the $500 will just be considered additional wages, since your business use of the vehicle is so minimal. Your taxes will probably be similar in proportion to the taxes in the example above, assuming that your employer is already including a similar amount in your paycheck for the lease value of the vehicle. Your state tax situation will probably not differ much.

Again, since you don't use the vehicle in business, if your employer pays off a car loan, that payment amount is considered additional compensation subject to payroll taxes.

If your employer has not been including the vehicle in your wages, then it has been treating the car as if you did use it in business. This is wrong on the company's part as well as your part. Your employer should consult with the company's accountant to determine the proper tax treatment of employer-provided vehicles. Failure to do so can create problems for your employer and you.

-- Posted: Sept. 18, 2001

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