Taxes, trusts, and passing down the family farm
Q: In 1980, my grandmother placed her farm in a trust. In December 2001, the trust was dissolved, and title to the farm then passed to the grandkids (myself included). I promptly sold (January 2002) my portion of the farm to one of the other grandkids. I have received a 1099-S reporting the $20,000 I received for the sale of my portion of the farm. When I fill out my 1040 schedule D (capital gains) form, what value do I enter for the basis? The value of my portion of the farm in 1980, or the value when I actually received title in 2001? What do I put in the column for "date acquired"?
F.N., Bowling Green, Ky.
A: Get thee to an accountant! Preferably, one who knows trusts. That's because the answers to your questions lie in the trust documents. Every trust seems tailor-made to the individual who creates it, and each can create a good number of tax questions. Only by deciphering the language of the trust, and how it passed control of the land, can you find your answers.
Depending on the trust, your cost basis and acquisition date for the property probably are determined by the date of your grandmother's death, presuming she has passed away, says Doug Flake, an accountant with Squire & Co., in Orem, Utah. Still, it's possible that the farm's value might be clear back to the time when your grandmother acquired the property.
Q: My husband was laid off from his job last year and we ended up cashing in his 401(k) as we struggled financially. When the money came, his former company said taxes and penalties had been deducted. Will we owe more April 15?
K.W.B., Pembroke, Mass.
A: That all depends on your income tax bracket, says Richard O'Donnell, a pensions tax analyst at RIA, the New York-based provider of tax information to tax professionals.
Your employer likely withheld 20 percent of your distribution, which is standard, to cover taxes, Mr. O'Donnell says. But if you're in the 28 percent or 31 percent tax bracket, you might owe even more.
Besides the income-tax hit, you're also liable to a flat 10 percent penalty for taking money out of the 401(k) before you're eligible. These taxes can exact a heavy toll on your retirement account. It's too late now, but if you had rolled over some of the money to a qualified plan, you could have avoided taking a hit on the entire payout.