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On money

A lesson for teachers on a new tax deduction

Personal Finance editor


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By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published February 9, 2003

One of the hazards of writing about personal finance for a living is that friends, neighbors and relatives regularly ask for advice. Thus it was no big surprise when this e-mail from one of my cousins arrived in my electronic mailbox:

"Why don't you write an article on helping teachers figure out things they can deduct? People would love you, and you could even e-mail that article to your long-lost cousin in South Carolina. I don't even know where to look for information, and every phone call I make to my CPA costs me money."

This year, my cousin and her fellow teachers are in luck. They are the beneficiaries of a new "above-the-line" tax deduction. This is the best kind of deduction because it can be used even if you do not itemize. Teachers and other educators can now write off up to $250 of their unreimbursed out-of-pocket expenses for school supplies. While that's no bonanza, it is a little extra cash in teachers' wallets.

Teachers who spend more than that can add the excess to their miscellaneous itemized deductions, although it will be the rare taxpayer who can accumulate enough of these to qualify to deduct anything.

Teachers who take college classes also may benefit from this year's other new above-the-line deduction, the ability to write off up to $3,000 in tuition expenses.

My cousin's e-mail offers a reminder that we all need to check for deductions relevant to our work to be sure we are not overlooking anything. Most income tax breaks are not so occupation-specific, but people in similar occupations tend to qualify for similar tax breaks.

That means it is a good idea to at least glance through any tax information that might be provided by professional or industry associations, unions or employers. Even lunchroom conversations can be a source of tax tips, though it's best to research them or consult a professional before claiming them on your own return.

Q. I bought 500 shares of Microsoft for $49,000. I received 500 shares from a 2-for-1 split, then 1,000 shares from another 2-for-1 split, giving me a total of 2,000 shares. I sold my original 500 shares for $49,000 and the next 400 shares for $22,000. What is my cost basis for each transaction? If I sell my remaining 1,000 shares, what would my cost basis be?

The only income tax calculations I'm willing to do are those for my own family. However, I will tell you how to do this for yourself and hope to help other readers at the same time. This is one of the most common questions I get.

When there is a stock split, the basis splits at the same time. If you have 100 shares you acquired for $10 a share and you receive 100 additional shares in a stock split, your new basis is $5 a share for all 200 shares. This process is repeated every time the stock splits.

When there is a spinoff rather than a split, some of the old basis is assigned to the shares received in the spinoff. The company sends basis information to shareholders at the time of the transaction. It is up to the shareholders to hang onto it.

Your calculations are easy because you made only one purchase, making the basis the same for all your shares. People who make multiple purchases have to track each lot of shares separately through the course of splits or spinoffs.

Q. I have E and EE bonds that are no longer paying interest. I have been cashing in just a few each year to try to keep my income tax down, but cashing them increases the tax on my Social Security income. Would I be better off cashing them all at once so my Social Security would be taxed in only one year?

Yes. Your attempt to reduce your taxes is backfiring, not to mention the fact that you are losing out on the interest income you could be earning.

You should have exchanged your E and EE bonds for HH bonds while you had the chance to earn higher interest rates. Now that the rate for new HH bonds has dropped to 1.5 percent, they don't look so attractive. But if you don't need the income, you still could use the after-tax proceeds from your bonds to buy new EE bonds. That way taxes would at least be deferred on your future interest earnings.

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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