Question:  My mom just died and left me $13,000. I paid down and off some bills.  How bad is it going to be come tax time?

Question:  I lost several thousand dollars trying to play the stock market this year. Can I use that loss to any kind of advantage when filing my income taxes?

Question:  This is a tax question. I removed money from my 403(b) plan with Fidelity to buy a house. This also happens to be my first house. Fidelity withheld 20 per cent of the withdrawal. Do I have to pay any taxes since that was withheld?

Question:  Good job on the website! My question is, what are tax-free bonds? How much interest do they usually pay? How much risk do they involve? Do you ever have to pay taxes on their value or interest?

Question:  How do I calculate mortgage repayments on a spreadsheet?

Question:  Is there a minimum amount of capital gains required before a 1099 form is sent to me? I earned $30 in long term capital gains on a mutual fund which I still own. I did not receive a 1099 form.

Question:  If I put extra money towards my principal on my house mortgage, will my regular house payments actually start taking more off my principal or does the total original amount of interest still have to be paid off first? I am looking for a faster way to pay off my house and how this works with the principal and interest.

Question:  What is phantom income?  Is it taxable?

Question:  How do I file a tax extension?

Question:  I've been involved with the 403b plan at my job. I've put 15% of my salary into the plan. Recently I've been looking into buying a house. I want to use some of the money in my 403b account for a down payment, but I don't want to pay the early withdrawal penalty or the income tax that would be due. What I want to know is this:           Can I roll $10,000 over from my 403b into an IRA and then turn around and take advantage of the once-a-lifetime IRA rule that allows you to withdraw up to $10,000 for a home? Since these are untaxed savings, will I have to pay tax on this money?

Follow-Up Response:  Thanks for your answer. I'll call the IRS and find out exactly what the deal is with 403b rollovers. If you find out anything else, please reply. Thanks again.

Question:  I have a Roth IRA. I would like to know if I can convert is to a regular IRA?

Question:  Beginning 2001, will there be a 18% capital gains treatment for stocks held over 5 years?

Answer:  Yes, you can!  While we have to pay taxes on our profits, we do get a tax break when we have losses.

If you have losses (also known as capital losses), first you need to balance those losses against any profits (also known as capital gains) that you have generated. Capital gains can come from selling an investment (such as a stock) at a profit or from capital gains distributions from mutual funds. If you still have a loss once you have balanced out your capital gains, you can then deduct up to $3,000 of your capital losses off your gross income. On a person who is in the 28% tax bracket, this will save $840 in taxes. If you still have additional losses after using this $3,000 maximum deduction per year, you can then carry forward these losses to future years.

It is important to remember that a loss must be realized before it can be used. A paper loss does not count. You will show your stock gains and losses on Schedule D of the 1040 series federal tax forms. If you do not file your own returns, your tax accountant will take care of this.

Answer:  It depends on your current tax bracket. You will be required to pay taxes on the money withdrawn from your 403(b) plan. Withdrawals from 403(b) plans are considered extra income so you will be taxed at your maximum tax bracket. On your tax form, you will add the amount of your 403b withdrawal to your adjusted gross income. You will now have a higher tax liability because of your higher income. But, you will also show that Fidelity withheld 20% of your withdrawal. This will be a tax credit that you will show. In the end, the amount of extra tax you owe due to the higher income may be more or less than the 20% tax that Fidelity withheld.

Also, are you under 59 1/2? If not, then you will also need to pay a 10% penalty on the 403(b) withdrawal. It does not make a difference whether it is a first time home purchase or not. You can only avoid the 10% penalty on a first time home purchase if the withdrawal comes from a traditional IRA or a Roth IRA. If you are over 59½, you can withdraw money out of the 403(b) plan and avoid the 10% penalty. Other special circumstances, like disability, may also let you avoid the 10% penalty as well. You still have to pay regular income tax on the withdrawal, though.

Answer:  Thanks very much for the feedback on the website. You have some good questions. Here are some answers:

What are tax-free bonds:  Tax-free bonds are bonds whose interest are exempt from federal tax and sometimes state tax. The most common tax-free bonds are municipal bonds. Municipal bonds are bonds that are issued by state and city governments and municipalities like water districts and school districts. These entities issue bonds to raise money. Investors buy the bonds and in essence lend money to the municipality. In return, the investor receives interest and a promise that they will receive their principal back at a later time at maturity of the bond.

Municipal bonds are federal tax-free. This means that you pay no federal income tax on the interest you earn. This is a significant saving because maximum federal tax rates are 39.6%. The higher your tax bracket, the more benefit you receive from tax-free bonds. If you buy a municipal bond from the state you live in, there is usually no state income tax as well. This is also important for residents of states that have a state income tax. State income tax rates can be as high as 10%. For example, the maximum state income tax in California is 9.3%.

It is important to note that some municipal bonds are subject to AMT (Alternative Minimum Tax). Typically, people who make a lot of money and have large deductions are often subject to AMT. A municipal bond may not be tax-free if a person is subject to AMT.

There are other tax-advantaged bonds as well. For example, US Treasury securities (Treasury Bills, Treasury Notes, and Treasury Bonds) and certain US Agency bonds are state tax-free. They are all federally taxable though.

How much interest do they usually pay:  Because a municipal bond is tax-free, the yields are usually lower. But, for a person that is in a higher tax bracket, municipal bonds usually provide higher after tax yields. Municipal bonds in early 2001, are typically yielding anywhere from 3½ to 5%. For a person in the 31% federal tax bracket, a 5% yield on a municipal bond that is federal and California income state tax-free is roughly equivalent to buying a taxable bond that is yielding 8%.

The yield you get depends on many factors including quality of bond, length of maturity, type of bond (i.e. general obligation versus revenue bonds), call features, the strength of the municipality issuing the bonds, the presence of insurance, and other factors.

The higher the quality the bond the lower the yield you receive because the more confidence you have that you will get your money back. Generally, the more risk you take in a bond, the higher the yield an investor expects. Bonds are rated by the following in order of highest credit quality:

AAA, AA, A, BBB, BB, B, CCC, CC, C, D.

Bonds at BBB and above are considered investment grade. Bonds below BBB are considered non-investment grade or junk bonds. Bonds receive a D rating when they are in default. Default means the issuer has stopped paying interest and principal.

The longer the maturity, usually the higher the yield.

General obligation municipal bonds usually offer lower yields than revenue bonds because they are considered safer. A general obligation bond is usually issued by a state or city government. It is backed by the taxing power of the government and is thus considered safe. A revenue bond is backed by the revenues of a project such as a utility or a toll bridge, for example. Because these revenues are not guaranteed, these bonds are not considered as safe and investors demand higher yields.

A call feature allows the issuer of the bond to call the bond back before it matures. This can be bad because you may get your money back sooner in a lower interest rate environment. You are now stuck with having to reinvest your money where yields are much lower. But, callable bonds compensate you with this risk by giving you a higher yield.

Bonds issued from municipalities that have proven track records of making interest payments generally have a higher credit quality. Investors will then receive lower yields in return for the safety.

Municipal bonds sometimes have insurance guaranteeing that interest and principal will be paid. Examples of insurance companies that provide this insurance are AMBAC and MBIA. Municipal bonds with insurance are typically rated AAA and investors will receive lower yields because of their safety.

How much risk do they involve:  This depends. There is a spectrum of risk involved with municipal bonds. Most municipal bonds are very safe and high quality. Some are less safe and have a lower quality. You can buy municipal bonds that are insured. This usually gives the municipal bond the highest credit quality rating. It is important to note that if there was ever a massive bond failure, the insurance company may not be able to make payments.

It is up to you to choose how much risk that you want to take. Most municipal bonds are high quality and have low risk levels. The default rates on investment grade municipal bonds are very low. In return for these lower risk levels, municipal bonds offer lower expected returns in relation to other asset classes like stocks, which offer higher expected returns but have higher risk levels.

Do you ever have to pay taxes on their value or interest?  If you buy municipal bonds and you live in the state from where the bonds came from, you typically will not have to pay any federal or state tax over the life of the bond. There are three exceptions.

The first exception is if the bond is subject to AMT (Alternative minimum tax). Some municipal bonds are tax-free but the interest is added back for AMT calculations. If you are a wealthy investor and purchase these types of bonds, you may end up paying taxes.

The second exception is for Industrial Revenue Bonds. They are a separate class of municipal bonds and are usually fully taxable. These are usually bonds that are issued by a municipality but benefit and are guaranteed by a private company.

The third exemption exists if you sell your bond before maturity for a profit and realize a capital gain. Bonds usually appreciate in value when interest rates go down. If you were to buy a bond and it then appreciates and you sell it, you would owe some taxes on the profits. As bonds typically do not appreciate that much in value, the amount of the profits are typically not large.

You can buy individual municipal bonds or buy them through a mutual fund. For smaller investors, mutual funds typically make more sense as they offer professional management and diversification for a small fee (the expense ratio of the fund). If you are interested, I would be happy to provide names of high quality, highly rated mutual funds that invest in municipal bonds.

Answer:  I will explain how to do this using Excel. If you have Excel, that is great! If you do not, your spreadsheet program should work similarly to Excel and you can try to duplicate the actions. Open up Excel: Now, do the following.

1. Click on an empty cell.

2. Click on "Insert" on the top toolbar and choose "Function".

3. Click on "Financial" in the Function category.

4. Click on "PMT" in the Function name. A box will appear.

5. In the "Rate" category, enter your interest rate. If you are calculating monthly payments, divide your interest rate by 12. For example, if your mortgage rate is 7%, you can enter .07/12 in the box. Also, .07/12 = .005833 and you can enter .005833 in the box as well.

6. In the "Nper" category, enter in the number of periods. If you have a 15 year mortgage with monthly payments, the number of periods is 15 x 12 = 180 periods.

7. In the "PV" (present value) category, enter the value of the mortgage.

8. In the "FV" (future value) category, enter 0.

9. In the "Type" category, enter 1 if payments are made at the beginning of each period, and enter 0 or leave it blank if payments are made at the end of each period.

Hope this helps. If you have any follow-up questions, please write back.

Answer:  The mutual fund company should send you a 1099 form for your long-term capital gains distribution. Sometimes they are late, and this may be the case. Regardless of whether they send it or not, you still need to report the amount on your tax forms if the mutual fund is in a taxable account. If the mutual fund is in a qualified account like an IRA or a 401k, you do not have to worry about the gain. In those accounts, all taxes are deferred until you actually withdraw money out.

If the mutual fund is in a taxable account, you will need to report the distribution on Schedule D. (If all your capital gains are mutual fund distributions, there is a short cut that may allow you to skip using Schedule D). Because the amount is long-term, your maximum tax on the long-term capital gain will be 20% if you are in the 28% federal tax bracket or higher. If you are in the 15% federal tax bracket, your tax on the long-term capital gain will be 10%.

If you file your own taxes, the tax forms will explain how to show this capital gain. If you use an accountant, let your accountant know that you received this $30 distribution.

Answer:  This is a good question and depends on the type of loan. In most cases, making additional payments each month goes directly towards paying off principal in the mortgage. By doing, this, you speed up the time upon which the mortgage will be paid off.

Here is how a typical mortgage works. With most traditional home mortgages, part of your monthly payment goes towards interest and part goes towards principal. In the early part of a mortgage, most of the payment goes towards interest and little towards principal. As time goes by and the principal begins to fall, more of the monthly payment goes towards principal and less towards interest. This is because the amount of interest due each month is dependent on the amount of principal. Less outstanding principal means less interest due. Near the end of the mortgage, most of the monthly payment goes towards principal.

When you make an additional payment on top of your required monthly payment, that extra payment goes straight towards paying off principal. This reduces principal and shortens the life of the mortgage. Future monthly payments now pay off more principal instead of interest. The more you prepay, the more principal you will reduce, and the faster you will pay off your mortgage. This represents a great way to pay off your mortgage.

Another great way to save money is to refinance the existing mortgage on your house. Interest rates have come down. If you can refinance and reduce your mortgage interest rate, you will have less interest to pay and more of your monthly payment that you are currently paying can go towards principal. When you refinance at a better rate, your monthly payment will drop. To pay off the mortgage faster, keep paying the same amount or more as you did with the original mortgage. You will be paying off more principal and will shorten the life of your mortgage.

Answer:  Phantom income is income that you have to show on your taxes but that you never received. For example, let's say that you bought a zero coupon bond or most other discounted bonds. (A discounted bond is a bond that is bought for less than par value or usually $1,000.) Each year, you have to accrete a certain amount of the discount and show it as income. You did not receive any income but you have to show it on your taxes.

Here is an example. You buy a discount corporate bond for $800. The par value is $1,000. This is the amount that you will receive at maturity. It has a coupon of 7%. This means that you will receive $70 per year in interest. It matures in 5 years at $1000. Thus, in that 5-year period, your bond will appreciate by $200. You paid $800 and it matures at $1,000. This averages out to $40 per year. For your taxes, you have to show the following income:

$70 in interest plus

$40 in accretion.

The total is $110 in income. You received the $70 in interest during the year, but you never received the $40. This $40 is known as phantom income because you paid taxes on it but never actually received it.

While you have to show this amount as income, you do get to increase your cost basis. So, after the first year, your cost basis on the bond is now increased to $840 from $800.

There are certain other investments that distribute phantom income as well. In addition to most discounted bonds, Treasury inflation protected securities (TIPS) do as well.

Answer:  Visit http://www.irs.gov. This is the IRS web site. On their home page, you will see a whole story that explains how to file for an extension. In brief, you will need to fill out Form 4868. The deadline for this year 2001 is Monday, April 16. Normally, it is April 15. If you do file for an extension and you owe taxes, remember to include a check for approximately the amount that you owe. The web site will explain all of this to you.

Question:  I've been involved with the 403b plan at my job. I've put 15% of my salary into the plan. Recently I've been looking into buying a house. I want to use some of the money in my 403b account for a down payment, but I don't want to pay the early withdrawal penalty or the income tax that would be due. What I want to know is this:           Can I roll $10,000 over from my 403b into an IRA and then turn around and take advantage of the once-a-lifetime IRA rule that allows you to withdraw up to $10,000 for a home? Since these are untaxed savings, will I have to pay tax on this money?

Answer:  This is a good question! I have done some research and I can only give you a partial answer as of now. Here are some answers that I can tell you.

All distributions from either a 403b plan or a traditional IRA are taxed as income. This is another way of saying that the distributions are taxed at your maximum tax rate. Thus, you are going to have to pay some taxes. The only way that a distribution may not be taxed is if you made a non-deductible contribution, which probably does not apply here. So, there is really no way to avoid paying the income tax on your distribution.

What are you trying to do is to avoid paying the 10% penalty. In an IRA, you can withdraw up to $10,000 and avoid the 10% penalty, if the funds are used towards a purchase of a first time home. (Remember, you still have to pay income tax on the amount that is withdrawn.) Based on what I have read, you can not do this from a 403b plan. If you do this from a 403b, you would pay full income tax on the distribution and pay a 10% penalty. In an IRA, you would still pay the income tax, but avoid the 10% penalty.

Now, what you want to do is move your 403b to an IRA and take advantage of that feature. You are allowed to rollover a TSA into an IRA. I do not know if you can rollover a TSA into an IRA while you are still employed. Also, at this point, I do not know if you are allowed to use that $10,000 exemption once the rollover is complete.

I am going to recommend that you talk to an accountant or call the IRS directly. Their number is (800) 829-1040 and contrary to some opinions, they are very helpful and courteous. As of this writing, I have called the IRS and they are going to call me back within 3 days. I will ask them if a person can rollover a 403b into an IRA, while they are still employed. And if they are then eligible for that $10,000 penalty free distribution. I will contact you when I receive their message.

Follow-Up Answer:  The IRS called back. This is what they said. First, you can rollover your 403(b) plan into an IRA only under certain circumstances. These include attainment of age 59½, hardship, separated from service, death, and disability. If you are still working at your job where your 403(b) is held, it does not appear you can rollover the 403(b) into an IRA.

Once the 403(b) is rolled over into an IRA, the IRS agent felt (although I do not feel she was 100% confident) that you could use the funds penalty free for a first time home purchase even though the source of the funds came from a 403(b) plan. Remember, though, that you are still responsible for paying normal income taxes on the distribution. The benefit comes in that you avoid the 10% penalty. Also keep in mind, to qualify for this penalty free distribution, you can not have owned an interest in the home for two years before the purchase.

If you end up rolling over your 403b into an IRA and taking a distribution, I would still consult with an accountant or reconfirm with the IRS that everything is okay. This is a challenging question!

Answer:  The answer is no. But there is an exception. If you convert a traditional IRA to a Roth IRA in a certain year, you have until the time you file your taxes in the next year to convert back to the traditional IRA. This is known as recharacterization. This is beneficial to do if the investments after the conversion to the Roth IRA have dropped in value.

For example, let's say in the year 2000, you convert a traditional IRA to a Roth IRA. In 2001, you file your taxes on April 16. You could recharacterize the Roth IRA back to a traditional IRA by April 16, 2001. This information came from a call to the IRS. If you have similar questions, you can call them at (800) 829-1040.

Answer:  The answer is yes. But it applies only to stock purchases made in the year 2001 or later.

The new tax rule is as follows. If you buy a stock after January 1, 2001 and hold it for at least five years, you are eligible to receive special capital gains treatment when you sell the stock.

If you are in the 28% federal income tax bracket or higher, you will be eligible for an 18% capital gains tax rate instead of the normal 20%. If you are in the 15% federal income tax bracket, you will be eligible for an 8% capital gains tax rate instead of the normal 10%.

Thus, you save an extra 2% on the capital gains tax rate if you buy the stock in the year 2001 or later and you hold it for 5 years.