A: Dear Lady Lee,

The general rule is that taxpayers may generally choose to use either the cost basis method or the average basis method to figure gain or loss on the sale of mutual fund shares.

The answer to the question of whether one owner of two mutual fund accounts with different custodians that invest in the same mutual fund can use different basis methods for each account, follows the general rule. Because they are separate accounts, the owner can use the same method to calculate basis, or a different method of basis calculation for the two accounts.

Likewise, when a taxpayer sells ALL the mutual fund shares in an account, and later buys more shares of the same mutual fund, they can choose either method for calculating the basis of the newly purchased shares.

Any questions regarding a specific company's policies should be directed to that custodian or agent. However, one federal tax requirement to note is that the mutual fund owner must notify the custodian of any election to use the average basis method for newly acquired covered securities. Generally, with certain exceptions, a covered security is a security you acquired after 2010. This election is made by sending written notice to the custodian or agent who keeps the account. The taxpayer may revoke this election, also by written notice to the custodian or agent.

Please note that there are new rules when using the average basis method. Taxpayers can no longer use the double-category method for figuring average basis. In the past, taxpayers using the average basis method for sales could use either a single-category method or double-category method.

Under the single-category method, the average basis of all shares owned at the time of each sale is used to figure basis, regardless of how long the shares are owned. Using the double-category method, all shares in an account at the time of each disposition are divided into two categories: short term and long term. Shares held one year or less are short term, and shares held longer than one year are long term, and the average basis is figured separately for each category.

More information about the average basis election rules and other mutual fund basis rules is provided in IRS Publication 550, Investment Income and Expenses on pages 47 - 49. Information about covered securities and the exceptions is available in the 2011 Instructions for Schedule D (Form 1040), Capital Gains and Losses.

Both products are available on the IRS.gov website, or you may have them mailed to you by calling 800-TAX-FORM (829-1040).

A: Dear Lady Lee,

You do not have to use the same method to determine the basis of mutual fund shares in the accounts registered to you and to your husband, or the joint account registered in both names. These are separate accounts and the basis can be determined using a different method for each. Whether you file your federal taxes jointly or separately would not affect how you determine basis in these accounts.

When a taxpayer sells mutual fund shares they must determine which shares were sold and the basis of those shares to figure gain or loss on the sale. If all the shares in a particular mutual fund were acquired on the same day and for the same price, figuring their basis is usually not very difficult. However, when shares are acquired at various times, in various quantities, and at various prices, those factors often make figuring basis more difficult.

Taxpayers may generally choose to use either the cost basis method or the average basis method to figure gain or loss on the sale of mutual fund shares. However, the cost basis method may be used only if an average basis method has not been previously used for a sale, exchange, or redemption of other shares in the same mutual fund. If a cost basis method is used for a mutual fund, a taxpayer can choose either the specific share identification method or first-in first-out (FIFO) method.

Under the specific share identification method, the taxpayer must adequately identify the shares sold, and use the adjusted basis of those particular shares to figure gain or loss. Special rules apply to how to adequately identify the mutual fund shares that are sold.

The FIFO method is commonly used when mutual fund shares were acquired at different times or at different prices, and the taxpayer cannot identify which shares are sold. Under the FIFO method, the basis of the shares acquired first are used as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely.

IRS Publication 550, Investment Income and Expenses, has very good information about mutual funds and determining basis. It also has a helpful table that illustrates the use of the FIFO method compared with the use of the average basis method to figure the cost basis of shares sold. It also has a worksheet you can use to keep track of the adjusted basis of your mutual fund shares.

The basis rules for mutual funds and other securities owned by individuals do not apply to securities held in individual retirement arrangements (IRAs), section 401(k) plans, and other qualified retirement plans. You do not report gains or losses from mutual fund sales transactions that occur within your Roth IRA or other retirement plans on your individual income tax return.

You can view or download Publication 550 at the IRS.gov website or order a copy through the mail by calling 800-TAX-FORM (829-3676).

I can only provide you with the rules that apply to federal income taxes. If you want information about the income tax rules that apply to California residents, you should contact the Franchise Tax Board's Daniel Tahara at www.sacbee.com/ask.

A: Dear Tumbleweed,

When a taxpayer sells jointly owned property that has been held for investment at a loss, each owner normally claims a capital loss deduction based on their respective ownership interest. The rules are different for property held for personal use than those for property held for investment. When property held for personal use is sold at a loss, the loss is not deductable. The determination of whether property is held for investment or for personal use is based on all the facts and circumstances involved with the investment.

Property taxes and homeowner dues are usually not factors in figuring a gain or loss when a property is sold. Property taxes are normally deductible on a yearly basis on Schedule A, Itemized Deductions. Similarly, homeowner dues paid in connection with investment property may qualify as an investment expense on Schedule A.

Allowable investment expenses (other than interest expenses) are usually deducted as miscellaneous itemized deductions if they are ordinary and necessary expenses paid or incurred to produce or collect taxable income, or to manage property held for producing taxable income. An ordinary expense is one that is common and accepted for a particular investment activity, and a necessary expense is one that is helpful and appropriate for the activity. The deduction for most income-producing expenses is limited to the total of these miscellaneous deductions that is more than two percent of your adjusted gross income.

In most cases taxpayers will use new Form 8949, Sales and Other Dispositions of Capital Assets to report individual capital gain and loss transactions when filing their 2011 federal taxes. The new form is filed with Schedule D, Capital Gains and Losses, which is now used as a summary sheet, reporting total amounts for all individual transactions, and certain tax calculations.

Capital losses are first applied against capital gains on Schedule D to arrive at either a net gain or a net loss. If capital losses are more than capital gains, a taxpayer can normally claim a capital loss deduction on line 13 of Form 1040, U. S. Individual Income Tax Return. The maximum yearly capital loss deduction is $3,000 ($1,500 for married persons who file a separate return).

If the total net loss is more than the yearly limit on capital loss deductions, the unused part may be carried to the following year and treated as if the loss is incurred in that next year. If part of the loss is still unused, it can be carried over indefinitely to later years until it is completely used up.

More information about capital gains and losses is available in Publication 550, Investment Income and Expenses. You may view or download this booklet and the forms and instructions mentioned at the IRS.gov website. You can also have these federal tax products mailed to you by calling the IRS at 800-TAX-FORM (829-3676).

A: Dear Gen,

I assume when you say "claim tax at the end of the year" you are referring to claiming the Child and Dependent Care Credit. This credit allows taxpayers to claim a tax credit for a portion of the work-related costs to care for a qualifying person.

Child and dependent care expenses must be work-related to qualify for the credit, which means the expenses qualify only if they allow you (and your spouse if filing jointly) to work or look for work and they are for a qualifying person's care. A dependent qualifying child who was under age 13 when the care was provided is an example of a qualifying person for this credit.

However, if the payments you make are paid to your child under the age of 19 to care for a qualifying person, those payments would not qualify for this credit. Please see IRS Publication 503, Child and Dependent Care Expenses on pages 7 - 8, which says in part:

"Payments to Relatives or Dependents
You can count work-related payments you make to relatives who are not your dependents, even if they live in your home. However, do not count any amounts you pay to:

1. A dependent for whom you (or your spouse if filing jointly) can claim an exemption,

2. Your child who was under age 19 at the end of the year, even if he or she is not your dependent,

3. A person who was your spouse any time during the year, or

4. The parent of your qualifying person if your qualifying person is your child and under age 13."

You can view or download Publication 503 at the IRS.gov website or have a paper copy mailed to you by calling 800-TAX-FORM (829-3676).

A: Hi Dano,

Life insurance proceeds paid to a taxpayer because of the death of the insured person are usually not taxable. However, when a policy holder surrenders a life insurance policy for cash, the taxpayer must report and pay tax on any proceeds that are more than the cost of the life insurance policy.

Generally, a taxpayer's cost (also called investment in the contract) is the total of premiums paid for the life insurance policy, less any refunded premiums, rebates, dividends, or un-repaid loans that were not included in income.

Taxpayers should receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., from the insurance company showing the total surrender proceeds and the taxable part in January following the year of surrender. These amounts are reported on Form 1040, lines 16a and 16b, or Form 1040A, lines 12a and 12b.

More information about this topic is available in Publication 525, Taxable and Nontaxable Income. You can view the publication online at the IRS.gov website, www.irs.gov . You can also receive paper copies by mail by calling 1-800-TAX-FORM (829-3676).

A: Dear Lynn,

Under the general rules, most inheritances are not taxable to the beneficiary who receives them. That normally would include the partial interests your husband will receive from the bank accounts, life insurance death benefit and real estate. However inherited IRAs or annuities are exceptions to the general rule.

Like the original owner of a traditional IRA, a beneficiary generally will not owe tax on the assets in the IRA until receiving distributions from it. Beneficiaries of a traditional IRA must include any taxable distributions received in their income. Qualified distributions from a Roth IRA are not taxable to beneficiaries. Benefits paid to a survivor under a joint and survivor annuity must be included in gross income in the same way the decedent would have included them in gross income.

For more information about inherited IRAs please see IRS Publication 590, Individual Retirement Arrangements (IRAs). For more about annuities see Publication 575, Pension and Annuity Income.

If inherited property later produces income such as interest from bank accounts, dividends from stock, or rents from real estate, that income is taxable. When property is given to a trust, and the income earned by the trust is paid, credited, or distributed from the trust to a beneficiary, that income is also normally taxable. If the gift, bequest, or inheritance is the income from the property, that income is taxable to the beneficiary who receives it.

Any taxable amounts received would be added to other income and taxed at whatever tax rate applies to your taxable income. Special maximum tax rates generally apply to capital gains.

Depending on the amount of taxable income you will receive in 2012, you may need to make quarterly tax payments (instead of putting the cash aside and paying all the taxes when you file in 2013). You should determine if you need to make estimated tax payments to avoid a penalty for underpaying your 2012 taxes throughout the year. Form 1040-ES, Estimated Tax for Individuals, is used to figure if you are liable for estimated tax, and it also has vouchers to use if you need to make payments.

Lastly, a 2011 estate tax return would normally not be required unless the estate's value and taxable lifetime gifts equal more than $5 million. In 2012, the filing requirement increases to decedents' estates that exceed $5.12 million.

You can view or download IRS forms and publications from the IRS.gov website anytime. You may also order hard copies through the mail by calling (800) TAX- FORM (829-3676).

Please accept my condolences for your family's loss.

A: Dear Rose,

It sounds as if you may have waited too long to claim a loss, because the key to the answer is the year the stock became worthless, and when the tax was paid for that tax year. If the stock became worthless in 2000, it likely would be too late to file a claim for the loss.

Stocks that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. If a loss for a worthless security is not claimed on the original federal tax return for the year it becomes worthless, a claim for a credit or refund due to the loss for that year can be filed using Form 1040X, Amended U.S. Individual Income Tax Return.

However, the amended return for the year the security became worthless must be filed within seven years from the date your original return for that year had to be filed, or 2 years from the date that the tax was paid, whichever is later. This seven-year timeframe to file a refund claim due to worthless securities (or bad debts) is much longer than refund claims in general. Normally, refund claims must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later.

For more information about worthless securities, see IRS Publication 550, Investment Income and Expenses. The booklet and Form 1040X are available online at the IRS.gov website, or you can have hard copies mailed to you by calling 1-800-TAX-FORM (829-3676).

Thanks for your question, and have a Happy New Year!

A: Dear Luther,

Thank you for your question.

Because I can only respond to federal tax issues, I have forwarded your question about California state income taxes as they relate to 529 college savings plans to Daniel Tahara, spokesman for the Franchise Tax Board.

Mr. Tahara answers state tax questions that are asked on the Sacramento Bee's Q&A Forum page at www.sacbee.com/ask.

A: Dear Mary,

The rules for employer-provided fringe benefits can be complex, and a determination is usually made by the employer, taking into account all the facts and circumstances. Fringe benefits are usually payments (including the payment of property, services, cash or cash equivalent) by an employer in addition to salary paid for the performance of services.

Fringe benefits for employees (and for those that are self-employed) are taxable compensation unless specifically excluded by law. There are several sections of the Internal Revenue Code that provide exclusions - and your question mentions a few.

I can't give an opinion on whether a given payment or transaction is, or is not taxable. And the IRS does not issue a ruling or determination through a forum such as this, even if all the facts were actually presented in the question.

The answers given in this blog provide the same type of information as the Taxable Fringe Benefits Guide you reference in your question. To quote the Guide, it is published to provide: "a basic understanding of the Federal tax rules..." The notice on page three also applies to answers published in this forum: "The explanations in the guide are intended for general guidance only, and are not intended to provide a specific legal determination with respect to a particular set of circumstances."

If you need help from the IRS on this local government issue, visit the Federal, State & Local Government Customer Service page on IRS.gov website at http://www.irs.gov/govt/fslg/article/0,,id=249130,00.html. To find out more about IRS written determinations, please see http://www.irs.gov/foia/article/0,,id=138707,00.html.

I often refer questioners the same way the Guide does, and I again suggest it applies to your inquiry: "Additional research may be required before a determination may be made on a particular issue. Citations to legal authority are included in the text. You may contact the IRS for additional information. You may also want to consult a tax advisor to address your situation."

Good luck.

A: Hi Jan,

The law provides a federal tax credit for qualified plug-in electric drive motor vehicles, which includes passenger vehicles and light trucks. The credit for this type of vehicle originally was to expire in 2014, but was made permanent by the American Recovery and Reinvestment Act of 2009.

The maximum credit allowed for a vehicle bought after 2009 is $7,500. As of today's date, nine manufacturers of this type of vehicle have received acknowledgement from the IRS of their vehicles' eligibility for the credit, and the amount that qualifies. The list of qualified plug-in electric drive motor vehicles is available on the IRS website at http://www.irs.gov/businesses/article/0,,id=219867,00.html.

Taxpayers may generally rely on the manufacturer's certification that a specific make, model, and model year vehicle qualifies for the credit and the amount that can be claimed. To be eligible to claim the credit a taxpayer must:

-- own or lease the vehicle;
-- have placed the vehicle in service during the tax year;
-- be the original user of the vehicle;
-- have acquired the vehicle for use or to lease to others, and not for resale; and
-- use the vehicle primarily in the United States.

Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit is used to claim the credit for vehicles placed in service during the tax year. A tax credit reduces tax liability dollar-for-dollar, while a deduction reduces the amount of income subject to tax. This credit is only available if a taxpayer has a tax liability, and any unused credit for a vehicle that is only for personal use cannot be carried to previous or future tax years.

Tax liability for this purpose means the total tax owed for the year. It is not based on the amount owed with the tax return. For example, let's assume a self employed person has a profit and has a tax liability of $10,000, paid $10,000 in estimated tax payments during the year, and is not claiming this credit. When filing the federal return, no payment is required and no refund is due. Using these same facts, if this $7,500 credit were to apply, the taxpayer would normally be entitled to a refund of that amount.

The tax credit rules get much more complex for a vehicle used in a business, including rules providing for a carryback and carryforward of unused credits. If that is your situation, you would be well advised to seek the assistance a tax professional when filing your return.