Deduction for Broker's Fees; Payment of Deductions with a Credit Card; Gifts of Bonds with Accrued Interest

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, March 19  , 2000.

Copyright 2000  Robert L. Sommers, all rights reserved.

Question:: My stock broker has suggested that instead of paying him a commission on each stock purchase or sale, I hire him on a flat rate for ongoing investment advice. Is there a tax advantage to switching?

Answer: Probably not. Commissions are not deductible when paid, but must be "capitalized" -- added to your purchase price as part of your purchase cost. Conversely, when you sell your stock, the commission paid reduces your gain (or increases your loss).

Payment for investment advice, however, may be currently deductible, but there’s a big catch: Investment advice is an itemized miscellaneous deduction. Therefore, it is deductible to the extent all your deductions in this category exceed 2% of your adjusted gross income (AGI). For instance, if your AGI is $100,000, then only itemized miscellaneous expenses exceeding $2,000 are deductible, a situation not too common. For many investors, this means that flat-rate payments for investment advice (along with any other investment expenses for the production or collection of income) may not be deductible.

The lesson: For those with large AGIs, the per-transaction commission may produce a larger tax benefit. With this method, you’ll eventually recover the cost of your sales commissions. The same will not always be true for flat-rate advice, unless you have miscellaneous expenses greater than 2% of your AGI.

Question: May I use my personal credit card to charge all my company’s expenses but receive the credit card’s bonus miles for air travel tax free? Of course, my company is reimbursing me.

Answer: No. IRS considers personal benefits from business deductions as additional income to the extent a deduction of the expense resulted in a tax benefit to you, provided the value of the award can be established. For instance, unrestricted airline mileage awards or benefits that can be redeemed for cash constitute additional compensation income because they can be valued. Conversely, if the benefits could not be used personally or converted into cash, you would not have to report the award as income.

Note: This rule does not apply to credit card awards based on personal expenditures since those purchases do not generally create a tax deduction. IRS has not stated whether credit card awards based on the payment of deductible state, local or real estate taxes by credit card will be considered additional taxable income.

Question: I have a bond that has accrued -- but unpaid -- interest. May I gift the bond to my 16-year-old son and have him pay taxes on the interest?

Answer: No. Although you may gift the bond to your son, interest that has accrued while you were the owner is taxed directly to you. Future interest earned on the bond will be taxed to your son.

The "assignment of income" doctrine states that income is taxed to the person who earns it. It is a fundamental principal of tax law. This doctrine prevents you from assigning accrued interest to someone else for tax purposes. It also applies to assignments of your wages or compensation to family members, irrevocable trusts and corporations.

The doctrine also applies when a corporation transfers to its shareholders a note receivable or other debt obligation which has accrued but unpaid interest; the accrued interest measured at the time of transfer is taxed to the corporation.

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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.