Taxpayer asks:
My mother in law has lost about 7000 in the past year with her stocks and bonds. She is thinking about taking them all out and paying off her mortgage. What kind of penalty will she pay and is there any additional IRS penalties that she is not aware of? Is there any way that reinvesting it into her home would delete any penalties?
Taxgirl says:
Um, your question is kind of tricky to answer in that I’m not sure what kind of account your mother in law has those stocks and bonds in. I’m going to assume – since you didn’t say differently – that it’s a regular brokerage account.
The good news is, then, that there is no income or penalty component to taking out cash or stocks from a regular brokerage account. Of course, if you have to sell stocks, there is an income (or in this case, possibly loss) component in the way of capital gains (or losses). When you liquidate securities, you report the gain (or loss) on the difference between your basis (generally the sales price plus any reinvested dividends) and the final sales price, less commissions. If that is a gain, you pay capital gains tax. If that is a loss, you can use the loss to offset other gains.
With respect to bonds, it depends on the kind of bonds that you have. This is not a tax issue, but a redemption issue. There may be early redemption penalties depending on the age and type of bond, check with your financial advisor or broker.
It’s important to make sure that you report the basis as noted above. It is NOT the value of the securities at their high point – all too often, folks want to report a loss because their stock have “lost money” in the market. If a stock has increased in value, then subsequently decreased, the increase does not affect the basis unless you sell the stock (or the stock is affected by some other tax trigger, like a death). A value must actually be “realized gain” in order for you to take the loss – the up and down of the market does not affect your tax consequences.
As for paying off the mortgage, that would be a financial analysis on her end. I personally don’t know that I would advocate pulling money out of an account to pay off a mortgage simply because the account is losing money, unless there are other circumstances at play. A regular mortgage may be useful, from a tax perspective, and there may be penalties that are assessed by your lender for paying a mortgage early (nonsensical, I know, but it happens). I would look at the totality of her financial situation before making a decision.
As to the purpose of the pay-out? You pay capital gains tax on the sales of securities irrespective of what the intended use of the proceeds would be.
I hope that helps.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
Well said. Glad you got that question.
Should you maybe answer with the assumption that the Stock and bonds are in a retirement account?