Just Checking--Is $17,000 Too Much?

Q: My wife and I are arguing about how much money we should keep in our checking account, which pays a bare minimum interest rate. My wife has squirreled away $17,000 in the account--an amount I think is about three times the absolute limit it should contain.

Who’s right? It might help you to know that we have paid off our mortgage and have more than $50,000 in credit union and bank accounts. -- R.A.H .

A: Getting involved in marital disputes is generally risky, but we’ll wade right in. Our experts side with you. They wonder if you need to keep even $5,000 in a checking account when you already have $50,000 readily accessible in savings accounts.

In general, the experts recommend that you keep no more than one month’s worth of expenses in a checking account. Additionally, you can keep the equivalent of about three months’ expenses in a highly liquid savings account of some sort. This should cover most emergencies and give you enough time to cash out other investments in the event of a catastrophe.

What should you do with the extra money your wife has accumulated? Our experts suggest a compromise: a no-load mutual fund that allows checking privileges but offers a higher interest rate than a conventional checking account.

You might even consider a fund--such as those offered by Franklin and Dreyfus--that invests in California municipal bonds if you want a doubly tax-free investment.

Both the Franklin and Dreyfus California tax-free funds are well respected and require no up-front load or commission.

Whose Social Security? Widow Has a Choice

Q: I began getting Social Security widow’s benefits at age 60. At age 65, I wanted to transfer to my own account and was told I could not do so. I think I was given the wrong information. What can I do? -- G.M.W.

A: As a widow, you are entitled to switch from widow’s benefits to your own account at age 65, but your benefit may be less than what you received as a widow and you certainly wouldn’t want to give up benefits just to draw on your “own” account.

The Social Security Administration representative might have made a mistake in advising you. But in all likelihood, the representative was trying to explain that while you are entitled to make the switch, you would be better off keeping your widow’s benefits.

To be absolutely sure you are getting what you are entitled to, you should immediately return to the Social Security office and ask for a review of your case.

The law guarantees you the higher amount: either your own benefits or widow’s benefits.

Spending on Lottery Is Not a Donation

Q: I play the state lottery a lot. Given that about half the money collected goes to the public schools, shouldn’t I be able to deduct half my costs as a charitable contribution? I keep all my stubs. -- T.B.

A: Neither the Internal Revenue Service nor the state Franchise Tax Board consider playing the lottery the moral or legal equivalent of making a charitable contribution. As they see it, your primary motivation for buying a lottery ticket is to take a chance at winning a prize.

Should you win the lottery, however, the IRS allows you to deduct the cost of tickets from your winnings, as long as the deductions do not exceed your winnings.

California does not tax state lottery winnings.

An Inherited ‘Loss’ Suffered by No One

Q: I know that the tax basis of inherited property is its value on the date of death of the donor. But what if the asset left by the deceased has lost value since its acquisition? Can the recipient choose between the stepped-up basis and the original one? --R.Q .

A: Assets bequeathed at death are valued as of the donor’s date of death--regardless of whether they are worth more or less than the donor paid for them. Recipients have no choice in the matter. And if you think about it, why would the government want to give you the opportunity to claim a loss you never suffered?

Consider this example: Your aunt leaves you 1,000 shares of stock at death. She paid $10 a share for it, but it is worth just $5 a share at her death. Selling it for $5, you would realize proceeds of $5,000--tax-free.

Why should Uncle Sam give you an additional $5,000 “investment loss” for the stock’s decline in value? You didn’t suffer that decline. Your aunt didn’t either, since she never sold the stock.

The “loss,” such as it is, goes unrecognized--and is not deductible.

Computing Earnings of Accumulated Stock

Q: I am trying to figure out how to compute the yield of my electric company shares. I bought 600 shares and have added about 425 over the years through the company’s dividend reinvestment program. --C.T .

A: The formula is a fairly simple one--if you have kept track of the paperwork from each of your dividend reinvestments.

First, add up your total investment in the stock--the initial purchase plus each reinvested dividend.

Next, divide that total by the number of shares you hold. This gives you an average per-share cost.

Now divide your average per-share cost into the stock’s annual dividend, a figure readily available in newspaper listings or on your most recent statement from the company. This will give you the average annual yield on your holdings.