Q & A
'Rule of 72' I've been hearing bankers and investment advisers talk about something called the ''rule of 72.'' Could you explain what it means?- B. H.
How quickly would you like to double your money? That's what the ''rule of 72 '' will tell you. To find out how fast your money will double at any given interest rate or yield, simply divide that yield into 72. This will tell you how many years doubling will take.
Let's say you have a long-term certificate of deposit paying 12 percent. At that rate your money would double in six years. A money-market fund paying 10 percent would take 7.2 years to double your investment, although money-fund yields fluctuate daily, so you can't depend on this.
You can also use the rule of 72 to find an investment to fit a long-term need. If, for example, you want to double your money in eight years, divide eight into 72 and you'll see you need to find an investment paying at least 9 percent over that period.
Tax on pension payments
I retired from a corporation four years ago. Soon after retirement, I turned a basement woodworking hobby into what is now a custom-furniture business. As a result, I don't need my $250 monthly pension for living expenses. Is there any place I can put these pension checks to shelter them from taxes?- R. L.
No. The law requires that pension payments be taxed, though you can take the usual income tax deductions, including the exemption for being 65 or older, assuming that you are. You could shelter some of your furnituremaking income by putting it in an IRA and a Keogh (you can have both), up to a maximum of 15 percent of income for the Keogh and $2,000 for the IRA. But this has to stop at age 701/2, when contributions can no longer be made.
I know this year's tax law changed the holding period for getting long-term capital-gains treatment on investments from one year to six months. Is this permanent?- T. O.
No. In 1988, the holding period goes back to a year. The new six-month holding period applies to assets acquired after June 22, 1984. But this change may mean more taxpayers are subject to the alternative minimum tax. This tax amounts to 20 percent of the amount over a specified exclusion and is imposed on certain items that receive preferential tax treatment, including capital gains. It is designed to make sure that people with a large number of deductions and tax-sheltered investments pay at least some income tax. Check with your tax adviser to see if claiming more long-term gains will put you in this situation.
Using personal car in business
I often use one of our family cars for business. Does the new tax law prohibit me from deducting part of its cost as a business expense?- R. G.
No, but the law does make some changes in this area. Before, a self-employed individual or an employee using his car partly for business allocated the cost of the car between business and personal use and deducted whatever portion was used for business.
Now, there is a 50 percent business use test that must be passed. At least half of the car's use must be for business, and taxpayers must keep current records, including dates of business trips and mileage, which they can show to the tax preparer - and maybe an auditor. If this requirement is not met, the investment tax credit will not be allowed.
The 50 percent rule applies to any other personal property used for business, including entertainment and recreation property, personal computers, and other items listed in the rules. Again, check with your tax adviser and be prepared to start a meticulous record-keeping system for personal property used in a business, or business property that may have personal uses.
Dollar cost averaging
For the last several months, the share price of my equity mutual fund has been falling. As a result, I have stopped sending money to the equity fund and am sending it to a money market fund until the equity fund picks up again. However, a friend says I shouldn't be doing this. Is he right?- D. W.
He probably is. What he's talking about is something called ''dollar cost averaging.'' With this investment method, you send the same amount of money into your fund in whatever time interval you choose, maybe every month or quarter. As long as the fund has a good long-term record of growth and can maintain that record, you will come out ahead. The reason: When the share price is down, your money is buying more cheap shares, so that as the fund's price increases, you have a larger number of shares and they're becoming more valuable. Although you're buying fewer more-expensive shares, the growth of those cheap shares more than offsets this.
For more information, the Investment Company Institute, the mutual fund trade group, has a free booklet that explains dollar cost averaging. Ask for: ''Discipline. It can't really be good for you, can it?'' The ICI's addrsss is 1775 K Street, NW, Washington, D.C. 20006.