A Little Comment Can Reveal A Lot

Q: I overheard a co-worker recently say he had just finished paying his Social Security taxes for the year. Am I right in assuming that I can use this tidbit of information to calculate how much he makes? The comment was made as of the end of September. What calculation do I have to make? -- A.C.S.

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A: With just a little bit of elementary algebra, you can indeed calculate how much your colleague is earning. The calculation may not yield an absolutely correct figure, but you can get close enough for your purposes, which presumably are driven by a quest for fairness, not general nosiness.

That said, here’s what you must do. First you have to know that there are two parts to the Social Security deduction: one for old age benefits and the other for Medicare insurance. This year, the former program levies a 6.20% tax on the first $61,200 of earnings. The Medicare portion of the tax is a 1.45% levy on all earnings. (Self-employed people pay the 6.20% employer portion as well.) Presumably what your colleague meant to say was that he had finished paying his old age benefits tax--by far the larger portion-- because his earnings had passed the $61,200 threshold.

The critical information here is the fact that on or about Sept. 30, your colleague had earned at least $61,200. Now we can set up our equation. If this were a math test the question would read: “If John has earned $61,200 in nine months, how much will he earn in 12 months?” Do you remember how to solve for the unknown?

First, set up your equation by saying that $61,200 is to 9 months as “X” is to 12 months. Now you multiply $61,200 by 12 and divide the result, ($734,400) by 9. The answer is $81,600. Of course, we are assuming that John is paid in equal monthly increments throughout the year. If he isn’t, our calculation is irrelevant and you are left knowing only that he had earned $61,200 by the end of September.

In 1996, the threshold will rise to $62,700 due to an inflation adjustment.

Not only have we gotten a little brush up on math, but we have also learned how much information we can give away by a seemingly innocuous comment. But perhaps John was actually looking all along to let you know that he was well paid and used the Social Security comment as a way to dropping an enticing hint without giving away the whole enchilada. Now he should know better.

By the way, the same mathematics formula will allow you to determine someone’s annual salary if you know when their contributions to the California Disability Insurance program ceased. What you need to know is that disability insurance is levied on the first $31,767 of a worker’s salary. Knowing when someone passed that threshold, and again assuming an even payment rate throughout the year, allows you to make the appropriate calculation.

Some Tips for Direct Stock Purchases

Q: Several months ago I heard about a book that lists companies that sell their stock directly to the public without requiring the services of an intermediary broker. Can you help me find the book? -- R.J.D.

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A: A relatively tiny number of the estimated 15,000 publicly traded companies in the United States sell their shares directly to the public without the services or a broker or other intermediary. Among the three dozen or so of these companies are Exxon Corp., Dial Corp., W.E. Grace Co., Johnson Controls and Texaco Inc., a list that includes some of the nation’s largest businesses.

Far more common are dividend reinvestment programs that allow existing shareholders to automatically convert their quarterly dividend payments into additional shares at prevailing market prices without paying any broker commissions. In many--but not all--cases, companies with dividend reinvestment programs also permit their shareholders to purchase additional shares throughout the year. Estimates of the number of U.S. companies offering this service range up to 1,200.

For more information about dividend reinvestment and direct stock purchases see “Directory of Companies Offering Dividend Reinvestment Plans,” published by Evergreen Enterprises. The book, which sells for $29.95, plus $2.50 for delivery, is available by writing to P.O. Box 763, Laurel, MD 20725. You may call the company directly at (301) 549-3939. Other good sources are “Free Lunch on Wall Street” and “Buying Stocks Without a Broker,” both written by Charles Carlson. Both books should be available through your local library or bookstore.

Some Exceptions to Home Sale Exemptions

Q: My sister and I jointly own the home in which we reside. We are both over 55. Are we each entitled to a $125,000 exemption when we sell the house? -- S.S.

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A: You are each entitled to a $125,000 exemption on your share of the profit when the home is sold. With the notable exception of married couples, any two or more homeowners who have lived in a home as their principal residence for three of the last five years are entitled to the exemption. In another example of the so-called marriage penalty, married couples are entitled to share a single $125,000 exemption.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, L.A. 90053. Or send e-mail to [email protected]