Need help with cost basis method ?

[Murf2]

Hello everybody, I'm back needing some advice. You all have been very helpful in the past. I hope someday I can help someone in return.

My situation, We have approx 160K in our brokerage account with Vanguard. It is split between 4 ETF's & 4 mutual funds.

In 2017 we will be drawing living expenses from these. I have made some purchases recently, with the market drops but there will, most likely, be no more purchases made before withdrawals start. The gains from these sales will be the only income we will show. I will need income to be above Medicaid level for ACA enrollment.

Finally my question is, Would the cost basis chosen for the holdings have a noticeable effect on the amount of capital gains that would show as income?
Or, is are there other things I should consider, as far as which method to use?

Currently the mutual funds are FIFO and the ETF's are "not established". Am I able to change this at anytime , or are there restrictions?

Thanks again!
Murf

 

[Gone4Good]

Finally my question is, Would the cost basis chosen for the holdings have a noticeable effect on the amount of capital gains that would show as income?

Or, is are there other things I should consider, as far as which method to use?

Currently the mutual funds are FIFO and the ETF's are "not established". Am I able to change this at anytime , or are there restrictions?

Thanks again!
Murf

The cost basis method you choose mostly impacts the timing of when you realize gains rather than how much in gains you ultimately realize. Delaying gains on today's sales usually results in higher gains to be realized in the future . . . all else being equal.

I think the above statement is generally true but there are exceptions, like if you end up passing on your portfolio to heirs who get to step up the basis. Delaying gains may turn into never paying taxes if those "unrealized gains" evaporate forever in a down market. And if you're bumping up against a higher tax bracket, selectively realizing gains or not can keep your ultimate tax bill lower than it would be otherwise.

[-]As to changing your cost basis, once you choose it, I don't think it can be changed. Ask a professional but I think you're probably stuck with FIFO on your funds.[/-]

Strike that: According to Vanguard's web site:

Even if you've already selected—and even used—one of these cost basis calculation methods, you can change it for future sales whenever you want. And you can apply those changes to just one fund or to all the funds within an account.

That's worth checking in to. If you can switch from FIFO and have the records to do it, you'd get the most control over your yearly taxes by switching to the specific ID method.

 

[DrRoy]

It can definitely make a difference if the holdings were purchased at very different times, with the market at very different levels. FIFO will give the largest cap gain at the time of the sale, assuming earlier shares have a lower basis (not guaranteed), but if you were to wait on designating those shares until later, if the market was higher then the gain would be even more. The other methods would be exact selection of shares, or average cost of all. I think that once you have started using a method you should stick with it so as not to make an error in the future. Of course, the % tax you pay will also be dependent on your bracket, so if that might change you should consider that as well. Unfortunately tax questions do not often have a simple answer.

 

[Gone4Good]

Oh, one more biggie.

For people in the 15% tax bracket or lower, the tax applied to capital gains is zero. And there's no "wash sale rule" on gains, meaning that you can selectively realize gains, repurchase your shares, and effectively step up your basis on those shares . . . essentially making those gains tax-free forever.

 

[photoguy]

Finally my question is, Would the cost basis chosen for the holdings have a noticeable effect on the amount of capital gains that would show as income?
Or, is are there other things I should consider, as far as which method to use?

Log into your vanguard account and select My Accounts >> Cost Basis. Then pick a holding. Vanguard will show you the gain/loss for all of your tax lots.

The tax lot chosen for selling can make a huge difference in gain/loss if you bought at a variety of different prices. Also since you mentioned ACA, if you are managing your income it's very important to be precise because of the hard thresholds for cost sharing / subsidy. Even going over a few dollars over can be very expensive tax wise. And you may not want to be too low either due to medicaid.

Currently the mutual funds are FIFO and the ETF's are "not established". Am I able to change this at anytime , or are there restrictions?

Given that vanguard now tracks this for you (making it easy and convenient), I don't see any reason not to use specific identification which dominates the others for tax management.

 

[LOL!]

I'll make this simple: Always choose "Specific Identification" for cost basis method nowadays.

Only mutual funds can have Average Cost for a cost basis method. ETFs cannot have Average Cost for a cost basis method.

FIFO for ETFs is just Specific Identification where the brokerage automatically specifically identifies the shares for you. You are fully capable of identifying your own shares for yourself, so don't select FIFO.

And pick the same method for your ETFs and your mutual funds. In other words, ...

... Always choose "Specific Identification" for cost basis method nowadays.

 

[Murf2]

Thanks a lot for all the replies! We will be in the 15% bracket for sure. I think my problem will be showing enough gains for ACA to stay off Medicaid. I assume I could withdraw enough to get my income above Medicaid levels and just reinvest some if that was more total withdrawal than I need.

The Vanguard says I need records to use anything other than average for mutual funds before 2012. What exactly would I need for records? They show the purchase & price in my fund history. I not sure what they would need.

Thanks, Murf

 

[Gone4Good]

If Vanguard has your complete history, then that's all you need. If you've sold any shares and used FIFO, you'll have to do some work to figure out which shares you've already "sold" for tax purposes.

Another potential problem is that it looks like Vanguard's history only includes the share classes you currently own. If you purchased Investor Shares that were later exchanged for Admiral Shares, you won't see your original purchase history and you'll have to piece that together somehow.

 

[MichaelB]

Thanks a lot for all the replies! We will be in the 15% bracket for sure. I think my problem will be showing enough gains for ACA to stay off Medicaid. I assume I could withdraw enough to get my income above Medicaid levels and just reinvest some if that was more total withdrawal than I need.

Exactly. Sell all that it takes to generate the income, then reinvest the part you don't need.

The Vanguard says I need records to use anything other than average for mutual funds before 2012. What exactly would I need for records? They show the purchase & price in my fund history. I not sure what they would need.

Thanks, Murf

Technically, you are responsible for documenting the cost basis prior to 2012. That's why they say you need records. If your investments are at Vanguard, however, they will have that information and will give it to you when you sell and once again when they send you the 1099.

 

[modhatter]

Thanks a lot for all the replies! We will be in the 15% bracket for sure. I think my problem will be showing enough gains for ACA to stay off Medicaid. I assume I could withdraw enough to get my income above Medicaid levels and just reinvest some if that was more total withdrawal than I need.

The Vanguard says I need records to use anything other than average for mutual funds before 2012. What exactly would I need for records? They show the purchase & price in my fund history. I not sure what they would need.

Thanks, Murf

Murf, I assume you know that only the gain portion of your fund will be considered income when you sell it (along with any dividends issued for the year) So, as an example. If you purchased $10,000 of a fund or ETF, and the next year it has increased in value to $10,600. If you sold the entire fund at that time, you would only have a $600 gain which will be considered income.

Conversely, if the fund after you buy it for $10,000 drops in value to $9,400, in just over a year, and you sell the entire fund, you will have a capital loss of $600. However, if you bought that fund say back in early 2009 for $5,000, and it is worth $10,000 now, you will have a gain of $5,000 when you sell it which will be considered income.

In order to qualify for an ACA plan and not be in medicaid territory, I think you need to show an income of approx. $16,000. If you don't have the majority of this needed income coming from somewhere else, such as part time work, then your $160,000 portfolio would probably prove insufficient to throw off anywhere near what you might need to qualify for ACA, unless your cost bases for the portfolio is very low.

Dividends alone might produce income in the neighborhood of about $3,200 - $3,500.

How much of what you need are you trying to get from your portfolio and for how long? They extent of your total income in your $160,000 portfolio rests in the total appreciation minus your cost bases. If you have a total cost bases of $100,000 in it, then you have a potential gain of $60,000 after you have sold all shares. You can buy those shares back again if you don't need the money at a later date, but of course your cost bases will be adjusted up to current market.

As for establishing your cost bases prior to 2012, do you have any of your older statements? If not, then have you asked Vanguard if they
can help you with establishing your cost bases, even if they charge a fee for research. Not sure how far back Vanguard's transaction history goes online, but if you need further back than you can see online, they may be able to help.

 

[photoguy]

Another potential problem is that it looks like Vanguard's history only includes the share classes you currently own. If you purchased Investor Shares that were later exchanged for Admiral Shares, you won't see your original purchase history and you'll have to piece that together somehow.

You can get the history of converted investor->admiral shares but it is an incredible pain. Basically go to transaction history, select "all holdings" (instead of a specific fund), and then manually pick out the entries for your investor fund. It may help to subset it by a custom date range and transaction type (i.e. buy).

 

[Murf2]

modhatter, Yes, I know that only the gains will count as income. My hope was to get above Medicaid level with the gains. Alas, the gains have taken a big hit in the last 6 months. I will have to see how it looks in 2017. I will be able to tap into a 401K or IRA in 2017, if necessary. I just planed on spending down taxable first. I may have to re-think that. I wouldn't need to withdraw nearly as much money from a 401K to get my taxable income up or ACA would I? All the money coming out would count as income, correct?

Again, I want to thank all of you for your willingness to help. I'm sure I'll need more but I am learning a great deal here.

Murf

 

[EastWest Gal]

All of the money taken out of a 401K or a tIRA will be ordinary income at the federal level.


Sent from my iPhone using Early Retirement Forum