gains and dividend reinvestment

[elroy]

In a taxable account should you reinvest cap gains and dividends or distribute then to a mmf or savings account? What makes it easier at tax time?

Elroy

 

[brewer12345]

I have divs paid in cash because I don't want to be bothered with complicated cost basis tracking.

 

[audreyh1]

Well you need some of those distributions to pay taxes. So some of them should go to a mmf.

Personally, for my overvalued funds (according to my asset allocation model) I have distributions sent to a mmf. This lets me rebalance a bit while I pay my taxes. The undervalued funds - I reinvest the distributions. It's just so much easier that way.

I have all the docs to do the cost basis tracking. But Fidelity also does the tracking for me and uses the average share cost method. This is the easiest thing to do, so ultimately I rely on Fidelity to give me my cost basis whenever I sell some shares. I'm not too worried about the IRS disputing what Fidelity claims.

Audrey

 

[riskadverse]

Always have distributions and dividends paid out. I have some investments that are so contaminated with reinvestments, splits, conversions to other stocks etc., that I'm afraid to sell them, knowing that I'll be unable to calculate an accurate cost basis.

 

[2B]

Always have distributions and dividends paid out.  I have some investments that are so contaminated with reinvestments, splits, conversions to other stocks etc., that I'm afraid to sell them, knowing that I'll be unable to calculate an accurate cost basis. 

Amen. I'm trying to deal with my Alzheimered FIL's "investments." He has a mixture of mutual funds that he bought decades ago. He has no record of the original purchase price (or date). He has had dividends reinvested during the entire period. He has no records of these purchases either and no long term file of tax returns. Fortunately (?), there isn't that much money in them so my suggestion to DW is to wait until he dies then the basis is raised to the value at his death.

 

[wallygator69]

Always have distributions and dividends paid out.  I have some investments that are so contaminated with reinvestments, splits, conversions to other stocks etc., that I'm afraid to sell them, knowing that I'll be unable to calculate an accurate cost basis. 

Huh? If you hold stocks or mutual funds longer than a year why does it matter. I thought long term cap gains were now taxed at 15%%

If not I am in a pickle.

Thanks,

Wally

 

[brewer12345]

Huh?  If you hold stocks or mutual funds longer than a year why does it matter. I thought long term cap gains were now taxed at 15%%

If not I am in a pickle.

Thanks,

Wally

Its not the tax rate we are afraid of. It is trying to figure out what you paid for the whole mess so that you know what dollar amount to apply the rate to.

 

[audreyh1]

Don't most brokers provide you that information?

Audrey

 

[youbet]

Eye-opening thread. Most of my non-deferred activity occurs in my Schwab account. They provide me with a cost basis report giving me the cost basis (average cost method) for all fund shares I sold during the year so taxes are no hassle. (Still painful! But not a hassle.) So, I'm taking away from the conversation that not all brokerage houses do that?

 

[audreyh1]

Fidelity provides very detailed cost basis accounting.  They use average share cost for mutual funds.  That works for me.

One of the reasons I reinvest dividends unless the fund is overvalued (per my allocation plan), is that it takes the timing out of putting the money back to work - i.e. it's automatic, I don't have to schedule it.

Audrey

 

[ERD50]

Even though the fund families provide the info on cost basis, re-investing dividends can still complicate your life at tax time. Example:


Fund pays dividend on June 1st. NAV is $10.03

You sell fund (or part of fund) on June 15. NAV is $10.00


You just created a wash sale for yourself. More entries and calculations on the Schedule D.


I still say, have the divs go to a MM, reinvest as you see fit, or spend.

-ERD50

 

[wallygator69]

Its not the tax rate we are afraid of.  It is trying to figure out what you paid for the whole mess so that you know what dollar amount to apply the rate to.

SOOOOOO...

If you were dumping your FA and had been with them for say 4 years and hadn't added to the mess but were reinvesting dividends and cap gains, a wise move might/would be to sell everything bought after the initial investment so they could compute all the cost basis stuff before you left.  

Then all you need to keep track of is the initial cost when you dove in?

Thnaks,

 

[grumpy]

Do you guys really think the IRS is going to waste its time trying to check your cost basis calculations unless a WHOLE LOT of $'s are involved? Say you sold 1000 shares of stock or a fund. If your "estimate" of the cost basis is off by $1 per share from the "real" cost basis (which neither you nor the IRS can easily determine) then your tax owed would be off by $150. And the error is as likely to be in your favor as in Uncle Sam's. Is it worth the time of an IRS auditor to dig into this? I don't think so. I think you all are worrying about something very minor and very unlikely. If you are having an attack of conscience because you think you might be underpaying your lawful tax liability then just roughly estimate your cost basis and subtract a buck or two per share to that number to ease your anxiety. As long as you don't claim a cost basis for shares that is obviously impossible (e.g. bought Google in 1992 at $400 per share) then I think this is a non-issue. Reinvest, don't reinvest, but the decision should be based on valuation and asset allocation considerations, not cost basis calculation concerns.

Grumpy

 

[ERD50]

grumpy, No, I don't lose sleep over it, but, if I DID get audited, the agent just MIGHT want to go through little details like that. I'd rather be in the position of being able to smile and say 'Sure, let's review my cost basis on this sale'. If I had all the t's crossed and the i's dotted, on such a minor thing, they might just decide there were better people to pick on.

Bottom line for me, is the advantages of auto reinvest seem nil, and there are easy alternatives. So why go the auto reinvest route?

-ERD50

 

[riskadverse]

 . . . And the error is as likely to be in your favor as in Uncle Sam's. . . .
 

So . . . having the reinvestments allows me to error on paying too much tax. I'd just as soon get it right and not worry during the audit as well. I will end up making a wild guess on the cost basis, but I doubt that my guess will be 1. close 2. in my favor 3. worth the time it will take to even make an educated guess.

 

[2B]

Do you guys really think the IRS is going to waste its time trying to check your cost basis calculations unless a WHOLE LOT of $'s are involved?.....Is it worth the time of an IRS auditor to dig into this?  I don't think so. I think you all are worrying about something very minor and very unlikely.

I don't think you've had much experience with the IRS. My experience tells me that when they see any "uncertainty" they assume you are committing tax fraud and are going to get you. If not criminally, they will get more taxes, penalities and interest. Convincing them your assumptions are reasonable is usually a great effort and opens you up to a "compromise" that will let them show their boss that their audit found additional tax owed.

Several people said they had an "average price." I don't have any experience with the IRS on that. Schedule D is very explicit at listing the dates and dollar amounts of your purchases and sales. It's another pathetic opportunity to give the IRS.

 

[lazyday]

Personally, for my overvalued funds (according to my asset allocation model) I have distributions sent to a mmf. This lets me rebalance a bit while I pay my taxes. The undervalued funds - I reinvest the distributions.

I sometimes act in a similar way with IRAs. My default in IRAs is to reinvest, but sometimes I'll have paid in cash if overvalued, according to AA or my crystal ball.

But, with taxable accounts, I always have distributions paid in cash, even for short term bond funds. Greatly simplifies taxes, especially if using specific id method.

I try to avoid situations where there are large transaction fees or commissions, so reinvesting dividends wouldn't save me very much money.
If I had to pay $75 fee to reinvest every quarter, I'd have to come up with another answer...

 

[grumpy]

I don't think you've had much experience with the IRS.

That's exactly my point. I have been investing and paying taxes for 40 years and have NEVER heard a word from the IRS. While I make a reasonable attempt to guesstimate an accurate cost basis when I sell shares, I do not obsess about it. For many years I used DRIPs and still have dividends automatically reinvested. If the IRS was that concerned about the exact accuracy of the cost basis figures used by small time investors like us, they would develop a method of capturing the necessary data themselves or would require brokers to report it to them. Now I can see if you are in business for yourself and are, therefore, more likely to be audited anyway, you might want to have better documentation of cost basis. But for wage slaves, who are VERY unlikely to be audited at all, this all sounds to me like irrational fear of the IRS. Do the feds really have you that frightened?

Grumpy

 

[bosco]

Several people said they had an "average price." I don't have any experience with the IRS on that. Schedule D is very explicit at listing the dates and dollar amounts of your purchases and sales. It's another pathetic opportunity to give the IRS.

I think the IRS accepts "average price" as long as once you start using it you keep using it. Similarly, if you started out claiming specific shares, you can't switch to the "average shares" method. Since it is MUCH simpler, I always use it although it may sacrifice a bit.

 

[Nords]

Amen. I'm trying to deal with my Alzheimered FIL's "investments." He has a mixture of mutual funds that he bought decades ago. He has no record of the original purchase price (or date). He has had dividends reinvested during the entire period. He has no records of these purchases either and no long term file of tax returns. Fortunately (?), there isn't that much money in them so my suggestion to DW is to wait until he dies then the basis is raised to the value at his death.

Unfortunately somebody has to die before the IRS rules allow the basis to step up. But you could be watching an unsuitable investment wither away in a bear market, not that I'm bitter about that anymore.

If you think that his old tax returns have useful data (Hah!) you could try a free IRS transcript.

It's great that guys like Fidelity have started maintaining long-term records-- especially online-- but unless we're fortunate enough to end up with a deep-pocket long-history firm like them then we investors are on our own.

That's exactly my point.  I have been investing and paying taxes for 40 years and have NEVER heard a word from the IRS.  While I make a reasonable attempt to guesstimate an accurate cost basis when I sell shares, I do not obsess about it. For many years  I  used DRIPs and still have dividends automatically reinvested.  If the IRS was that concerned about the exact accuracy of the cost basis figures used by small time investors like us, they would develop a method of capturing the necessary data themselves or would require brokers to report it to them.  Now I can see if you are in business for yourself and are, therefore, more likely to be audited anyway, you might want to have better documentation of cost basis.  But for wage slaves, who are VERY unlikely to be audited at all,  this all sounds to me like irrational fear of the IRS.  Do the feds really have you that frightened?  Grumpy

Man, Grumpy, I don't know whether to envy your or pity you. Since you're not cheating on your taxes I guess you have nothing to fear and it's mostly envy. But think of all the heart-pumping excitement you've missed!

We've received a letter every couple of years for the last couple decades. Usually they're politely-disguised "fishing" expeditions-- "Your broker told us he sold this much but you claimed that much" or "You sold your house and we want our cap gains tax". The letters are clearly designed to strike fear & trembling into the hearts of the blissfully ignorant taxpayers. It's very difficult to figure out from their latest format that you're actually allowed to disagree with their "you owe us this much" conclusion. It took me two days to sort out the IRS' recent question about a Roth IRA conversion, and I presumably know what the heck I'm doing. If I was a 20-something new employee or a resident with minimal English skills I'd be terrified.

You're right, a compliance audit is very unlikely. But once they shine that spotlight on you, if you flinch then you're pretty much guaranteed a few years of compliance audits. A friend of my FIL's made the mistake of depreciating the property under his rental home (instead of just the rental home) which earned him the usual IRS letter. Although he confessed his ignorance and paid his debt to society, he spent the next 10 years dealing with IRS auditors to pay back his innocent mistake. Ironically they saved him money in the long term by pointing out his mistake, but today he sure feels that he paid for the privilege.

 

[youbet]

2B - the IRS accepts average price (commonly tracked and provided by your brokerage house) or lot price.  Schawb provides average price  for me online, average price and lot price in a separate gain-loss report mailed quarterly and average price on the year end 1099.  I use average price as it's simplist.  Once you use average price, you must stick with it for that fund.  I just flipped open the instructions for Schedule D and it's all there for you're reading pleasure.   

That doesn't help for your situation with your FIL however.  I suggest you contact the brokerage house holding the fund shares and ask if they can help you calculate the basis.  They likely can.  If not, you could get some historical share price information and swag it in.  Since it's a small amount of money and you'd use reasonable assumptions, your probability of IRS problems are minimal.  (And if you do get audited and locked up, I have no idea who you are and will deny writing this.)  Or, you do the worse case scenario and assume the basis is zero and pay 15% of the whole nut.   

Good luck!

 

[2B]

youbet,

His accounts are pretty small. I hope to get him into an assisted living facility soon but I need DW to do the "deed." I'm just the scummy cad that drug her away from his happy home. Of course, he used to change her diapers so what can she know. I'm sure it will get uglier before he gets moved.

Back to the money.... When in assisted living, all of his and MIL's expenses will be deductible as medical expenses on Schedule A. Their expenditures will only be their combined nursing and assisted living expenses -- ~$90K. Their income will be SS, military pension and some minor stuff -- $50K. I'll pull the other $40K out of their assets. Even with a basis of zero, their maximum taxable income will be less than $10K.

 

[youbet]

2B - Figuring the cost basis for FIL's small fund is indeed the least of the worry, that's for sure. It's a tough situation I hope works out as favorably as possibly for you and your wife.