Fidelity Question #1 (Basis for mutual fund sale)

[Slow But Steady]

My dad owns a bunch of index funds bought using a windfall in about 2001. He has never traded in the account. The dividends have just been reinvested since the original purchase.

He has Alzheimer's, and we need to sell some of the shares to fund his expensive long-term care.

Fidelity says that for shares bought since 2012, we can order them to sell by highest cost basis, but for shares bought earlier, they can only sell based on the average cost. We can fund about a year of his care using shares bought since 2012, and after that we will be selling the earlier shares.

For those earlier shares, do I have to declare the basis as the average cost, which will result in more capital gains tax? Or can I calculate the basis using the the trade confirmations? Or should I use some other method?

Your advise and comments will be welcome and most appreciated.

Thanks!

Dve

 

[Senator]

If you know what was paid for each share, you can use that as a basis, rather than an average.

Sell the oldest ones first.

 

[Slow But Steady]

If you know what was paid for each share, you can use that as a basis, rather than an average.

Sell the oldest ones first.

Thanks for the quick response.

I'm trying to minimize capital gains tax. I'm not sure how selling the oldest ones first does that.

Bear in mind that upon Dad's passing (before too long), whatever shares are left will come to my brothers and me with a stepped-up basis.

 

[bingybear]

I'm trying to minimize capital gains tax. I'm not sure how selling the oldest ones first does that.

Selling the oldest is not directly related to minimizing capital gains. Selling the shares with the highest basis does. If you can identify the basis for each share purchased including reinvested shares, then I would think it would be possible to minimize capital gains.
Can Fidelity sell shares prior to 2012 based on specific shares? I think you need to sell specific shares to use the basis for them.
What do you expect your father's tax bracket to be? To the top of the 15% bracket LTCG is not taxed.

 

[pb4uski]

Thanks for the quick response.

I'm trying to minimize capital gains tax. I'm not sure how selling the oldest ones first does that.

Bear in mind that upon Dad's passing (before too long), whatever shares are left will come to my brothers and me with a stepped-up basis.

I suspect that you already know this but if your Dad is in the 15% tax bracket then capital gains tax is 0%.

 

[pb4uski]

....Can Fidelity sell shares prior to 2012 based on specific shares? I think you need to sell specific shares to use the basis for them. ...

bingybear, I think what would happen is that the pre-2012 shares would be sold [-]and Fidelity would report the gains based on average cost to the IRS[/-]. The OP would file based on specific-identification for those pre-2012 shares using their purchase records. [-]The IRS would see that the amounts are different and perhaps ask questions. The OP would then need to explain that they sold based on SID which they are entitled to do, perhaps provide some documentation for the amounts they reported and then (hopefully) the IRS would note it in their files and that would be then end of it.[/-]

 

[Slow But Steady]

They were in the 25% tax bracket this year, but with only about 4 months of medical expenses. With a full year of nursing home costs at $8,000 per month, they may very well be down in the 15% bracket. I'd have to put a sharp pencil to it, though, to be sure, considering that the RMD will go up every year and the capital gains will depend on which shares are sold.

I hadn't thought about that aspect until you good folks reminded me.

By the way, I am assuming Fidelity will not report the basis on pre-2012 shares sold. Their web site says "Brokers are required to report adjusted basis for mutual fund shares purchased after 1/1/2012 to the IRS on Form 1099-B. Fidelity has computed a separate average for fund shares that will be reported and a separate average for fund shares that will not be reported."

I think that would leave me free to calculate the basis based on the most beneficial method.

 

[pb4uski]

You're right... I forgot about that part with respect to the non-covered shares... so it becomes even easier. Vanguard explains it this way:

For tax-reporting purposes, the difference between covered and noncovered shares is this: For covered shares, we're required to report cost basis to both you and the IRS. For noncovered shares, the reporting is sent only to you.

 

[kaneohe]

bingybear, I think what would happen is that the pre-2012 shares would be sold [-]and Fidelity would report the gains based on average cost to the IRS[/-]. ..................................................[/-]

pb4.........my impression (like OP's) is that Fidelity would not report basis on non-covered shares to IRS.

 

[pb4uski]

Agreed... that is why I crossed it out.

 

[Animorph]

I've been with Fidelity since 2001 or so and have always used specific shares for mutual fund cost basis. Fidelity always had the info online, no need to review buy confirmations. The only reason I can think of that would require them to use average cost would be if some of the shares had already been sold using that method. The IRA used to require you to stick with a method once you had started with it.

You can change the cost basis method that Fidelity uses by navigating through your account menus.

 

[kaneohe]

......................................
By the way, I am assuming Fidelity will not report the basis on pre-2012 shares sold. Their web site says "Brokers are required to report adjusted basis for mutual fund shares purchased after 1/1/2012 to the IRS on Form 1099-B. Fidelity has computed a separate average for fund shares that will be reported and a separate average for fund shares that will not be reported."

I think that would leave me free to calculate the basis based on the most beneficial method.

In the past, specific lot ID choices had to be made prior to the sale(and documented in writing by the broker)