Tax question - Cost basis on gifted stock

[Steelart99]

This is my first year retired and first year on ACA.

I'm trying to get a handle on my taxes for next year and have to control where I take income since the ACA is based on MAGI. I plan to sell some stock and as I understand it, the long term capital gains is the amount used for MAGI.

Now, the issue is that the stocks were gifted to me. As I understand it, the LTCG's would be the sale price minus the cost basis of the person who gifted it to me.

But ... I want to sell the reinvested dividends first (using Specific ID's).

The question is, do I have to used the cost basis from the giftor for the reinvested dividends, or do I use the purchase cost at the time that the dividends were reinvested?

 

[bingybear]

First note that the tax law may change the answer for next year. But for your issue this year, If you sell based on specific shares you use the basis for the shares actually sold. It really doesn't make a lot of difference if the shares were bought with dividends or other money. It is a matter of date and price paid.

Now you say you only have to consider LTCGs, wrong. For taxes and the ACA you need to consider LTCG/L, STCG/L and dividends. Both gains and losses can change your MAGI. But losses can offset gains, but can offset other income up to 3k when filing jointly.

Even if dividends are taxed at 0%, they still contribute to MAGI.

 

[Steelart99]

First note that the tax law may change the answer for next year. But for your issue this year, If you sell based on specific shares you use the basis for the shares actually sold. It really doesn't make a lot of difference if the shares were bought with dividends or other money. It is a matter of date and price paid.

Now you say you only have to consider LTCGs, wrong. For taxes and the ACA you need to consider LTCG/L, STCG/L and dividends. Both gains and losses can change your MAGI. But losses can offset gains, but can offset other income up to 3k when filing jointly.

Even if dividends are taxed at 0%, they still contribute to MAGI.

Thanks for getting back to me. The genesis of the question came about because I was using the online TurboTax (just came out) and the cost basis for reinvested dividends was set to be the cost basis of the gifted shares ... not the basis for the specific shares It is the fact that these are gifted shares that throws a monkey wrench into things

 

[pb4uski]

I guess the first thing to verify is that you received this stock as a gift rather than inherited it but given the way that you are asking the question seems clear that you received the stock as a gift.

If so, then see this: https://ttlc.intuit.com/questions/3...-the-cost-basis-of-stock-i-received-as-a-gift

In theory, your cost basis is the giver's cost basis. I think in theory this would be by purchase lot if you have that information. For reinvested dividends, the cost basis for
each reinvested dividend lot would be the amount of dividend reinvested... generally the product of the shares and the price on date the dividends was "paid"... this would be true whether you or the giver were the owner when the dividends were reinvested.

But you make a good point in that you need to ascertain the cost basis for each purchase lot that you now own in order to make intelligent decisions to manage your income for ACA purposes.

The broker may be able to help you... especially if the broker is the same broker who previously held the shares for the giver.

 

[bingybear]

I don't think TurboTax would have set the basis. It must have been something you likely input. Were all the gifted shares purchased at the same time? Were some of the gifted shares purchased by dividend reinvestment? The bases of the gifted shares are the adjusted cost basis the original owner paid. Then any shares that you bought outright or using dividend reinvestment would be based on what you paid with any necessary adjustment (like if it distributed ROC).

Do you know the basis for all the stock? It is not figured based on the value when gifted.

 

[Steelart99]

I don't think TurboTax would have set the basis. It must have been something you likely input. Were all the gifted shares purchased at the same time? Were some of the gifted shares purchased by dividend reinvestment? The bases of the gifted shares are the adjusted cost basis the original owner paid. Then any shares that you bought outright or using dividend reinvestment would be based on what you paid with any necessary adjustment (like if it distributed ROC).

Do you know the basis for all the stock? It is not figured based on the value when gifted.

The gifted shares came in two lots and I know the cost basis the original owner paid. Unfortunately, VG screwed that up on one set of shares when they were transferred in (another issue I'm working out).

The stock I wanted to sell was the stock purchased via dividend reinvestment. I guess I'll have to go back into TT again to see if there is some field I input incorrectly. When I tell TT that the stock being sold is via dividend reinvestment, it refuses to continue until I tell it that the source of the reinvested dividends if from gifted stocks.

I just checked and TT does automatically use the cost basis of the original owner. I don't have the option of putting in the cost basis once I indicate that the original stock was gifted.

 

[LOL!]

The cost basis is what the shares cost. It is really that simple. So what did the gifted shares cost and what did the shares bought with dividends cost. In fact, if you or the person who gifted you the shares paid for any shares with dividends, then the cost basis is what was paid for those shares.

So I see a user error with TT. If you bought the new shares you sold with dividends received after you owned the shares, then those new shares were not gifted.

The shares gifted to you were probably not all purchased at the same time, so different groups or "lots" of the shares will each have a different cost basis. Also for stock shares Average Basis is not allowed.

 

[cathy63]

The gifted shares came in two lots and I know the cost basis the original owner paid. Unfortunately, VG screwed that up on one set of shares when they were transferred in (another issue I'm working out).

The stock I wanted to sell was the stock purchased via dividend reinvestment. I guess I'll have to go back into TT again to see if there is some field I input incorrectly. When I tell TT that the stock being sold is via dividend reinvestment, it refuses to continue until I tell it that the source of the reinvested dividends if from gifted stocks.

I just checked and TT does automatically use the cost basis of the original owner. I don't have the option of putting in the cost basis once I indicate that the original stock was gifted.

I am confused. Where is TT getting the cost basis of the original owner from? If you had a 1099-B and you imported it, then the cost basis would be coming from the brokerage that handled the sale. That's the main reason that you need to get Vanguard to fix their records.

But ... it's way too early to have a 1099-B for 2017, so either it's getting numbers from somewhere else online and assuming you paid market price (which seems like a really dodgy assumption, though maybe because it's div reinvestment and it has the acquisition date it is more certain?), or you are typing the numbers in by hand. I use TT desktop, so I'm not familiar with TT for the web, but on the desktop version, it lets me enter a new sale and type in the numbers that would be in boxes 1a through 1e of the 1099-B. 1e is the cost basis. I can just put whatever number I think is right in there. If my brokerage ends up putting the wrong number in that box later on, then I can click on the button that says "I have additional info about this sale" and there's a box for Corrected Cost Basis and Corrected Holding Period. Are you able to find any place to override the 1099-B box 1e or enter additional info in the web version of TT? Alternatively, can you proceed by not entering the exact symbol of the stock you're selling so that it won't grab whatever cost basis it thinks is right?

Can you post a screenshot of the page where you're entering the sale info?

 

[Steelart99]

The cost basis is what the shares cost. It is really that simple. So what did the gifted shares cost and what did the shares bought with dividends cost. In fact, if you or the person who gifted you the shares paid for any shares with dividends, then the cost basis is what was paid for those shares.

So I see a user error with TT. If you bought the new shares you sold with dividends received after you owned the shares, then those new shares were not gifted.

The shares gifted to you were probably not all purchased at the same time, so different groups or "lots" of the shares will each have a different cost basis. Also for stock shares Average Basis is not allowed.

That is how I thought it worked too. Here is the text from TT (I could not get an image attached ... yet)

"Let us know how you came into possession of this stock.
I bought this stock
I inherited this stock
I received this stock in a divorce
I received this stock as a gift
... etc"

"If you received this stock as a result of a merger, spin-off, stock dividend, or similar corporate activity, please answer the question above with respect to the original stock you owned before the exchange. For example, if you inherited the original stock, then select inherited above."

Once I answer "gifted" then TT uses the cost basis of the original owner.

 

[RE2Boys]

And the issue may very well be that TuboTax Online will undergo a several revisions in the fine details before the IRS begins accepting returns in late January 2018. There is usually an opportunity in the program to correct the basis for each transaction.

Do not even remotely consider the software as finalized at this point in time.

 

[Steelart99]

I am confused. Where is TT getting the cost basis of the original owner from? If you had a 1099-B and you imported it, then the cost basis would be coming from the brokerage that handled the sale. That's the main reason that you need to get Vanguard to fix their records.

But ... it's way too early to have a 1099-B for 2017, so either it's getting numbers from somewhere else online and assuming you paid market price (which seems like a really dodgy assumption, though maybe because it's div reinvestment and it has the acquisition date it is more certain?), or you are typing the numbers in by hand. I use TT desktop, so I'm not familiar with TT for the web, but on the desktop version, it lets me enter a new sale and type in the numbers that would be in boxes 1a through 1e of the 1099-B. 1e is the cost basis. I can just put whatever number I think is right in there. If my brokerage ends up putting the wrong number in that box later on, then I can click on the button that says "I have additional info about this sale" and there's a box for Corrected Cost Basis and Corrected Holding Period. Are you able to find any place to override the 1099-B box 1e or enter additional info in the web version of TT? Alternatively, can you proceed by not entering the exact symbol of the stock you're selling so that it won't grab whatever cost basis it thinks is right?

Can you post a screenshot of the page where you're entering the sale info?

I got the cost basis from the Vanguard site. It is too early for the tax documents, but I have to make this sale before the end of the year, so I'm getting the info where I can. I've never received a 1099 as this is my first time to try to sell stock.

The only way to override the cost basis is to say that "I purchased the stock" instead of indicating that the original stock from which the dividends were generated was "gifted"

 

[Steelart99]

screen shot

 

[cathy63]

OK, this screenshot makes it all clear. You did not receive this stock as the result of a "stock dividend". You received this stock as the result of reinvesting a "cash dividend". You need to answer this question as "I bought this stock" and then proceed from there.

 

[Steelart99]

OK, this screenshot makes it all clear. You did not receive this stock as the result of a "stock dividend". You received this stock as the result of reinvesting a "cash dividend". You need to answer this question as "I bought this stock" and then proceed from there.

WELL !!! If that's what I can do then it solves my issue!

 

[pb4uski]

Since the recipient inherit's the giver's cost basis, you have two lots of XYZ stock with a basis of what the giftor paid, plus lots for any shares from dividend reinvestment irrespective of who owned the stock when the dividend was reinvested.

So if the gifter bought shares on xx/xx/xx for $x and on yy/yy/yy for $y and did dividend reinvestments on aa/aa/aa of $a and bb/bb/bb of $b then you have 4 lots "purchased" on those dates for those amounts.

Worst case, forget about the gifted and tell TT that you purchased them on those dates for those amounts and don't worry about it.

If Vanguard is not reporting the basis properly then you are not compelled to use the improper basis... but you need to be ready to defend and explain what you did and why to the IRS when they ask why what you reported on your tax return differs from what Vanguard reported to them.... that is why it is best to try to work things out with Vanguard for them to fix the problem before they report these sales to the IRS.

 

[cathy63]

WELL !!! If that's what I can do then it solves my issue!

Yeah, the terminology is confusing, especially if you're new to this. A "stock dividend" is when a company declares a dividend and pays it out in the form of shares instead of money. It's rare, but if it happens, then it would affect your cost basis, which is why TurboTax is treating it differently.

If you had the option of getting cash and chose to reinvest it instead, then it's just a normal stock purchase.

 

[LOL!]

Yep, you bought this stock. Whenever one autoreinvests dividends, the way to think about it is:

1. You got the dividend in cash
2. You gave the cash back to the financial institution and the financial institution
3. Bought shares for you with the money you got from the dividends

In the old days, this was not a bad way to do things since the financial institution would not charge a commission for this. In the new days, since commissions are $0.00 in many instances, it is often better to do the reinvesting yourself. Not always, but often enough.

 

[Steelart99]

Thanks to all for clarifying this for me. I can't begin to tell you how much this was baffling me!