Cost Basis

If you own mutual funds outside a retirement account, you likely have heard from the investment companies asking you to choose your math. The companies want you to select the method they should use to calculate your "cost basis" — how much you paid for the shares. What you decide can make a difference in your tax bill when you sell. The fund companies are acting on legislation passed in 2008 that requires brokerages and investment companies to report cost-basis information to the Internal Revenue Service when securities are sold.

If you own mutual funds outside a retirement account, you likely have heard from the investment companies asking you to choose your math. The companies want you to select the method they should use to calculate your "cost basis" — how much you paid for the shares. What you decide can make a difference in your tax bill when you sell. The fund companies are acting on legislation passed in 2008 that requires brokerages and investment companies to report cost-basis information to the Internal Revenue Service when securities are sold.

You've been buying stock on a regular basis and reinvesting the dividends to acquire more shares. Maybe over the years the stock has split once or twice. But accumulating stock this way might be a lot easier than selling it. You have to figure out how much you paid for the stock so you can report a gain or loss on the sale for tax purposes. If you're not a good record keeper, this can be a hair-pulling exercise. Tracking what you paid for securities, or the so-called "cost basis," may get easier for you - and Uncle Sam. President Bush's 2009 budget proposes requiring brokerages, asset managers and mutual funds to report the cost basis to the IRS when securities are sold.

You've been buying stock on a regular basis and reinvesting the dividends to acquire more shares. Maybe over the years the stock has split once or twice. But accumulating stock this way might be a lot easier than selling it. You have to figure out how much you paid for the stock so you can report a gain or loss on the sale for tax purposes. If you're not a good record keeper, this can be a hair-pulling exercise. Tracking what you paid for securities, or the so-called "cost basis," may get easier for you - and Uncle Sam. President Bush's 2009 budget proposes requiring brokerages, asset managers and mutual funds to report the cost basis to the IRS when securities are sold.

Q: In the case of a divorce when you're over age 55, if I buy out my ex-husband's share of my house, do I have to pay gift or other taxes on the amount? If not, how do I account for this money?M. Hart, PasadenaA: You won't owe any gift or other taxes on the money used to buy out your ex-husband's interest in your home. Instead, the money would be treated as an additional purchase price or, put another way, would increase your "cost basis" in your home.For example, if you originally paid $50,000 for your house, and years later you paid your ex-husband another $25,000 for his share, your total cost basis for the house would be $75,000.

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.Q: I'm going to give my son a gift of less than $10,000 in stock for a wedding present in October. What is the cost basis for that gift? Second, if they then immediately sell it, say five days later, what would be their tax consequences in the '98 tax year?A: Generally, the cost basis would be what you paid for the stock. For example, if you bought the stock for $5,000 and on the date of the gift, the stock has a fair-market value of $9,000, your cost basis would be $5,000.

Taxes and estate issues are tricky. Not surprisingly, last week's column on the tax consequences of putting children's names on the deed of a parent's house raised questions from readers. Here are the answers: Raphael of Baltimore sold a house he inherited from his father and gave $28,000, the majority of the proceeds, to his son and daughter-in-law. "Am I liable for any taxes on the sale of the house?" he asks in an e-mail. "And if I gifted the bulk of the money that I received in the sale, can I deduct it on my income taxes?"

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15. See below for how to submit a question.When calculating capital gains, do stock splits have to be compensated for when doing the arithmetic? If so, how is it done, i.e., what is the procedure?Stock splits are not taxable transactions. When a split occurs, a taxpayer retains his/her original cost basis for the new number of shares. For example, suppose you bought 100 shares of XYZ Co. at $10 per share, or $1,000.

Editor's note: Every Sunday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax advice column featuring experts from the Sparks accounting firm SC&H Group answering reader questions. Submit questions at www.baltimoresun.com/taxtalk I sold shares of stock last year that I bought through payroll deduction during a three-year period. I know the individual purchase prices but I need to know the best way to come up with the "cost basis." Can you help?

Now that tax time is approaching, here are answers to a few questions If I sell shares in a fund or exchange them from one mutual fund to another, do I need to report my gain or loss on my income taxes?Yes, unless the transactions occurred in a tax-sheltered retirement plan or a variable annuity. An exchange of assets from one fund to another is the same as a sale and purchase for tax purposes.Will my fund sponsor provide information about my own gains and losses?Maybe. Although shareholders are ultimately responsible for calculations of their own fund transactions, a growing number of mutual-fund families do report on cost basis (including reinvestment)

Editor's note: Every Sunday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax advice column featuring experts from the Sparks accounting firm SC&H Group answering reader questions. Submit questions at www.baltimoresun.com/taxtalk I sold shares of stock last year that I bought through payroll deduction during a three-year period. I know the individual purchase prices but I need to know the best way to come up with the "cost basis." Can you help?

Ed of Randallstown has death and taxes on his mind. "I am interested in what happens to inherited stock from a tax perspective," he writes in an e-mail. He wants to know the consequences under a variety of scenarios: What if he doesn't know how much he paid for the stock? What if he donates it to charity? What if he gives stock to relatives? Not knowing how much you paid for a stock - the cost basis - is problematic. And potentially costly. In these cases, the Internal Revenue Service assumes the cost basis is zero, says Jeff Gonya, an estate planning lawyer in Baltimore.

Taxes and estate issues are tricky. Not surprisingly, last week's column on the tax consequences of putting children's names on the deed of a parent's house raised questions from readers. Here are the answers: Raphael of Baltimore sold a house he inherited from his father and gave $28,000, the majority of the proceeds, to his son and daughter-in-law. "Am I liable for any taxes on the sale of the house?" he asks in an e-mail. "And if I gifted the bulk of the money that I received in the sale, can I deduct it on my income taxes?"

Reports that Tribune Co. is considering selling its assets piecemeal pleased the leader of a local group that wants to buy The Sun, but it was still unclear yesterday whether the Baltimore newspaper is for sale. Theodore G. Venetoulis, a publisher and former Baltimore County executive who is leading the Baltimore Media Group in efforts to purchase The Sun, said a representative from Tribune telephoned yesterday to confirm the company had received the group's letter of interest. Venetoulis along with at least 15 business and civic leaders inquired last week about Tribune's interest in selling The Sun. "There is an indication there is a chance that local people might have an opportunity to negotiate for the local property," Venetoulis said yesterday.

Now that the chore of your tax return is done, it's time for another spring ritual - cleaning your mutual fund files. Done properly, a little effort now will not only make it so that future returns are less taxing on your time and energy, but also will make it so that you have better control over your portfolio. Most people keep too much information, cluttering their files with redundant papers rather than refining their filing system to keep only what is necessary and current. The easiest way to avoid potential problems stemming from cluttered records, experts suggest, is purging your fund files of every unnecessary document.

Baltimoresun.com's tax advice column features three experts from the Hunt Valley accounting firm SC&H Group answering questions about preparing your return. Here is an edited excerpt of this week's column: I worked for a company that filed for bankruptcy. When they filed, they owed me 20 days of vacation. I filed a claim as a creditor. I have been notified by the court that the company never came out of bankruptcy. Can I claim this as a loss, as the debt will never be paid? - Barbara, Baltimore Individual taxpayers file on the cash basis method of accounting.

Q: I have three grandchildren, ages 11, 7 and 2. I purchased 100 shares of AT&T for each of them on different dates and had all the dividends reinvested. The three certificates are in my name, so I am paying the income tax.I intend to transfer each certificate to the individual grandchild at age 18. Should I not be alive, my will specifies that each certificate, with the reinvested dividends, will go to each grandchild.AT&T lumps all the dividends together. Is there any way to be sure each certificate goes to its beneficiary with all of its specified dividends included, rather than divided into three equal parts?

Baltimoresun.com's tax advice column features three experts from the Hunt Valley accounting firm SC&H Group answering questions about preparing your return. Here is an edited excerpt of this week's column: I worked for a company that filed for bankruptcy. When they filed, they owed me 20 days of vacation. I filed a claim as a creditor. I have been notified by the court that the company never came out of bankruptcy. Can I claim this as a loss, as the debt will never be paid? - Barbara, Baltimore Individual taxpayers file on the cash basis method of accounting.

Sometimes, addressing the concerns of the fund-investing public leaves a few open questions. Here are three - with answers - that readers shared after some recent columns: In your column on calculating the cost basis of funds, you didn't cover my problem: The funds I bought about 20 years ago were sold, and the firm that runs them now says it doesn't have my original cost information. My tax preparer says that if I sell and can't figure out the cost, I should just use zero. That doesn't seem very tax wise, so how do I come up with a cost basis?

I'm getting married in November. I make about $50,000 a year and my fiancee makes about $20,000. We are saving vigorously for the wedding because it will be costing us and her parents about $35,000, including the honeymoon. We are on target to afford it, so no worries there. However, we will be maxing out our credit cards and we are hoping that the wedding gift money will pay off as much as 75 percent of the credit card debt. Any leftover debt can be paid off within a year, tops. Unfortunately, her car is really a wreck, and I fear for her safety.