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Author: Badger18 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121563  
Subject: Basic Questions Date: 2/8/1999 7:49 PM
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I have some basic tax questions. Thanks much in advance for the help.

The first two Q's deal with investing outside of an IRA.

Am I correct in understanding that shares of stock are transferable to your heirs at a stepped-up cost basis, or some such term? Meaning that if I buy XYZ Corp now for $20/shr, and when I die it's worth $200/shr, my heirs receive it at a cost basis of $200/shr and only pay capital gains taxes, when they sell the stock, on any gain above the $200/shr price.

Is this true for mutual funds? If not, are mutual funds transferred at original cost basis?


The next Q deals with IRA investing.

What happens to a) stocks and b) mutual funds held in an IRA when you die? I.e. can they be transferred at a stepped-up cost basis?


The next 2 Qs have nothing to do with death (or IRAs).

Are capital gains on mutual funds held less than 12 months considered short or long term gains? The rationale for considering them long term gains would be that the fund might be assumed for tax purposes to have held all its shares for more than 12 months already.

(Assuming gains on mutual funds held less than 12 months are short term gains...) What happens if I make monthly contributions to a fund for 15 (i.e. more than 12) months and then make a withdrawal? If I have a gain, will it be a short or long term gain? I bought some of my shares more than 12 months ago and some less than 12 months ago.



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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9958 of 121563
Subject: Re: Basic Questions Date: 2/11/1999 3:38 AM
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[[ Am I correct in understanding that shares of stock are transferable to your heirs
at a stepped-up cost basis, or some such term?]]

Yup...your heirs receive the shares at the FMV of the stock at your date of death.

<< Meaning that if I buy XYZ Corp
now for $20/shr, and when I die it's worth $200/shr, my heirs receive it at a cost
basis of $200/shr and only pay capital gains taxes, when they sell the stock, on
any gain above the $200/shr price.>>

Yup...now YOU may have massive estate taxes to pay on that appreciation...but that's another story. As far as the beneficiary is concerned, you are correct with your example.

[[ Is this true for mutual funds? ]]

Yup...

[[ The next Q deals with IRA investing.

What happens to a) stocks and b) mutual funds held in an IRA when you die?
I.e. can they be transferred at a stepped-up cost basis?]]

Nope...IRA are treated completely differently. SOMEBODY will pay the untax appreciation on the traditional IRA account...and that somebody will be your heirs. There are many options that you beneficiaries may have with respect to the receipt of your IRA. If you would like to read more about this, check out IRS Publication 590 at the IRS web site.

[[ The next 2 Qs have nothing to do with death (or IRAs).

Are capital gains on mutual funds held less than 12 months considered short or
long term gains?]]

Holding 12 months or less is considered short term capital gains.

[[ The rationale for considering them long term gains would be
that the fund might be assumed for tax purposes to have held all its shares for
more than 12 months already.]]

It makes no difference what the mutual fund does. It is YOUR holding period that matters. If the mutual fund has long term holdings that the subsequently sell, you'll get a long term capital gain distribution from the fund.

[[ (Assuming gains on mutual funds held less than 12 months are short term
gains...) ]]

They are...

[[What happens if I make monthly contributions to a fund for 15 (i.e.
more than 12) months and then make a withdrawal?]]

Part of your "sale" will be long term, part will be short term. You'll have to split out the basis computations and holding periods if your mutual fund company doesn't.

[[ If I have a gain, will it be a
short or long term gain?]]

Both...some short, some long.

We discuss this in much greater detail in TMF Investment Tax Guide. You might want to check it out.

TMF Taxes
Roy

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