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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: of 121095  
Subject: Re: another cost basis question Date: 7/9/1997 12:13 PM
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This is stock that I was given by my grandmother in the the 80's, but she's no longer around to tell me what her cost basis was. I have the dates on the stock certificates and could, with a bit of looking, come up with the FMV at the date of the gift. But that's not enough, is it? In this case, do I need to show that I have chosen the lower of the two amounts (FMV at that date versus my grandmother's cost)?

I would like to get rid of these fleas this year to compensate for some rare long-term gains. Assuming I can manage to sell the shares or have them declared worthless, is there a way I can use the FMV at the date printed on the shares as a basis?>>

Your problem is that you do NOT have a choice. Because this was a "gift" and not an "inheritance", you have to determine Grandma's original cost basis AND FMV at the time of the gift. Check out the Taxes Frequently Asked Questions are for a discussion on gifts of stock and how it works..what you have to use to compute your gain or loss. Then, and only then, will you be able to focus on the appropriate measure of value (generally, if the shares have appreciated, you must use Grandma's cost basis, but if the shares have depreciated in value, you may be stuck with the FMV at the date of the gift).

Once you determine if you must use cost or FMV, all you can do is your best to determine the appropriate value. Once you have determined what value you need, post a follow up question here and I'll try to give you additional specific information.

<<Also, I have an IRA question. I live and work in Tokyo and my salary is fully exempted from US tax. Since I don't believe I'll be retiring here, I would like to open an IRA in the US. But I know I can't do that unless the IRS has some earned income of mine to tax. My question: is it possible to declare some of my foreign earned income taxable (say, uh, $2000?), pay the tax on that and get going with my IRA? Or is it an all or nothing situation? I still have about 40 years before retirement so, while time is
on my side, I'd like to get some work out of that Compounding Clown I keep hearing about. Or was that some dream I had?>>

Well, I'm not sure that you would want to. The law is clear: income not subject to tax because of the foreign earned income exclusion is not eligible for IRA contributions. But if you are NOT saving tax dollars by making an IRA contribution (since you income is currently protected), why contribute to an IRA where your withdrawals would be subject to tax at some time in the future?? I realize that your "earnings" would be sheltered in the IRA, but you would get screwed on your principal withdrawals in the future.

And since most of your investment income will probably be taxed at the 15% rate, it may WELL be in your best interest to simply save that money outside of any IRA account, pay money on the earnings, and NOT pay any taxes in the future on the principal. I think that you would be bette off.

Thoughts??

TMF Taxes
Roy
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