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Author: Aida2003 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121482  
Subject: MF sales-what method to choose? Foreign tax CR. Date: 2/7/2009 8:46 PM
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It's a small amount, but still...

The 1099-DIV of my Vanguard mutual fund shows $6 foreign tax paid. Can I put that amount on line 47 of our 1040? I thought so, but after reading an example under "Foreign tax credit limitation" http://www.fairmark.com/mutual/foreign.htm, it made me confused.

In 2008 we sold two mutual funds (the entire holdings, including fractions) for TLH purposes, but how do I decide which method is best when reporting to the IRS? When the entire holding is sold, can I still choose FIFO or Specific identification of shares? If so, do I have to report each and every purchase and Div./Cap.Gain reinvestments (100 entries for one fund and 120 for another)?

One thing about using Average cost method confuses me though. Fairmark http://www.fairmark.com/mutual/selling.htm says "The averaging rules apply only to mutual fund shares. You can't use them for regular stocks." But to me it sounds that the Double-category method is used with idividual stocks. On the purchase side, you separate total amount spent on ST shares and then do the same on LT shares. Am I correct here?
When I used single category average method, my ST loss is smaller vs. using Double-category method? In general, I'm guessing that bigger ST loss is more tax beneficial, right?

One last question, in 2006 and 2007 Vanguard charged $2.50/quarter account charge. The charge was deducted from dividends. Would this charge qualify to be included as a cost on sale side?

Thanks so much.
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Author: Hohum77 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104351 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/7/2009 10:00 PM
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The 1099-DIV of my Vanguard mutual fund shows $6 foreign tax paid. Can I put that amount on line 47 of our 1040? I thought so, but after reading an example under "Foreign tax credit limitation" http://www.fairmark.com/mutual/foreign.htm, it made me confused.

Well, if the Example did not help, here are your choices
a. an amount less than $6
b. $6

In 2008 we sold two mutual funds (the entire holdings, including fractions) for TLH purposes, but how do I decide which method is best when reporting to the IRS? When the entire holding is sold, can I still choose FIFO or Specific identification of shares? If so, do I have to report each and every purchase and Div./Cap.Gain reinvestments (100 entries for one fund and 120 for another)?

FIFO stands for First In First Out
If you sell everything, FIFO does not exist for the situation.
You do have to separate long term capital gains/losses from short term
capital gains/losses. Since this was a Mutual Fund, the 1099 should have the numbers for you.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104352 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/7/2009 10:03 PM
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In general, I'm guessing that bigger ST loss is more tax beneficial, right?

If you have offsetting short term gains. If the loss is applied to regular income or long term capital gains, it makes no difference.

If so, do I have to report each and every purchase and Div./Cap.Gain reinvestments (100 entries for one fund and 120 for another)?

You can split the purchases into two categories: long term and short term with the purchase date as various.

Debra

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Author: Aida2003 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104355 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/8/2009 8:49 AM
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Thanks so much for a prompt answer.

One quick question (or two).
So, when the entire MF holding is sold, FIFO is not applicable, what about Specific Identification? If one can use it, then if I'm reading right, the calculation of cost basis would be the same as for Average-cost Double Category, correct?

That's all, no more questions.

And Thank you for sharing your knowledge.

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Author: Hohum77 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104357 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/8/2009 9:59 AM
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One quick question (or two).
So, when the entire MF holding is sold, FIFO is not applicable, what about Specific Identification? If one can use it, then if I'm reading right, the calculation of cost basis would be the same as for Average-cost Double Category, correct?


Suppose you purchased three lots of the same Mutual Fund (or stock) on
three different dates. You then sold all three lots in one transaction. Just as there is no FIFO, there is no Specific Identification in this scenario.

However, because you purchased the three lots on different dates, and because of dividend reinvestments, you may have both long term capital gain/loss in some shares and short term capital gain/loss in the remaining shares.
Long term gain/loss apply for Mutual Fund (or stock) shares held for over a year, short term capital gain/loss apply for Mutual Fund (or stock) shares held for less than a year.


I don't know what Double Category means

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104371 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/8/2009 3:55 PM
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So, when the entire MF holding is sold, FIFO is not applicable, what about Specific Identification? If one can use it, then if I'm reading right, the calculation of cost basis would be the same as for Average-cost Double Category, correct?

To say a cost basis calculating method is not applicable may be misleading. The point is that any of the methods you might use will arrive at the same cost basis if you are selling the entire holding of the fund.

Bob

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104377 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/9/2009 1:06 AM
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Since you sold your entire holdings, the total loss will be the same, regardless of whether you use average cost per share or individual transactions. It is possible that the percentage allocated to short term losses might be different using average versus individual transactions.

Allocating losses to short term instead of long term is only an advantage if you have short term capital gains to offset the losses. Up to $3,000 of capital losses can be applied against regular income each year. Short term losses are allocated against regular income before long term losses.

So, it won't hurt to use the method that applies the most loss to short term, but don't be surprised if it doesn't reduce your taxes.

Debra

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104380 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/9/2009 1:51 AM
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CABob writes (in part):

The point is that any of the methods you might use will arrive at the same cost basis if you are selling the entire holding of the fund.

I reply:

That's true, but different methods of calculation may divide that cost basis differently between short-term and long-term shares. As the OP correctly points out, performing FIFO accounting will give the same division as double-category cost averaging, but single-category cost averaging may give a different division. Specific identification is almost certainly not available (and in any event would be a waste of time and energy because it would reach the same result as FIFO) because it's doubtful that the requisite instructions were given at the time of the sale. --Bob

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Author: Aida2003 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 104393 of 121482
Subject: Re: MF sales-what method to choose? Foreign tax Date: 2/9/2009 10:27 AM
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Thanks everyone for great answers. Last year I learned how to report idividual stock sale and this year I learned about mutual fund's sale.
Hopefully I won't need to see our holdings in lots because it creates more learning and question asking.

I appreciate everyone's answers.

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