Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Sorry for the length of this post.

I'm trying to help my girlfriend with her taxes, and I'm running into some problems. I'm relatively new to investing, haven just gotten out of debt a couple years ago, but I keep a record of everything I buy, when I buy it, and what my cost basis was.

She's been investing since she was really young, and doesn't have any records. In addition to this, she just "got rid" of her broker (I'm not sure what she did, all I know is she now has posession of her stock certificates) because they were charging her a hefty quarterly maintenance fee.

I've got two (well, three) questions, and I would really appreciate some help:

1. She's got these stock certificates. There's no way for her to buy/sell anything unless she opens and account with a broker, correct? So, I'm thinking I should advise her to open an account with a discount brokerage firm and transfer the certificates to them.

2. It looks like her old broker was routinely selling stock in order to generate the cash for her quarterly fees. Also, there are some mysterious random sales, as well as liquidation of fractional shares on the last statement she received from her old broker. So, I think there are some gains that she needs to report.

She didn't buy all at once, rather she invested over a period of time, and it appears that she re-invested dividends as well. When I'm figuring her cost basis for the shares that were sold, can I pick which purchase-times/costs I want to use, or do I need to combine them all for an average cost basis? Due to the dividend-reinvestment, she has some short-term and some long-term holdings. Do I need to use the short-term rate before the long-term rate, or can I choose that as well?

3. Also, am I correct in thinking that you don't need to pay capital gains tax on dividends that you re-invest?

Any advice you could offer would really help me (us) out.

Thanks!
Matt
Print the post Back To Top
No. of Recommendations: 1
<Also, am I correct in thinking that you don't need to pay capital gains tax on dividends that you re-invest?>


You are greatly confusing the terminology. All dividends are taxable income that needs to be reported. It has nothing to do with capital gains. The only exceptions are if they were specifically tax free investments (ie: muni bonds, etc), or if some portion of the dividend was a non taxable return of capital (most common in REITs, but it can happen with others too). The mechanism for doing this should be through a 1099 from the place where the shares were being held. The 1099 should provide enough detail on what is being reported to the IRS. As an aside, this should have been going on for all the years that she has been investing. You may want to take a look at some prior year returns to see if you can make some sense of things.

Likewise all of the sales (including partial share sales), both in 2002 and prior years are taxable events. Whether there are gains or losses and whether they are LT or ST is something that needs to be determined. Any reinvestment of dividends should be added to the original cost basis. You also need to account for any spilts (standard or the more recent variety of reverse), spinoffs, special distributions, etc. All of those will effect the cost basis too.

It is hard to tell from your post if this is a small or large dollar amount. Regardless, even if one is going to be a passive investor it pays to develop a good understanding of how taxes work WRT investments. Keeping a good paper trail is really essential. If you go through enough quaterly statements, you may find enough to get started. Please don't tell us she threw out all of the statements.

On a personal note, I don't know if you should be congratulated or pitied for volunteering to work in such a potential mine field.<grin> I hope that being forced to ask some difficult questions will not negatively impact the relationship. If it gets too rough, you may want to recommend a tax pro at least until everything is straightened out. Good luck!


BRG
Print the post Back To Top
No. of Recommendations: 1
She's got these stock certificates. There's no way for her to buy/sell anything unless she opens and account with a broker, correct?

Not necessarily. Many companies these days - maybe even most - have stock purchase and dividend reinvestment plans. If she's still interested in reinvesting dividends, she could enroll in the company plan and send them her certificates (for that company, obviously). If she's in such a plan, she can liquidate part/all of her holdings at any time, at little or no cost, through the plan administrator.

So, I'm thinking I should advise her to open an account with a discount brokerage firm and transfer the certificates to them.

But yes, more generally she would be wise to open an account with a discount brokerage. Several of them offer very small commissions and often no fees at all.

It looks like her old broker was routinely selling stock in order to generate the cash for her quarterly fees. Also, there are some mysterious random sales, as well as liquidation of fractional shares on the last statement she received from her old broker. So, I think there are some gains that she needs to report.

I don't know about the mysterious random sales, but the liquidation of fractional shares shown on the last statement is perfectly normal. They only issue certificates for whole numbers of shares, so when you ask for a certificate (as your girlfried did) they sell the fractional part. And yes, all these sales need to be reported, and taxes paid on gains, if any.

When I'm figuring her cost basis for the shares that were sold, can I pick which purchase-times/costs I want to use, or do I need to combine them all for an average cost basis?

No and no. Absent any arrangement with the broker to sell specific lots of shares, you must use FIFO (first in, first out). That is, the earliest shares purchased were the ones sold. And average cost basis works only with mutual funds. You can't do that with stocks.

Due to the dividend-reinvestment, she has some short-term and some long-term holdings.

Again, each sale is a separate transaction. The shares sold were the oldest ones she had at the time of the sale. Whether it's a short or long term transaction depends on the difference between the purchase and sale dates. Remember, you can aggregate purchases and use a date of "various" - but you do have to keep short and long term sales separate. A single sale can have both a short and long term component, in which case it is broken down as two separate sales.

Also, am I correct in thinking that you don't need to pay capital gains tax on dividends that you re-invest?

Dividends, whether reinvested or not, are taxed as ordinary income. When you eventually sell shares acquired through dividend reinvestment, you will have a capital gain/loss, and if the former, you'll pay tax on it. But it's not a tax on the dividend - you already paid that! It's a tax on the gain realized subsequently.

Lorenzo
Print the post Back To Top
No. of Recommendations: 0
Any advice you could offer would really help me (us) out.


I don't know just what your situation is but some places keep track of your cost basis for you in their records. Would it be possible to ask the broker for a year-end report? A lot of brokerages put out such a thing as a matter of course.

I'd go back to the broker to at least TRY to get some info. Otherwise it sounds like all the numbers would be guesses.

Just a thought.

Andy
Print the post Back To Top