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Posted by Bill on March 16, 2007, 12:52 pm
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charry@gmail.com (chrisexv6) posted:
> I see there are a TON of cost basis questions
> on this group, but I couldnt quite get the
> answer I needed.
> My wife has funds that she's held for a long
> time (15 years or so). I *know* the dividends
> were reinvested, but she's also had capital
> gains distributions reported for several of
> those years. Not being a tax pro, it looks to me
> like the capital gain distribs were listed as part
> of her gross income on the 1040.
> She has now sold 3 of the funds, and we're
> trying to determine the cost basis (to get an
> idea of the tax implications). My (almost
> complete) understanding is the following:
>
> taxable amount from sale = sale price -
> (original investment + reinvested dividends)
Actually, the equation might better read: Proceeds - Cost
basis = net taxable gain. (The "cost basis" computation is
what you're concerned about -- and it should properly
include _all_ reinvested funds.)
> My question is where the capital gain distribs
> fall into place. It makes sense (to me, anyway)
> that they would be another amount subtracted
> from the above calculation, because they've
> already had taxes paid on them, thereby
> reducing the taxable "profit" from the sale of
> the funds (profit in quotes because Im
> assuming she ended up making $$$).
>
> Is my logic correct (provided the capital gains
> distribs WERENT reinvested every year)?
> If they WERE reinvested, I assume they are
> then rolled into the "reinvested dividends"
> number in the above calculation?
In general, your logic is correct; however, you should
carefully check statements for previous years (undoubtedly
available from the mutual funds involved), or simply phone
the customer service number to determine whether CGD
(Capital Gains Distributions) were _reinvested_ for your
wife's holdings.
The most common practice [for mutual funds where
reinvestment is requested] is that the mutual fund will
reinvest _all_ dividends and distributions. So, if you
don't verify this, you might be _understating_ your wife's
cost basis ... which would cause her/you [if MFJ] to pay
unnecessary extra taxes.
Bill
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