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Posted by Barry Margolin on April 7, 2008, 8:30 pm
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> I ran into a strange problem. There was a spin off, and about $35 was
> received for cash in lieu. Being lazy to look up the original
> purchase date and calculate the cost basis for the fractional number
> of shares, I just entered the purchase date as the date of the split
> and the cost basis as zero, for a net short term gain of $35.
>
> Then I decided to calculate the exact numbers, hoping it would reduce
> tax. The cost basis was $14 and the purchase date many years ago, so
> the net gain was long term of 35-14=21. But the tax increased!
>
> It seems the reason for this is the rounding of taxes under 100k.
> Consider by example:
>
> - For single filer, 50000 to 50050 has tax of 8930
> - Suppose taxable income is 50050 with the $35 included in short term
> gains
> - Tax is 8930
> - Now remove $35 for short term gain and add $21 to long germ gains
> - Short term tax is still 8930
> - Add long term tax of 21*0.15 = $3 rounded
>
> And to make matters worse, in the lazy approach, the cost basis for
> the shares when you eventually sell them would be X. But in the exact
> approach, the cost basis would be X-14, thereby increasing your tax by
> 14*0.15 = $2 rounded.
>
> Is there anything that can be done about this?
On the other hand, if their income had been $50,051 with the $35
included, your regular tax would drop by $50*marginal rate and the
capital gain tax would increase by $14*15%, so you would get a
significant saving. Using the granular tax tables tends to magnify some
small income differences and ignore others, depending on the luck of
whether you cross one of the $50 boundaries. In the case of a $35
check, you have a 70% chance of winning, 30% chance of losing.
I vaguely recall that when I used to do my taxes by hand (about 25 years
ago, before Macintax) that you could actually choose whether to use the
tax table or calculate the percentage exactly. Am I misremembering? Is
this still allowed?
--
Barry Margolin, barmar@alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***
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