Adding very old transactions (do I need to?)

Won't your mutual fund be providing that using a default method such as
average cost per share when you sell and they provide you with the
paperwork come tax time?  You're not required to use it if you have
documentation you can use for other methods (like directed shares), but
it's the simplest way to do it, and at least you know you 'have got it
right'.  Downside, might not be the cheapest tax calculation, but since
you don't know the cost basis now anyway, I wouldn't sweat it.

Check with them.

--
-------------------------------------------------------------
Regards -

- Andrew

Hi, Ross.

"Pay me now...or pay me later!"  (From an auto transmission repair
commercial than ran on TV several years ago.)

You do need to determine your tax basis and holding period for the shares
you sell.  How you do it is your business.  The IRS won't need to see your
Quicken, or your spreadsheets.  But those may be the most effective and - in
the long run - the fastest and easiest ways to calculate your basis.

When I was a practicing public accountant, I did this sort of thing quite
often.  When all the documents were available, it was like a game, almost
fun.  When records were missing or incomplete, it was more work than fun.
But I was getting paid by the hour.

You said this fund "was no longer active, just sitting and generating
dividends".  Were you reporting and paying taxes on those dividends each
year?  Did the cash from the dividends just sit in the fund as more Cash
Balance?  Or were the dividends re-invested in more shares each quarter, or
whenever you received the dividends?  Were ALL the dividends "ordinary
income", or did they include long-term capital gains, too?

If all the dividends were properly reported each year, including
classification as to capital gains, non-taxable, etc., and if all were
re-invested automatically, then your basis - overall - would have been
increased by the total of the dividends.  Then all that's left to do is to
divide your current shares between long-term and short-term for capital
gains calculations.  If you sell all your shares in a single transaction,
you can just recalculate your basis to the point when you started proper
recording in Quicken.  But if you sell your shares piecemeal, then you will
need to determine which shares are sold in each batch - and the basis and
holding period for each batch.

If it were me (knowing my personality), I would start at the beginning.  I
might create a new Quicken file just for the purpose of determining the
basis to the date when my main Quicken started, and use that data to update
my actual Quicken file.  But you are not me, so you'll have to decide how
you will do it.  Good luck!

I've been retired from public accounting for over 20 years and much of what
I remember is out of date, so be sure to check with your own CPA before
filing your return.

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP (2002-2010)
(Using Quicken 2012 Deluxe R 2 and Windows Live Mail in Win7 x64)


"Ross Dillon"  wrote in message

I bought Quicken several years after I opened this particular mutual
fund (which in fact was no longer active, just sitting and generating
dividends).  Rather than go back enter every transaction from the
beginning (8 years worth), I just started with the then-current
balance.  I'm now about to sell those shares off and I need to
calculate my cost basis and realized that without those transactions
Quicken won't have a prayer of being correct.

Do I need to enter the old transactions or can I just calculate the
cost basis to that point in a spreadsheet, add what Quicken thinks is
the current cost basis, then subtract the opening balance?

 

Actually, it was an oil filter company, Fram.  You can watch one on line,
if you desire...  www.youtube.com/watch?v=aq3wL8ZXjBU

Hi, Bruce.

Thanks for the correction and reminder.  ;<)

RC
--  
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP (2002-2010)
(Using Quicken 2012 Deluxe R 2 and Windows Live Mail in Win7 x64)



On Tue, 18 Oct 2011 08:33:28 -0500, R. C. White wrote:


Actually, it was an oil filter company, Fram.  You can watch one on line,
if you desire...  www.youtube.com/watch?v=aq3wL8ZXjBU

Oh, oh, what does that make those of us who remember that commercial?

R.C. - You sure this is true? If I ask a MF to sell 'x' shares and I
have more left 'over', I don't have to determine this.  Again, they'll
send me (at the moment, the rules change in 2012) a statement using
average cost per share that I can use if I wish.  And once I start using
one method, I believe I need to continue to use the same method in
subquent sells of the same fund from the same account.

--
-------------------------------------------------------------
Regards -

- Andrew

Hi, Andrew.

As I often remind here, I've been retired for more than 20 years - and tax
rules change daily.  So I always advise readers to check with their own CPA,
who should be up to date with current tax laws and rules.

When I retired, the "average cost" method was not yet available, so the
taxpayer had to choose LIFO or FIFO or specific identification - and stick
with it, as you said.  And to use specific identification, we would have to
tell the fund manager, in writing, which batch should be sold.  Reinvested
dividends from mutual funds always created a large volume of transactions,
with their (usually) quarterly dividends and purchases.  Each individual
dividend was not hard to record.  But if 10 years of transactions had not
been timely recorded, then it became a lengthy exercise to enter them all at
once.  When a client sold all shares in a single transaction, we still had
to determine which shares had been purchased within the past 6 months (or
the past year - rules changed at some point, which I've forgotten and would
have to look up again) and separate those from long-term holdings.  And when
only part of the holdings were sold, the exercise got more complicated.

But I'd better excuse myself from this thread now.  Twenty-year-old
knowledge is OK for general discussion, but not for specific
guidance.

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP (2002-2010)
(Using Quicken 2012 Deluxe R 2 and Windows Live Mail in Win7 x64)



R. C. White wrote:

R.C. - You sure this is true? If I ask a MF to sell 'x' shares and I
have more left 'over', I don't have to determine this.  Again, they'll
send me (at the moment, the rules change in 2012) a statement using
average cost per share that I can use if I wish.  And once I start using
one method, I believe I need to continue to use the same method in
subquent sells of the same fund from the same account.

--
-------------------------------------------------------------
Regards -

- Andrew

Thanks RC - you probably have forgotten more than I'll certainly ever know!

Well, for the record, here's a link:
http://www.rowanmagazine.com/departments/alumniadvisor/archive/taxes/

Four ways to sell investments

1. The FIFO method
First In-First Out assumes you first sell the shares you bought first.
(The first person who gets on the bus is the first person to get off the
bus.) This is the default method; the IRS (as well as your broker or
mutual fund company) assumes you use this method unless you notify them
otherwise.

2. The specific identification method
You name which shares you are selling (you do this by referring to the
date you acquired the shares to be sold). For this method to be
successful, you must specify to the mutual fund company or to the
advisor of record serving your account the particular shares to be sold,
and you must do this at the time of sale. Furthermore, you must receive
confirmation of your specification from your advisor in writing within a
reasonable time, and the confirmation by the mutual-fund company must
confirm that you instructed your advisor to sell particular shares.

3. The average cost single method (only available for mutual funds)
Figure the tax on the average cost and the average profit from all your
trade lots.

4. The average cost double method (only available for mutual funds)
Separate the trade lots into two groups: those held one year or less and
those held more than one year, and then figure the tax on the average of
each group.

(end of Andrew's paste)

Looks like #1 is what shares the MF uses by default, not average cost as
I said.  Whatever - my big point was that THEY (the FI) handles the
paperwork and even though it is indeed probably not the most tax
advantageous method, I let them worry about calculating my cost basis!


(I probably don't want to know how much this might cost me!)

_____________________



--
-------------------------------------------------------------
Regards -

- Andrew

Hi, Andrew.

That link is informative, but suffers from the same weaknesses as MY
explanations.  :>(  It's better to go to the authoritative sources:
Internal Revenue Code, Treasury pronouncements, court cases, etc.  For
example, Edelman omits LIFO altogether.  And I don't think his "on/off the
bus" analogy is very clear; entry/seating/exit on a bus is often quite
random, not in any specific order.

FIFO is more like the way a merchant stocks his shelves or we arrange things
in our refrigerator:  we move the oldest (first-in) item to the front of the
shelf so that it will be the next one we use.  LIFO (Last In, First Out) is
like a stack of dishes; we are most likely to use the one on top - which is
the last one that was placed on the stack.  (The "stack" is a standard tool
of computer programmers who "push" items onto the stack and later "pop" off
the top one; the analogy usually given is of dishes added to the
spring-loaded stack in a cafeteria line.  Accounting teachers have long
likened LIFO to a coal dealer's supply, where the latest load received gets
dumped onto the top of the pile and then gets sold first.)

The average cost methods for mutual funds (your #3 and #4) were not
available until about the time I retired.

In a continuously-rising market, FIFO will produce the highest reportable
gains by selecting the oldest shares, bought at the lowest prices.  LIFO
will show lower gains, but some of them will probably be short-term, which
might produce a higher tax on a similar amount of gain.  Good tax planning
often requires more analysis and care than either of these ways might
produce, so specific identification might produce the best results - for
this year and next.  This is especially true in an erratic market such as
we've seen in the past decade.

Taxpayers and advisers usually concentrate on reducing THIS year's taxes,
overlooking the effects on future years of this year's decisions.  A
taxpayer whose income over several years is level or climbing smoothly will
pay a lot less in taxes than one whose taxable income level shows a saw
tooth pattern of highs and lows, because of our progressive tax rates.  One
who has taxable income of $50,000 per year for 3 years will pay a LOT less
than one who has $0, $50,000 and $100,000 - or $0, $150,000 and $0!  The FI
handling YOUR mutual fund has only a mild interest in how all this affects
you.  You and your own CPA should have a much greater interest in managing
this.

Let's see, just for a quickie calculation...I no longer have good tax
references at my elbow, but they are available online; we can start with the
Tax Tables for 2010 at http://www.irs.gov/pub/irs-pdf/i1040tt.pdf    Ignoring
all the many other complicating details, looking simply at Taxable Income
for a Married couple filing jointly, and at "Taxable Income", which means
Gross Income AFTER Adjustments, Deductions and Exemptions:
On $ 50,000     $  6,666
On $100,000    $17,356 (actually on $99.999)
On $150,000    $30,244

So the taxpayer with level taxable income of $50,000 per year will pay 3 x
$6,666 = $19.998.
On $0 + $50,000 + $100,000, the tax would be $0 + $6,666 + $17,356 =
$24,022, or $4,024 more.
On $0 + $150,000 + $0, the onetime tax of $30,244 would be $10,246 more than
on the 3 years of level income.

That might even be enough to pay for advice from a good CPA who knows about
YOUR personal situation, not just generic "tax tips" from a magazine
column - or a newsgroup.  ;^}

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP (2002-2010)
(Using Quicken 2012 Deluxe R 2 and Windows Live Mail in Win7 x64)



R. C. White wrote:

Thanks RC - you probably have forgotten more than I'll certainly ever know!

Well, for the record, here's a link:
http://www.rowanmagazine.com/departments/alumniadvisor/archive/taxes/

Four ways to sell investments

1. The FIFO method
First In-First Out assumes you first sell the shares you bought first.
(The first person who gets on the bus is the first person to get off the
bus.) This is the default method; the IRS (as well as your broker or
mutual fund company) assumes you use this method unless you notify them
otherwise.

2. The specific identification method
You name which shares you are selling (you do this by referring to the
date you acquired the shares to be sold). For this method to be
successful, you must specify to the mutual fund company or to the
advisor of record serving your account the particular shares to be sold,
and you must do this at the time of sale. Furthermore, you must receive
confirmation of your specification from your advisor in writing within a
reasonable time, and the confirmation by the mutual-fund company must
confirm that you instructed your advisor to sell particular shares.

3. The average cost single method (only available for mutual funds)
Figure the tax on the average cost and the average profit from all your
trade lots.

4. The average cost double method (only available for mutual funds)
Separate the trade lots into two groups: those held one year or less and
those held more than one year, and then figure the tax on the average of
each group.

(end of Andrew's paste)

Looks like #1 is what shares the MF uses by default, not average cost as
I said.  Whatever - my big point was that THEY (the FI) handles the
paperwork and even though it is indeed probably not the most tax
advantageous method, I let them worry about calculating my cost basis!


(I probably don't want to know how much this might cost me!)

_____________________



--
-------------------------------------------------------------
Regards -

- Andrew

Just got back from work, got an engagement to go to tonight, but I got
to say I always LOVE your posts...got a lot to read here, learn, and
think about.  Thanks as always.

--
-------------------------------------------------------------
Regards -

- Andrew

(Some of this assumes you're in the US)

Assuming that you've captured the cost basis for everything since that
starting balance transaction, the transaction that holds your starting
balance should have a field to capture the cost basis for the Added
shares (Right-click that xctn & try to Edit it).  If you have the
luxury of an old statement that shows the cost basis for those shares
on a "then current" statement, or if you already have the individual
historical transactions (with each one's cost) in a spreadsheet, you
should be able to determine what to enter in the cost field in Q.  If
you're looking at long-term/short-term implications for the shares you
sold, you'll probably need two transactions to differentiate between
LT/ST.

If you don't have that info and you need accurate figures in Q, you'll
have to capture the info somewhere.  The effort to capture the
individual transactions in Q may not be that much more than entering
them in a spreadsheet.

OTOH, unless you're really fond of Q's Tax Estimator or you're
uploading your Q file to TurboTax, do you really need Q to have that
cost basis?  My tax profile doesn't fit Q's tax estimator & even when
my profile was much simpler, I found myself spending more time fixing
the TT import stuff that didn't work correctly than I would have just
entering straight from tax forms.

My 2 cents, YMMV.