Entering Reinvested Dividends

I'm using Quicken 2006 H&B and I'm a little confused about entering reinvested dividends. Each Dividend has a Gross Amount, Net Amount (Gross - Fee), Price Per Share, Transaction Shares and Tax Basis Per Share. When I enter the transaction in Quicken, I enter the Action as ReinvDiv, the Gross in the Dividend Amount, the Transaction Shares in the Dividend Shares and the Fee in Commission Amount. Quicken removes the Commission Amount and creates a second transaction of type MiscIncX with the Fee amount. The Quicken share price doesn't equal either the Price Per Share or the Tax Basis Per Share. Am I entering the amounts incorrectly?

TIA,

Greg

Reply to
Greg Grotyohann
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Hi, Greg.

I'm a little confused, too. ;^}

Who gets the fee that is deducted from your gross amount? Mutual funds don't typically charge a fee for reinvesting their dividend, so this must be a DRIP or similar reinvestment arrangement.

If you bought shares through your broker and paid him a commission, your tax basis would include the commission. And if you pay a fee for someone to reinvest your dividend, then that fee also should be included in your basis. In either case, your tax basis would be higher than the quoted price per share, because it would include the commission or fee. And, in either case, you can't deduct the commission or fee except as a part of your basis when you sell those shares.

The only amounts with lasting significance here are the amount of your dividend and the number of shares you get.

If you get a $100 dividend, from which your agent deducts $5 and buys you 19 shares at $5 per share with the remainder, then record in Quicken's Reinvested Income screen your $100 dividend and the 19 shares you got. Quicken will calculate your basis as $5.263158 per share. And the $100 dividend will show up in your _DivInc, as it should.

The $5 is important, but only as a part of your cost of those shares. If you sell 10 of your 19 shares, you will show $52.63 as your cost of those 10 shares. A part of the $5 fee is included in the $52.63 and the rest of the $5 will reduce your gain when you sell the remaining 9 shares. Yes, I know it SEEMS that you should record the fee, but you shouldn't.

If I've misunderstood your question, please let me know.

RC

Reply to
R. C. White

This is what I thought too. It appears that Intuit thinks otherwise. The $5 does not get distributed to the cost basis of the 95 shares, but instead is reported separately from the remaining $95 dividend as both Dividend Income and an expense. I presume that that expense could be reported as a miscellaneous investment expense on Schedule A, if the deductible were exceeded. I first noticed this behavior with Quicken

2005. 2001 added the amount to the basis.

I have no idea what the IRS expects.

John B.

Reply to
John Beurket

RC,

Thanks for the reply. It's a stock dividend. Here's the actual figures from my last statement:

Net Dollars: 8.22

Fee Deducted: 0.91

Price Per Share: 19.6651

Transaction Shares: 0.418

Tax Basis Per Share: 19.6901

How should I enter this transaction? If I enter the Gross amount (Net + Fee), Quicken calculates the per share price to be $21.842105. If I enter the Net amount, Quicken calculates the per share price to be $19.6651 but the Gross amount will be shown on the 1099-DIV.

Greg

Reply to
Greg Grotyohann

Hi, Greg.

Well, all dividends are, by definition, paid on stock. But the phrase "stock dividend" usually is reserved for a dividend that is PAID IN STOCK, not in cash. In other words, if the company declares a 5% stock dividend, you get 5 more shares of stock for each 100 shares that you already own. You get no cash, not even for a moment, so you have nothing with which to buy any more shares. The market value of the shares doesn't matter. You don't get a new basis for just the new shares. You would keep your old basis for the 100 shares, but divide it by 105 to get the basis for each of your 105 shares after the stock dividend. Your holding period for the whole

105 shares would start with the purchase of the 100 shares. And you would not be charged a fee. The only cash involved would be if you were entitled to a fractional share and received cash in lieu of that fraction.

That's not what happened here. You didn't get a stock dividend paid in shares. You got a cash dividend paid in cash, and then you used that cash to buy more shares. You never saw the cash, but your agent did. He bought .418 share at $19.6651 per share for $8.22, then he charged you a $.91 commission, making your total cost $9.13, and he took your $9.13 cash to cover the total cost. So your total basis for the .418 shares is $9.13, or $21.842105 per share. (The only way your per-share basis will be needed is if you sell a smaller fraction of your .418 share. If you sell .3 share, calculate the basis as (.3 / .418) * $9.13. = $6.55, or .3 * $21.842105 $6.55.)

It might make more sense if you record this in Quicken as two transactions. First, record the $9.13 dividend. Use any handy account to hold the cash momentarily. Then record the purchase of .418 shares for $8.22 + $.91 commission, making a total cost of $9.13, using that cash. When the dust settles, the cash will be gone and Quicken will show your $9.13 dividend income and your portfolio will be increased by .418 share at a cost of $9.13. Your holding period for the .418 share will start the day the .418 share was purchased, not the day you bought your original shares.

RC

Reply to
R. C. White

I do this all the time with Wells Fargo which has a $4.00 charge for reinvested dividends. Here is how I do the entry:

Go to "Reinvest - Income Reinvested"

Enter "Gross Amount of Transaction" under "Dividend Amount" Enter "Shares increased or Decreased" under "Shares" Then hit "Enter"

Quicken calculates the "Price per Share" which does not agree with the Price per Share on the Account Statement. (Note that the Total Amount and Total Shares IS correct.) This makes the cost basis work out correctly. The total price of the holdings, in the "Investing Center", will be incorrect until the next time you download (update) the prices.

Ron

Greg Grotyohann wrote:

Reply to
Ron

So I went to "IRS Publication 550 (2004), Investment Income and Expenses"

Dividends Used To Buy More Stock (Chapter 1)

The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. If you are a member of this type of plan and you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See Expenses of Producing Income in chapter 3.

Expenses of Producing Income (Chapter 3)

You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). To be deductible, these expenses must be ordinary and necessary expenses paid or incurred:

  1. To produce or collect income, or 2. To manage property held for producing income.

The expenses must be directly related to the income or income-producing property, and the income must be taxable to you.

The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income.

...

Automatic investment service and dividend reinvestment plans. A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Or, a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Through that service, cash dividends are reinvested in more shares of stock, after the bank deducts a service charge.

A corporation in which you own stock also may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash.

You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Deduct the charges in the year you pay them.

----- End of quotes -----

This appears to agree with the newer Quicken implementation.

John B.

Reply to
John Beurket

Hi, John.

Thanks for the update and the reference.

Since Greg, the OP, did not give us any details, I suppose that's the best we can do for now.

Even if the fee paid fits the requirements for deduction as an expense of producing income, his total such expenses might not exceed his 2% of AGI threshold. In that case, adding the fee to his basis would at least allow him to deduct it from his gain (or include it in his loss) when he sells the stock some day. There used to be an election (IRC Sec. 266?) that we could make to add some otherwise-deductible expenses (interest and property taxes, specifically) to basis; do you know if such an election could be used in this case? (It's not worth the trouble for $0.91, of course, but it might be useful information for others with larger transactions.)

RC

Reply to
R. C. White

I did not find any reference in 550 to indicate that that was an option, and of course there are all of the entries that I made with Quicken 2001 which do add the fee to the basis. Also I do not know of any cases where the IRS challenged any one who computed gains with such a cost added to the basis.

Thanks for the response. I have made a few previous posts on the matter and received no response. I would like to know if I am in trouble if I leave those previous entries unchanged.

John B.

Reply to
John Beurket

RC,

I did give details in my reply to you dated 12/8/2005 at 7:06 PM.

Greg

Reply to
Greg Grotyohann

Hi, Greg.

Sorry. I said "did not give us any details". Should have said that you didn't give us details about the plan. You did give us details of the amounts involved and those details were helpful. We don't know if this was in a DRIP, or some other plan run by the company, or if it was a plan run by a stockbroker or other organization. As discussed in the IRS publication that John Beurket quoted, there are several varieties of such plans and we still don't know which variety yours is. (Maybe it doesn't matter.)

Some types of plans Publication 550 mentioned:

"The corporation in which you own stock may have a dividend reinvestment plan."

"...a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value..."

"... A bank may offer its checking account customers an automatic investment service..."

"Or, a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service."

My guess is that your plan is the first kind mentioned and that we have arrived at the correct answer for you, although we went roundabout to get there. I agree with John B's final line:

My personal opinion is still that a transaction fee should be included in the basis of the new shares. An annual or other fee for maintaining the plan itself should be an "expense for the production of income" and currently deductible as such. But the IRS lawyers write Publications according to their own interpretation, not mine. Courts have said that Publications are just the opinions of the IRS; they are not law. Only the language of the Code itself, as interpreted by the courts, is the final authority.

In a year when your investment expenses (and other such deductible items) total less than 2% of your AGI, the deduction is wasted. Including the fee in your basis would let you get the benefit of the deduction in the year that the shares are sold. I'm not sure that Publication 550 says you cannot choose to do this. A post to misc.taxes.moderated might get you a better answer.

RC

Reply to
R. C. White

RC,

Just for the record, it was AT&T but I guess it doesn't make any difference any longer.

Greg

Reply to
Greg Grotyohann

By doing the two transactions, don't you now throw off your "Amount Invested" which affects your ROI. I guess it would depend how you view a cash dividend - I look at it as a return in that account, not "out-of-pocket" income that I invest. In Quicken, a single ReinvDiv transaction does not add to your Amt. Invested, where the Div then Buy method does.

I may be way off - I'm by no means an accountant - but I would love to know why the ReinvDiv transaction treats the commissions this way

Reply to
Avenger95

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