By Sheryl Rowling
SAN DIEGO — Whether you’re managing your own investments or using an advisor, be aware that a new tax law has created an opportunity. If you don’t want a dray kup, just ask your advisor or your stockbroker to make sure you’re taking advantage of the new rules. For those of you interested in the actual rules, here goes:
As a result of the Emergency Economic Stabilization Act of 2008, brokers and custodians must report cost basis information on sales of mutual funds as of January 1, 2012. IRS Notice 2011-56 was recently released to explain how these new reporting requirements should be implemented, creating a great opportunity for investors.
Unless you elected otherwise, the cost basis of your mutual fund shares was set by the broker’s default method, average cost. Once the average cost method was applied to a particular fund, you were required to use average cost for all shares of that fund forever!
Beginning in 2012, you may revoke the average cost method for shares acquired after the date of the change. (The basis of stock prior to revocation remains averaged.) This can save you tax dollars!
For example, let’s say you own the following shares of Mutual Fund A:
100 shares bought at $10 on June 12, 2000
100 shares bought at $12 on September 20, 2005
100 shares bought at $17 on April 10, 2008
If you sell 100 shares at $20 on January 15, 2012, your average cost would be $13 per share ($1,000 + $1,200 + $1,700 divided by 300). Thus, your gain would be $700. Instead, if you used high cost, your tax cost would be $17 per share, resulting in a taxable gain of only $300. Thus, choosing high cost (or “best tax”) can save you tax dollars!
If you decide to change your cost basis method, remember that the new method will apply only to shares acquired after the change. To ensure that you take advantage of this opportunity, be sure to make an affirmative election with your custodian. And, if you’re using an advisor or stockbroker, ask him or her to make this election for you!
Disclaimer: Any tax advice contained in this article, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax-related penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law of (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
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Sheryl L. Rowling, CPA/PFS, partner of Moss Adams Wealth Advisors LLC, has been providing tax, financial planning and investment advice for over 30 years, since 1979. Contact her at sheryl.rowling@sdjewishworld.com.