stupid tax question of the day

[Road Guy]

okay here I go...

I had some stock for the last 15 years, which I utilized dividend reinvestment.. I have my tax records where even though I received no actual money I included the money from the dividends with my taxes and paid taxes on that money.

last year I sold all the "plan dividends" for a sum of $2700.

There is a line in turbo tax when I enter this it asks "How much did you pay for this stock"?

Of course If I enter $0 then I owe about $1300 in taxes, if I enter $2700 I dont owe anything?

How would this be interpretted? My opinion is since I have paid taxes on this all along I would enter $2700 for the "cost"

I know none of you are CPA's but I appreciate your tax saviness

 

[Flyer_PE]

If I understand the question correctly, you have already paid taxes on the money as income. If you have already paid taxes on the $2700 over the years, I would say your cost basis is $2700.00.

You should only owe taxes on the difference between what you sold it for and what amount you have already paid taxes on.

 

[benbo]

okay here I go...
I had some stock for the last 15 years, which I utilized dividend reinvestment.. I have my tax records where even though I received no actual money I included the money from the dividends with my taxes and paid taxes on that money.

last year I sold all the "plan dividends" for a sum of $2700.

There is a line in turbo tax when I enter this it asks "How much did you pay for this stock"?

Of course If I enter $0 then I owe about $1300 in taxes, if I enter $2700 I dont owe anything?

How would this be interpretted? My opinion is since I have paid taxes on this all along I would enter $2700 for the "cost"

I know none of you are CPA's but I appreciate your tax saviness

Hmmm. I don't know much about this but I don't see what difference it makes how much you paid for the stock, unless you are talking about capital gains. That would only matter if you sold the actual stock.

In this case you are just cashing in dividends.

Didn't you get something like a 1099? Can't you just copy boxes off of this?

Otherwise, I would say you have to put in what you paid for the stock, but I don't see how that has anything to do with the taxes.

Well, I'm just guessing. I never cash in any stocks.

Edit- Of course, like Flyer says, if you've already paid taxes on it I wouldn't put anything down and let them track you down. It can't cost you that much anyway.

 

[wilheldp_PE]

I read an article about this a while ago, and it said that no matter how long ago you bought the stock, or even if it was given to you as a gift, you have to know the original price paid for the stock at the time of investment. Even though you have been paying taxes on the dividends over the years, you have not yet been taxed on the increase in stock value. But now that I re-read your post, I'm not sure that is what you are doing. Are you keeping the original stock that you purchased and selling the additional stock that you bought with dividends, or are you selling all of the stock?

Regardless of what you are doing, you will have to know what you paid for each share when you bought it, then pay taxes on the difference between that amount and the amount you sold each share for.

 

[chaosiscash]

Regardless of what you are doing, you will have to know what you paid for each share when you bought it, then pay taxes on the difference between that amount and the amount you sold each share for.

Yep. If you bought the stock though a dividend reinvestment program, then you'll need the purchase price at each reinvestiment time (quarterly, annually, whatever) in order to figure your cost basis. Turbotax should be able to find those average daily prices for you, if you have the dates.

For example, if you had 3 dividend reinvestment purchases, and they were 10 shares for $100, 12 shares for $80, and 8 shares for $120, then your cost basis for those 30 shares would be $300. If you then sold those for $400, you would not pay any additional tax on the first $300 (you already paid that on your dividends yearly), but you would owe capital gains tax on the $100 profit.

At least thats how I believe it works. Hope that makes sense.

 

[Chucktown PE]

^^ x2.

 

[z06dustin]

How would this be interpretted? My opinion is since I have paid taxes on this all along I would enter $2700 for the "cost"

I don't think so. I'm not a CPA, but I fool around with options and always have to dig thru tons of records to pay my taxes.

Here's my stab at it, again, I DON'T KNOW this is just how I would pay them.

You did in fact pay tax on your dividends... however that's basically treated as a form of income. So basically, you need to hunt down what your cost was when you reinvested the dividends. This is your cost basis.

Example:

I own a stock, which pays 10% dividend. It pays me 10% when it's worth $100. I take that $10, and buy another 0.1 share. When I sell my 0.1 share at $200 a share, my cost basis was $100, so I pay capital gains on $10 (the overall increase in value of my 0.1 share of $200 valued stock).

I understand how you might feel like you've already paid the tax on this income, however you haven't paid the tax on the share's increase in value. Confusing? Fair? Make you want to fly a plane into a building? (KIDDING)

This is why it's important to have tax-efficient assets in your taxable accounts. Anything that trades frequently or has high dividends need to be in your tax advantaged funds (Roth, 401k, etc).

Here's a pretty good one (IMHO) but I'm very biased towards Vanguard. Tax exempt because of the way they invest.

https://personal.vanguard.com/us/funds/snap...;FundIntExt=INT

Also, here's a really great board which I used to be more active on but haven't been lately. These guys will answer these questions better than I can if this explanation wasn't helpful.

http://www.bogleheads.org/

 

[wilheldp_PE]

Make you want to fly a plane into a building? (KIDDING)

TOO SOON!

j/k...I LOL'd.

 

[Road Guy]

Thanks, I think I have some research to do

What would have been easier is inshoukd have converted the dividend to stock and then sold it.( maybe)

 

[z06dustin]

Thanks, I think I have some research to do
What would have been easier is inshoukd have converted the dividend to stock and then sold it.( maybe)

I don't know the specifics behind the item, but if you're going to do that, why not just keep the dividend? Reinvesting then selling has two transaction fees. Cashing out a dividend is free.

 

[Road Guy]

I use vanguard so the fee's were pretty low,, I was needing to pay for some of the basement work and the stock wasnt moving much anytime soon..