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Surprise taxes?

Posted by nycefarm (My Page) on
Wed, Mar 28, 07 at 20:39

Just trying to work out in my head an issue that just came up. With an investment account, (not retirement, 401 or IRA) like Vanguard, if you cash out a portion, what is the obligation to pay taxes on it? Presumably the money (principle?) was taxed before it ever went in to the account. I understand there is a tax consequence on capitol gains or dividends, but this is neither.
I know the IRS isn't infallable, could this just be a stupid mistake on their part?


Follow-Up Postings:

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RE: Surprise taxes?

I'm no tax expert. But.... the money you put into the account was after taxes, right?
If so, my understanding is that all you owe are taxes on the capital gains....

Not sure what you mean by "presumably the money was taxed before it went into the account"....
Don't you know?


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RE: Surprise taxes?

You will owe taxes on the dividends or interest the account earned, and capital gains if you have sold the shares.


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RE: Surprise taxes?

If you own mutual funds through Vanguard (as opposed to stocks that might have been purchased elsewhere and transferred to their brokerage account), and it's in a taxable account (i.e. not IRA, 401(k), etc)., then the periodic statements you get from them will tell you what to report on your tax forms--assuming that you use the same accounting method as they do.

Here is a link that might be useful: Information about Vanguard's tax forms


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RE: Surprise taxes?

Ok. Not sure I am understanding your question. If you buy Mutual Fund V and spend 10k for 100 shares. And then you sell 50 shares for 20k because the value went up, you would pay taxes on 20k - 5k (your basis in the shares) = 15k. So you would pay capital gains (depending on how long held) on 15k. If you sold 50 shares for 5k which is the same as your basis you would pay nothing but you would have to fill out a tax form to show them your basis.

Of course if you got additional shares as dividends on your investment and sold some of those it gets more complicated but your basis would be whatever you reported and paid taxes on the year you got those dividends


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RE: Surprise taxes?

Ditto mary and alphacat. You are issued, as is the IRS, a 1099 yearly that shows your dividends and you need to pay taxes on those dividends in that year. If you sell a stock, you pay capital gains taxes on the increased value (share price now vs. then) re when you bought it.


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RE: Surprise taxes?

All dividends and capitol gains are claimed. I think it is probably the basis issue, but think they still are wrong.
If the account was $20K (transferred through an estate, estate taxes paid), now the account is worth $22K, but redeemed $10K - the IRS is saying there is a tax liability on the $10K.
I think the IRS does not see the taxes paid on the original transfer.
Thanks for all your thoughtful posts.


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RE: Surprise taxes?

Stupid questions here, what kind of investment was this and was the sale or redemption reported on your tax return? I am assuming that you inherited stocks or mutual funds.

The IRS doesn't know that you have a basis in the investment unless you told them so on your tax return.

Sorry if I'm asking dumb questions, but I'm not sure I understand the problem.


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RE: Surprise taxes?

J is right, in the year you sell all or part of a security you must file taxes showing your basis and then selling price. In an estate situation, your shares get a stepped up basis to whatever they were worth on the day of death. So if your parent originally bought for 10k, was worth 20k at death, now 22k your basis in half the shares is 10k, so if you redemmed 10k worth, you still have a 10% appreciation which you must pay capital gains on but the rest is tax free, just have to file to show basis. For purposes of illustration, if you sold 11k of shares you would owe taxes on profit of 1k


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RE: Surprise taxes?

jlhug - Believe me I am the one that feels stupid here.
It is the magellan fund received through inheritance. They sent the 1099 form, which shows the redemption and dividends. the dividends were reported. I am more cerain now that it IS the proof of basis that they need. I will be calling a tax accountant today.
Again, thanks very much for your thoughts!


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RE: Surprise taxes?

nycefarm,

You probably need to talk to the executor of the estate, for likely the estate had to account for the capital gain on the increased value of the asset between the time of purchase and the time of death.

Quite likely your basis will be that declared value at the time of death (possibly the date of transfer to you, but I doubt it) - you just have to get certification of the appropriate valuation.

It would have been considerate of those in charge of the estate to have provided that information at the time of transfer - they should have known that you'd need it, eventually.

In Canada, if you are a spouse, usually you can elect to have the transfer take place at the original price, and use that amount as your basis on subsequent sale (or death).
______________________

I prepared this information a couple of days ago before I learned of the estate situation and have done some revising in the meantime. It may not be very relevant now, but may be useful, so I'll include it.

Unless you're talking of a guaranteed investment certificate, CD or bond, forget the term "principal".

A dollar, is a dollar, is a dollar. Some are originally invested amount, some are interest earnings, some are dividends, some are capital gain (probably 2 kinds).

When an investor (you) bought some mutual fund investment(s), say 10 years ago in an unregistered account, enter that amount in your permanent record.

Some managers make payouts over the years, in many cases those amounts are not paid to the investor (you) in cash but reinvested at that time, and you report them as income and pay tax on them at that time. Possibly at varying rates, depending on whether they were declared as income, interest, dividend or capital gain at that time - but you paid tax on them, at the time that they were declared (whether reinvested or taken in cash).

Some of the investments which the managers made produced interest, some produced dividends, and sometimes they sold some stocks, bond, etc. for more than they'd paid, to produce capital gain.

The managers usually pay their expenses and management expense ratio from the most highly taxed portion of those different kinds of income. At the end of each year some managers send you a report showing your portion of such interest, dividend and capital gain (or other) income received during that year, with a cheque if you are taking the annual income in cash. You report that income for income tax purposes, whether received in cash or reinvested.

If those annual payouts were reinvested then you need to keep track of all of them in your permanent record, as they are amounts that you invested, in addition to the cash amount that you invested originally.

If you originally invested $10,000. and the amounts that were declared as payouts but not paid out in cash but reinvested over the years and tax paid on them at those times was $4,000. and you sell them for $20,000., your total amount invested was not $10,000. but $14,000. and your capital gain would be $6,000.

When various new amounts of cash were invested over a number of years, as is common with purchase of mutual funds, you need to record those newly invested amounts in your permanent record.

But then, after a number of years of accumulation, a number of owners choose to have various amounts withdrawn. They must report the amounts withdrawn to the income tax people on an annual basis, with capital gain being calculated and tax paid at that time. You know how many units were cashed, and what the adjusted cost basis was per unit, and what the value was on the date of sale.

Record those amounts in your permanent record.

During those years with amounts withdrawn occasionally, there usually are varying amounts being declared as payouts but reinvested more or less annually, and tax paid on them at those times, so the issues get quite complicated.

It is essential that people keep accurate records of all of those actions as they take place.

And I suspect that few do.

ole joyful


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RE: Surprise taxes?

I do have all the records of the original transactions, that should fix it!


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RE: Surprise taxes?

Talked to the tax accountant and feeling a bit better. It seems I may have a loss on the transaction anyway and that it really is just a reporting error on my part..
Thanks for your posts!


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RE: Surprise taxes?

The 1099 just shows what proceeds you received.
When you fil out your tax return you will likely use Schedule D.
On the schedule you will list eh basis for the holding, the net sale price, and compute the taxable amount.
The 1099 rarely shows the basis, just the proceeeds.


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RE: Surprise taxes?

Just a quick note on this - I ended up with an additional refund for the amended tax return! Woo Hoo! Of course it will all go the the tax accountant...


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