I screwed up my taxes last year and am still trying to get them correct. What i am planning on doing is only taking the stocks I sold that year and minus it by the amount i paid for it. If i didnt sell the stock that year I do not include it in my taxes correct? Please explain if this is not correct.

many thanks

 

It is a little more complicated than that...if you held it over a year it is taxed at a different rate than if you held it less than a year. Dividends are taxed differently than regular income, etc, etc. You would report differences in sale prices as a capital gains rather than ordinary income.

If you did'nt sell it, you would only need to include it if you received any dividends from it.

If you are not sure how to do it, perhaps get a professional to do it the first time and try to understand how they do it for next time. Dealing with the IRS if you don't get it right can be very un-fun.

Calculate the "Cost Basis" for each share you held, for the tax yeat, let us say 2007.
Forms1099-DIV Consilidated, will report to the IRS the dividend you have received.
Forms 1099-B will report the GROSS procedes from selling stocks;
If you held a stock form more than a calendar year, more than 12 months, this will be considered as a Long-Term, and they are taxed according to the long-term tax bracket, also it depend on your state of residence.
If you sell a stock that you held for less than 12 months sharp, then this sale is taxed as a short term.
If you sold a stock with a loss, then you can benefit from this loss, by deducting the amound lost from your 2007 taxes.

If you can not completely manage yourself with stock taxes, either you have to see a Tax Advisor or go to a local IRS office in you city, first you have to schedule an appointment, but then you have to work on the taxes on your own.

Hope this helps you out.

Plan9

Will completing the the appropriate fields in a tax program like TaxCut or TurboTax guarantee that your returns are accurate?

johnfeustel:

Will completing the the appropriate fields in a tax program like TaxCut or TurboTax guarantee that your returns are accurate?

Mostly yes. This what I'm doing now for my 2007 tax year. My experience with TurboTax, althoght the others are almost identical, e.g. H&R, TaxComplete, etc. But you may struggle for calculating the cost basis, especially if you held several stocks that pay dividends and you elected to re-invest these dividends.

If you don't have a software that keeps track of all your buy/sell/split/dividend transactions, then I suggest that before you login to TurboTax or what ever, is to sit down on a table with all your confirmations, statements, and the IRS forms (1099-B, 1099-DIV, 1099-INT, etc.) and away from the computer screen, calculate the cost basis, whether each stock, bond, etc. you held and sold, was a short vs. long term.

Plan9

"If you sold a stock with a loss, then you can benefit from this loss, by deducting the amound lost from your 2007 taxes."

oh really? i didn't know this.. is this deffinatley true?

for example, i bought apple at $170, sold it at $150 taking a $20 per share loss, then i bought apple at $120 and sold it at $142 making $22

does this mean i would only be taxed on that $2 per share?

 

thanks

jtroszok:

"If you sold a stock with a loss, then you can benefit from this loss, by deducting the amound lost from your 2007 taxes."

for example, i bought apple at $170, sold it at $150 taking a $20 per share loss, then i bought apple at $120 and sold it at $142 making $22

does this mean i would only be taxed on that $2 per share?

 

In my above statement, it should be read as:

  "If you sold a stock with a loss, then you can benefit from this loss, by deducting the amound lost  from your 2007 tax bill that you have to pay to the IRS."

Here how it works:

First, you have to report as *income* of any capital gains:

    $22 * Number of Apple Shares sold with profit ---> reported as income in your 1040 form/Schedule D.

Then, in the deduction section, you report the amount you lost,

    $20 * Number of Apple Shares sold with a loss ---> reported in the deduction section of the 1040 form.

Now, if you have to pay a bill (you are entitled for payment)  to the IRS, you can deduct the amount lost in all you loss shares, not only APPLE, from your total bill. If you were entitle for refund (IRS has to pay you) then you may not get any benefits.

Remember that, all investment tax articles, tax advisors, etc. advise investors to sell on a loss before the end of the tax year, i.e. before Dec 31 of a tax year, or for settlement, 31 minus 3 buseniss days.

Hope this helps you out.

Plan9

yes this does help

thanks for your time!

Plan9 thank you for explaining.

How dividends are used in calculating cost basis for a stock? are they added to the cost price?

How splits are taken into account? In my tax statement from Penson my 'Gross proceeds less commision' is way more than the total of all i have invested so far. how is that possible.

How is 'Gross proceeds less commision'  calculated

Say if so far if I have invested 10 grand in total how can my 'Gross proceeds less commision' be 27,000?

Any help will be appreciated?

Are commissions deductable also?

First off, thanks for some great information!

If you held a stock form more than a calendar year, more than 12 months, this will be considered as a Long-Term, and they are taxed according to the long-term tax bracket, also it depend on your state of residence.
If you sell a stock that you held for less than 12 months sharp, then this sale is taxed as a short term.

I'm a little confused about this aspect when you buy the same stock twice.

For example, (just using simple numbers here):
I buy RIMM in January '08 for 100$, and in March '08 for 110$.
I sell all shares of RIMM in February '09 for 150$.

Do I separately file the March purchase as a 40$ capital gain, and the Jan. purchase as a 50$ long-term gain?

salstone:

Are commissions deductable also?

Purchase

They are part added to the cost basis when purchased, i.e. 20 shares of Ford (F) @ 5/sh = $100 + 4.95 commission = 104.95 / 20 = 5.2475 / per share. 

Sale

The Commission is netted against the gross proceeds at time of sell, i.e. Sell 20 shares of F @ 6/sh = $120 gross proceeds - 4.95 commission = 115.05 worth of proceeds. 

Here is the scenario IF that was the only transaction for Ford.

Proceeds (less Commissions) - 115.05

Cost (plus Commission) - 104.95

Capital Gain $10.10

NOTES

The tax rate on capital gains depends on if was held short term (<1yr) or long term (>1yr).

You can only record a capital loss of up to $3,000 per year.  You can carry forward any carry over loss.  If you had $6,000 worth of capital gains during the year (don't worry about short vs long term) but you also sold some stock for a total loss of $10,000, you would claim a loss of $3,000 as a capital loss and have $1,000 carried over to 2008. 

I run a tax business on the side and have handled (not only my own) but other clients capital gains (losses) in the past.  Since I am a bit busy this time of year (the tax business is my side job) you can contact me at Zoomn FInancial @ gmail.com (no spaces).

 

 

Thank you so much for this breakdown!

DrSB892:

Plan9 thank you for explaining.

How dividends are used in calculating cost basis for a stock? are they added to the cost price?

How splits are taken into account? In my tax statement from Penson my 'Gross proceeds less commision' is way more than the total of all i have invested so far. how is that possible.

How is 'Gross proceeds less commision'  calculated

Say if so far if I have invested 10 grand in total how can my 'Gross proceeds less commision' be 27,000?

Any help will be appreciated?

Shares Split: Most probably, splits are not the-then-current-price-adjusted.
If 2-to-1 splits, 10 shares with $50 each, would be 20 shares with $25 each.
If you transfer shares from another broker, then the transferred shares will be considered with $0 ZERO DOLLARS cost basis.

Please post more specific info so I can figure out what is exactly the case.

Dividends, in the first place, are taxed as income, wehter you re-invest or not.
  - If no dividend re-investing, then just add them to the Income section of the 1040 form. They have nothing to do with the cost basis.
  - If you re-invest dividends, (1) You have to report them as income, as illustrated above. (2) Consider them as OUT OF YOUR OWN POCKET cash, as the initial fund you spent to buy shares.


Example of the dividend re-investment for calculating the Cost Basis:
  You bought 100 shares of AT&T at $35 per share, Initial Price Per Share, PPS_Init = $35.

  This example illustrates the calculations with respect to short vs. long term shares held.

  Commission = $7.00
  Quarterly Dividends = $0.40.
  Up to this point, the Average Cost Per Share
  Avg_Init = [(35 * 100) + 7 ] / 100
       = 3507/100
       = $35.07


  Case 1. No dividend re-invested.
     The cost basis will be $35.07 per share or $3507. #DONE#


  Case 2. Dividend are re-invested.
       Assumptions
    - You reinvested the dividends on 80 shares.
    - Dividend are re-invested with $0, Free of charge.

     Scenario (a) Only one quarter included in the calculations.
    - Price Per Share when dividend re-invested, for the first quarter, is $40.00,
      i.e. PPS_Div_Q1 = $40
   
    Calculations:
      Dollar amount re-invested = 0.40 * 80 = $32.
    That is, 32/40 = 0.8 shares being purchased.
    (the other $8.00 = 20 shares * $0.40, that are not re-invested, have nothing to do with the cost basis).

  Now, the total number of shares is 100.8

    General rule for calculating the cost basis per share
        = Total_Cash_Invested / Total_Number_of_Shares
        = ($35 * 100 + 7.00 + $32) / (100 + 0.8)
            = (3507 + 32) / 100.8
        = $35.11
     #DONE#


     To put things in a general formula,

       Total_Cash_Invested = (PPS_Init * Number_of_Shares + Fees)
                 + (PPS_Div_Q1 * Number_of_Shares + Fees).
   
     Scenario (b) Two quarters included in the calculations.
    - Price Per Share when dividend re-invested, for the second quarter, is $38.00,
      i.e. PPS_Div_Q2 = $38

    Calculations
      Up to the first quarter, the cost basis is as in scenario (a) above.

      For the second quarter
         Dividends re-invested = 80 shares * $0.40 = $32
         Number of shares purchased = 32/38 = 0.842 shares

         Total Cash invested = (PPS_Init * Number_of_Shares + Fees)
                   + (PPS_Div_Q1 * Number_of_Shares + Fees)
                   + (PPS_Div_Q2 * Number_of_Shares + Fees)

                 = (35 * 100 + 7)
                   + (40 * 0.8 + 0)
                   + (38 * 0.842 + 0)

                 = 3507 + 32 + 32
                 = 3571

         Cost Basis = 3571 / (100 + 0.8 + 0.842)
            = 3571 / 101.642)
            = 35.133
        

Assume dividends are being paid quarterly. Quarters for each year are serial in numbers and NOT on a year-basis. I.e. Q1 is the first quearter the divideds are being paid. Q5 is the fifth quarter the dividends are being paid, etc.
          Total Cash Invested = Total Initial Cash Invested
                      + Total Cash Invested for Q1
                      + Total Cash Invested for Q2
                      + Total Cash Invested for Q3
                      ....
                      + Total Cash Invested for Qx
                      ....
                      + Total Cash Invested for Qn

          Where all shares before Qx are held for Long-Term, shares after Qx for short term.