Paying current taxes vs continued high expenses

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HeelaMonster
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Paying current taxes vs continued high expenses

Post by HeelaMonster » Tue Aug 13, 2019 2:22 pm

Buried within my request for a general portfolio review viewtopic.php?f=1&t=287910 was an isolated scenario on which I have a very specific question. Would greatly appreciate your thoughts, so will pull it out here to focus attention.

Long before we stumbled onto Vanguard and low-cost index funds, we invested in the set of 5 mutual funds listed below (probably guided by Money Magazine or similar lists). This was our early, admittedly crude attempt at diversification, between 1980-1986. We haven't added to them since, but dividends and cap gains have been reinvested. In total, they are now worth around $220k. They carry expense ratios much higher than our more recent (and much larger) investments:

* Nicholas Fund (NICSX)(0.72% ER) = 1% of portfolio
* Nicholas II Fund (NCTWX)(0.6% ER) = 1% of portfolio
* Fidelity Europe Fund (FIEUX)(0.96% ER) = 1% of portfolio
* Wells Fargo (formerly Evergreen) Opportunity Fund (WOFDX)(1.0% ER) = 1% of portfolio
* Wells Fargo (formerly Evergreen) Classic Value Fund (EIVDX)(0.95% ER) = 2% of portfolio

Aided by reading here, I see (at least) two options for managing these high-cost funds.
  • Sell them off and exchange into lower cost index funds (3-fund portfolio stands ready to receive). DOWNSIDE: This would generate considerable tax liability on 30+ years of gains, just as I am relishing some low tax space to convert tax-deferred 401k (TSP) into Roth IRA. Plus the nightmare of calculating cost basis over that stretch.
  • Let them sit until we are gone, at which time our kids can inherit them with stepped-up basis, wiping out those decades of taxable gains. We shouldn't need to tap them in retirement, so they could sit undisturbed. I already plan to turn off dividend reinvesment, as suggested by Bogleheads. DOWNSIDE: Continuing to pay higher than necessary expenses, "as long as we both shall live."
  • Other?
To my read, this boils down to a comparison of current taxes owed (door #1) versus the difference in fees that would accrue for the next 20-30 years (door #2). Do I have that right? What am I missing??

GetRichQuick
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Re: Paying current taxes vs continued high expenses

Post by GetRichQuick » Tue Aug 13, 2019 2:30 pm

Before I did anything else with those funds, I would stop reinvesting dividends and capital gains. After that, I would pick the fund with the worst performance or least aligned with your current asset allocations and liquidate it as you rebalanced or needed cash. I wouldn't pay taxes on the gain until you needed to.

megabad
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Re: Paying current taxes vs continued high expenses

Post by megabad » Tue Aug 13, 2019 2:34 pm

Personally, I would probably sell the funds up to the top of the 15% LTCG bracket. 1% ER is a lot to me in the current market environment. The only reason I wouldn't is if they were separate assets and one spouse was in poor health or very advanced age (as in a lot older than 62).

bloom2708
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Re: Paying current taxes vs continued high expenses

Post by bloom2708 » Tue Aug 13, 2019 2:39 pm

The fees will continue to add up over the next 30.

The funds might be worth $400k+ without the fees nibbling and nibbling.

Use this tool and see what the fees will do to $220k over 30 years (no new contributions), 6% return. Compare 1 and 1.5% fees to .06% (3 fund style at Vanguard).

https://www.dinkytown.net/java/compare- ... -fees.html

I did a rough stab. .06% fees instead of 1.5% over 30 years means $418k more in your account. :shock:
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

Katietsu
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Re: Paying current taxes vs continued high expenses

Post by Katietsu » Tue Aug 13, 2019 2:40 pm

How significant is the nightmare of calculating basis? Have you checked to make sure that it is not available to you by request? And do you know that you have large capital gains? The active management fund that I started with 20 years ago is worth 6 times the original investment. But I could actually sell it now at a loss due to the reinvestment of the dividends and capital gain distributions.

If you would consider it, do you have anyone in the 0% capital gain tax bracket that you would want to gift any of the shares?

Topic Author
HeelaMonster
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Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Tue Aug 13, 2019 2:43 pm

Thanks for responses thus far. As noted, I am switching off reinvestment, so that's in the bag.

But, as also noted, we could really use that space to the top of 15% (or 22%) bracket to convert pre-tax accounts, or we're going to get hammered by RMDs. So we have competing uses for that window of opportunity.

Unfortunately, we are both healthy as oxen. :D

ralph124cf
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Re: Paying current taxes vs continued high expenses

Post by ralph124cf » Tue Aug 13, 2019 2:48 pm

If you support any charitable institutions, giving appreciated shares is much better than selling the shares and giving money. No tax will be due from either you or the charity, and you get a deduction for the full appreciated value of the shares.

Ralph

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HeelaMonster
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Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Tue Aug 13, 2019 2:54 pm

Katietsu wrote:
Tue Aug 13, 2019 2:40 pm
How significant is the nightmare of calculating basis? Have you checked to make sure that it is not available to you by request? And do you know that you have large capital gains? The active management fund that I started with 20 years ago is worth 6 times the original investment. But I could actually sell it now at a loss due to the reinvestment of the dividends and capital gain distributions.
Fair questions. For some of them, I have manually tracked dividends and capital gains, and could hopefully reconstruct for all, but have not asked the company. It may be that I am making (false) assumptions about the level of gains, without the actual data. I just know we put in something like $10k total (if that), and now worth $220k. Time to hit the books and confirm.
Katietsu wrote:
Tue Aug 13, 2019 2:40 pm
If you would consider it, do you have anyone in the 0% capital gain tax bracket that you would want to gift any of the shares?
We would consider, and I'm sure it would be welcome(!)... but can you please enlighten me further? I am confident in the handling of stepped-up cost basis for INHERITED mutual fund, but was getting messier picture as to tax status of GIFTED shares, while I am still alive and kicking.

Thanks to all for the quick feedback!

ExitStageLeft
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Re: Paying current taxes vs continued high expenses

Post by ExitStageLeft » Tue Aug 13, 2019 2:56 pm

Considering you have been holding for over 30 years the basis is probably around $5k. That makes a bulk sale rather unappealing as far as capital gains. Were I so unfortunate as to have your dilemma I would consider:

1) Hold the five funds but be prepared to sell one or more if there is a big downturn. Calculate the basis for each and figure out how low they would need to go so that capital gains taxes would be manageable.

2) or hold for your heirs

3) or contribute to a Donor Advised Fund. The deduction might allow you to bump up Roth conversion that year.

deikel
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Re: Paying current taxes vs continued high expenses

Post by deikel » Tue Aug 13, 2019 3:02 pm

Your capital gains tax rate is only 15% though - so whats the big deal ? (assuming married filing jointly and your current combined income is not over 200k plus the 200k gains) ?

https://www.nerdwallet.com/blog/taxes/c ... tax-rates/

And if you are currently moving IRA to Roth because you are in a low income tax bracket (true ? I have not read your original post), then it might even be 0 if you can fill your income up to 80k ish, maybe for a couple of years till the bucket is empty.

I would empty this first before moving money from IRA to Roth

Yes, you can bequest the money ultimately, but if for whatever reason you take the money out at later old age when filing single (one spouse dead) or in addition to RMDs and SS, you might be worse off then doing it now....
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

HomeStretch
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Re: Paying current taxes vs continued high expenses

Post by HomeStretch » Tue Aug 13, 2019 3:05 pm

Good step to stop reinvesting dividends.

You probably have some recent tax lots from dividend reinvestment with lower gains. If your tax situation permits, you could sell these lots first for minimal gains (> 1 year so long term).

I know it’s just “nibbling away” at the problem, but these two steps are a start to working down the high-ER holdings. Agree with advice to look at high ER fees due to holding over your investment horizon versus selling and paying capital gains tax now. It may be less costly to sell sooner rather than later.

cas
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Re: Paying current taxes vs continued high expenses

Post by cas » Tue Aug 13, 2019 3:08 pm

HeelaMonster wrote:
Tue Aug 13, 2019 2:22 pm

* Wells Fargo (formerly Evergreen) Opportunity Fund (WOFDX)(1.0% ER) = 1% of portfolio
  • Sell them off and exchange into lower cost index funds (3-fund portfolio stands ready to receive). DOWNSIDE: This would generate considerable tax liability on 30+ years of gains, just as I am relishing some low tax space to convert tax-deferred 401k (TSP) into Roth IRA. Plus the nightmare of calculating cost basis over that stretch.
I realize that this gets into "the nightmare of calculating cost basis," but that 30+ years of unrealized gains may be much less than you think, due to large capital gains distributions over the years. (Yes, the CGD were reinvested. But that amount gets added to your cost basis.)

Randomly, I chose WOFDX out of your list and looked up its distributions on Morningstar. (On the new Morningstar layout, you have to go to the Performance tab, then there is a "Distributions" sub-tab on the Performance page.)

If my math-in-the-head is working, it looks like WOFDX had capital gains distributions of more than 10% of the fund value in each of 2014, 2015, 2017, and 2018. And in 2013 and 2016, the CGD were somewhere between 5% and 10% of the fund's value. And a hefty chunk of those CGD were short term, which means the fund was magically transforming *your* unrealized long term gains into short term capital gains distributions (with the accompanying higher tax rate on short term capital gains). (And 2013 is as far back as the Morningstar record shows me.)

Even given that you've owned the fund since the 1980s, if the fund has been distributing somewhere between 5% and 15% of its value EVERY YEAR for (at least) the last 6 years, I suspect the remaining unrealized capital gains are probably way less than you might think.

But figuring out where you really stand on the unrealized capital gains will require calculating the cost basis. (If you keep your tax records,the 1099-DIV for each year will show you the (dividends + CGD) that were distributed each year. Since you reinvested them, you get to add that amount to your cost basis. Looks like, at least for WOFDX, even relatively recent 1099-DIVs would give you records to reconstruct a large amount of cost basis.)

cherijoh
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Re: Paying current taxes vs continued high expenses

Post by cherijoh » Tue Aug 13, 2019 3:18 pm

Katietsu wrote:
Tue Aug 13, 2019 2:40 pm
How significant is the nightmare of calculating basis? Have you checked to make sure that it is not available to you by request? And do you know that you have large capital gains? The active management fund that I started with 20 years ago is worth 6 times the original investment. But I could actually sell it now at a loss due to the reinvestment of the dividends and capital gain distributions.
+1. I was getting ready to post basically the same thing. I just went through a similar exercise with my brother who was reluctant to sell shares and generate capital gains. It turned out that all but one of the funds either showed a loss or only a very modest gain even though the values were many times his original investment..
Last edited by cherijoh on Tue Aug 13, 2019 3:47 pm, edited 1 time in total.

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HeelaMonster
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Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Tue Aug 13, 2019 3:21 pm

deikel wrote:
Tue Aug 13, 2019 3:02 pm
Your capital gains tax rate is only 15% though - so whats the big deal ? (assuming married filing jointly and your current combined income is not over 200k plus the 200k gains) ?

https://www.nerdwallet.com/blog/taxes/c ... tax-rates/

And if you are currently moving IRA to Roth because you are in a low income tax bracket (true ? I have not read your original post), then it might even be 0 if you can fill your income up to 80k ish, maybe for a couple of years till the bucket is empty.

I would empty this first before moving money from IRA to Roth

Yes, you can bequest the money ultimately, but if for whatever reason you take the money out at later old age when filing single (one spouse dead) or in addition to RMDs and SS, you might be worse off then doing it now....
All good points (and I like your disclaimer).

Will admit that I was not giving full consideration to the preferential rates for cap gains. With these 30-year old funds as prime example, we are extreme practitioners of "buy-and-hold".... so really haven't spent much time over the years selling!

To the details you were missing above, we are not quite in the low tax situation yet. I am retiring end of this year, but my spouse isn't quite ready yet. So yes, we are currently over 200k taxable income, but that should drop to around $80k next year, and perhaps $30k the following. That takes us up to age 65, with a shrinking time window before SS and RMDs kick in.

Who knew retirement could be so complicated?? Well, maybe all of you...

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VeganBH
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Re: Paying current taxes vs continued high expenses

Post by VeganBH » Tue Aug 13, 2019 3:25 pm

bloom2708 wrote:
Tue Aug 13, 2019 2:39 pm

Use this tool and see what the fees will do to $220k over 30 years (no new contributions), 6% return. Compare 1 and 1.5% fees to .06% (3 fund style at Vanguard).

https://www.dinkytown.net/java/compare- ... -fees.html

I did a rough stab. .06% fees instead of 1.5% over 30 years means $418k more in your account. :shock:
Following - good information here.
We're in the same situation - sell our early "mistakes", pay taxes owed, move to index funds....or not. The calculation tool is really helpful. We'll need to do the cost-basis homework to get the full picture, but it would appear in our case (also 30 year time horizon) - taking the lumps now might make a lot of sense.
"Until we extend our circle of compassion to all living things, humanity will not find peace."​ ~ Albert Sc​hweitzer

cherijoh
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Re: Paying current taxes vs continued high expenses

Post by cherijoh » Tue Aug 13, 2019 3:31 pm

HeelaMonster wrote:
Tue Aug 13, 2019 2:22 pm

Aided by reading here, I see (at least) two options for managing these high-cost funds.
  • Sell them off and exchange into lower cost index funds (3-fund portfolio stands ready to receive). DOWNSIDE: This would generate considerable tax liability on 30+ years of gains, just as I am relishing some low tax space to convert tax-deferred 401k (TSP) into Roth IRA. Plus the nightmare of calculating cost basis over that stretch.
  • Let them sit until we are gone, at which time our kids can inherit them with stepped-up basis, wiping out those decades of taxable gains. We shouldn't need to tap them in retirement, so they could sit undisturbed. I already plan to turn off dividend reinvesment, as suggested by Bogleheads. DOWNSIDE: Continuing to pay higher than necessary expenses, "as long as we both shall live."
  • Other?
A third option is to wait until the stock market makes a significant correction and then sell the actively managed funds for an index fund that matches your current fund's benchmark - for example an S&P 500 index fund fund to replace a large cap blend fund or small cap value fund to replace a small cap value fund.
Last edited by cherijoh on Tue Aug 13, 2019 3:44 pm, edited 1 time in total.

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HeelaMonster
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Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Tue Aug 13, 2019 3:36 pm

cas wrote:
Tue Aug 13, 2019 3:08 pm
I realize that this gets into "the nightmare of calculating cost basis," but that 30+ years of unrealized gains may be much less than you think, due to large capital gains distributions over the years. (Yes, the CGD were reinvested. But that amount gets added to your cost basis.)

Randomly, I chose WOFDX out of your list and looked up its distributions on Morningstar. (On the new Morningstar layout, you have to go to the Performance tab, then there is a "Distributions" sub-tab on the Performance page.)....
Thanks for the homework! Seriously, I need to crack open the record books tonight, where I have this info back to 1980. My binder with end-of-year statements may finally pay off.

I do know that WOFDX and EIVDX, in particular (back when they were Evergreen), dumped some major distributions back on us over time. Will be interesting to see what that adds up to be.
Last edited by HeelaMonster on Tue Aug 13, 2019 3:47 pm, edited 2 times in total.

Afty
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Re: Paying current taxes vs continued high expenses

Post by Afty » Tue Aug 13, 2019 3:42 pm

ralph124cf wrote:
Tue Aug 13, 2019 2:48 pm
If you support any charitable institutions, giving appreciated shares is much better than selling the shares and giving money. No tax will be due from either you or the charity, and you get a deduction for the full appreciated value of the shares.
A related option is to use the appreciated shares to start a donor advised fund.

fyre4ce
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Re: Paying current taxes vs continued high expenses

Post by fyre4ce » Tue Aug 13, 2019 3:55 pm

I did some math, and the break-even period is 15 years, if you are going to leave the funds as part of your estate or donate them to charity, or 5 years if you are going to use the money yourself. In other words, you'll be better off holding the current active funds if you expect you'll bequeath or donate the shares before 15 years, or cash out the funds and use the money yourself in less than 5.

Agreed with a previous poster that you should switch off automatic reinvesting of gains and dividends.

Assumptions: $30,000 cost basis on current funds (remember to include reinvested dividends). 8% growth before fees in both active and passive funds. Active: 0.863% ER, 3% yield, 85% qualified. Passive: 0.04% ER, 1.8% yield, 95% qualified. 24% marginal tax rate on ordinary income, 15% on long-term capital gains and qualified dividends. I assumed no net investment income tax or state taxes. These are somewhat crude assumptions but they should get you in the ballpark. Source: https://drive.google.com/file/d/1rgwLsY ... sp=sharing

Although it's a morbid subject, age, health, and life expectancy (> or < than 15 years) should probably be the deciding factor in whether it makes sense to switch funds now.

HomeStretch
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Re: Paying current taxes vs continued high expenses

Post by HomeStretch » Tue Aug 13, 2019 4:01 pm

HeelaMonster wrote:
Tue Aug 13, 2019 3:36 pm
cas wrote:
Tue Aug 13, 2019 3:08 pm
I realize that this gets into "the nightmare of calculating cost basis," but that 30+ years of unrealized gains may be much less than you think, due to large capital gains distributions over the years. (Yes, the CGD were reinvested. But that amount gets added to your cost basis.)
Thanks for the homework! Seriously, I need to crack open the record books tonight, where I have this info back to 1980. My binder with end-of-year statements may finally pay off.
You might want to check your brokerage account online to see what cost basis information is available. Brokerages are required to track and report the cost basis of purchases (including reinvestment of dividends and capital gains) since 1/1/2012. The online tracking may go back even farther. Probably won’t have 30 years of data but it’s a start especially if decide to sell more recent purchases first which may have the least gains.

Some brokerages allow you to manually enter online the cost basis for pre-1/1/12 tax lots. It can be helpful to do this as it becomes easier to see gains/losses especially if you sell over time. Plus the supplemental info included with your 1099 (at least for Fidelity) will show the manually-entered cost basis info. Having it in one place can be helpful at tax time.

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Re: Paying current taxes vs continued high expenses

Post by bradpevans » Tue Aug 13, 2019 4:29 pm

ExitStageLeft wrote:
Tue Aug 13, 2019 2:56 pm
Considering you have been holding for over 30 years the basis is probably around $5k. That makes a bulk sale rather unappealing as far as capital gains. Were I so unfortunate as to have your dilemma I would consider:

1) Hold the five funds but be prepared to sell one or more if there is a big downturn. Calculate the basis for each and figure out how low they would need to go so that capital gains taxes would be manageable.

2) or hold for your heirs

3) or contribute to a Donor Advised Fund. The deduction might allow you to bump up Roth conversion that year.
2) and 3) make a lot of sense.

Option 1 seems to put "less taxes: ahead of "more money left AFTER taxes".
Or am i missing something?

Another strategy would be to sell in small enough Gains to hold LTCG at 15%,
which might take a while. Or not depending on basis, other income, etc.

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grabiner
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Re: Paying current taxes vs continued high expenses

Post by grabiner » Tue Aug 13, 2019 8:31 pm

See Paying a tax cost to switch funds on the wiki.

It's likely to be worth selling. If you lose 9% of your investment to capital-gains tax, and you are losing 1.5% per year to higher fees and taxes, you'll actually be well ahead after six years; you will have the same number of dollars (assuming that your replacement funds perform equally well before expenses and taxes), but you will also have a higher cost basis and thus a lower capital gain when you sell the replacement funds.

Your basis may also be higher than you expect if you have been reinvesting dividends. (And if you are, turn that off in any fund you choose not to sell, such as a fund you intend to use for charitable contributions.)

If you are charitably inclined, putting all of these into a donor-advised fund, and then making contributions to charities over the next few years from those funds, might be a good idea. You would get a tax deduction for the full value (limited to 30% of your adjusted gross income, but excess carries over to future years). The deduction would also allow you to make a larger Roth conversion this year while staying in your desired tax bracket.
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Stinky
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Re: Paying current taxes vs continued high expenses

Post by Stinky » Tue Aug 13, 2019 9:52 pm

grabiner wrote:
Tue Aug 13, 2019 8:31 pm


If you are charitably inclined, putting all of these into a donor-advised fund, and then making contributions to charities over the next few years from those funds, might be a good idea. You would get a tax deduction for the full value (limited to 30% of your adjusted gross income, but excess carries over to future years). The deduction would also allow you to make a larger Roth conversion this year while staying in your desired tax bracket.
+1 on the donor advised fund, which has been mentioned several times in this thread.

You can prefund charitable contributions, get a current tax deduction, and avoid capital gains taxes on the donated shares. Sounds like a trifecta to me.
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HeelaMonster
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Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Wed Aug 14, 2019 8:30 pm

OP here, with an update.

First, thanks very much to all who commented... this has been extremely helpful!

Second, those who guessed that I might not owe as much in taxes as expected were spot on. I spent the last couple nights with my paper files on each of these old high-cost funds, and there is very little left on which to pay taxes, after subtracting the cost basis. In some cases, there will actually be a net loss, even after 30 years of pretty solid returns. I will be very happy to offload these high fees, and roll into current allocation.

Now I have two final questions, before I wrap this up:

1. At best, the fund companies are providing me cost basis info for only the last few years, and that appears to be defaulting to average cost method. I have taken cost info directly from year-to-year statements, back to 1980, with no guesswork. Am I correct that there will come a point in the selling process where I can indicate what method I prefer to use in reporting to IRS.... or do I need to reset that inside each fund profile, prior to sale? Just wondering about logistics and timing.

2. Finally, I need your help with an embarrassing senior moment (feel free to laugh). Way back in December 1986, the funds held at that point were sold and repurchased, in their entirety, on the same day. I know we didn't come up with that maneuver on our own, so must've following some specific guidance at the time... but can't for the life of me remember what or why!? The timing makes me think there must've been some window of opportunity closing end of that year. I did make a handwritten notation that "all shares sold and repurchased for tax purposes," but that's all I have to go on, as to intent or purpose. Notwithstanding my failing memory, am I correct in assuming that such a swap would effectively start things over at that date, in terms of cost basis? For example, if we held a fund from 1980 to 1986, then sold for $5600 and immediately repurchased $5600 on the same day, ending up with same number of shares... does that mean $5600 is the new cost basis from that point forward, until the next addition or reinvestment? :?

Thanks again for all the help.

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grabiner
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Re: Paying current taxes vs continued high expenses

Post by grabiner » Wed Aug 14, 2019 9:11 pm

HeelaMonster wrote:
Wed Aug 14, 2019 8:30 pm
1. At best, the fund companies are providing me cost basis info for only the last few years, and that appears to be defaulting to average cost method. I have taken cost info directly from year-to-year statements, back to 1980, with no guesswork. Am I correct that there will come a point in the selling process where I can indicate what method I prefer to use in reporting to IRS.... or do I need to reset that inside each fund profile, prior to sale? Just wondering about logistics and timing.
If you sell your entire balance, you don't need to set your cost basis, as specific identification and the IRS default of FIFO will give the same capital gains.
2. Finally, I need your help with an embarrassing senior moment (feel free to laugh). Way back in December 1986, the funds held at that point were sold and repurchased, in their entirety, on the same day. I know we didn't come up with that maneuver on our own, so must've following some specific guidance at the time... but can't for the life of me remember what or why!? The timing makes me think there must've been some window of opportunity closing end of that year. I did make a handwritten notation that "all shares sold and repurchased for tax purposes," but that's all I have to go on, as to intent or purpose.
The tax laws changed in 1987, so you may have sold for a capital loss which was deductible at a higher rate in 1986 than in 1987, or for a capital gain which was taxed at a lower rate in 1986. It might have also been related to your income; many investors do "tax gain harvesting," selling stock for a capital gain in a year that their capital-gains tax is zero in order to have a lower gain when they sell later to spend the money.
Notwithstanding my failing memory, am I correct in assuming that such a swap would effectively start things over at that date, in terms of cost basis?
This is correct. You don't hold any shares bought before that date, because you already sold them. You do hold the shares you bought on that date.
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HeelaMonster
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Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Wed Aug 14, 2019 9:31 pm

Thanks, grabiner! Let me make sure I understand this specific point....
grabiner wrote:
Wed Aug 14, 2019 9:11 pm
If you sell your entire balance, you don't need to set your cost basis, as specific identification and the IRS default of FIFO will give the same capital gains.
I do intend to sell the entire balance. But presumably I still need to provide missing cost basis info at some point, assuming the fund company will not be providing earlier than 2012 (and all the way back to 1980). Do I understand correctly that I am not required to provide that to the fund company, so long as I provide directly to IRS when filing taxes? If so, then all is clear.

trueblueky
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Re: Paying current taxes vs continued high expenses

Post by trueblueky » Thu Aug 15, 2019 7:05 am

HeelaMonster wrote:
Wed Aug 14, 2019 9:31 pm
Thanks, grabiner! Let me make sure I understand this specific point....
grabiner wrote:
Wed Aug 14, 2019 9:11 pm
If you sell your entire balance, you don't need to set your cost basis, as specific identification and the IRS default of FIFO will give the same capital gains.
I do intend to sell the entire balance. But presumably I still need to provide missing cost basis info at some point, assuming the fund company will not be providing earlier than 2012 (and all the way back to 1980). Do I understand correctly that I am not required to provide that to the fund company, so long as I provide directly to IRS when filing taxes? If so, then all is clear.
Correct.
The broker should provide a 1099-B with separate lines for each fund for 1) short-term, 2) long-term with basis provided to IRS, 3) long-term, basis not provided IRS. You will enter the basis for 3. If 1 or 2 is incorrect, you will correct it.

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HeelaMonster
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Joined: Sat Aug 10, 2019 11:46 am

Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Thu Aug 15, 2019 8:03 am

trueblueky wrote:
Thu Aug 15, 2019 7:05 am
Correct.
The broker should provide a 1099-B with separate lines for each fund for 1) short-term, 2) long-term with basis provided to IRS, 3) long-term, basis not provided IRS. You will enter the basis for 3. If 1 or 2 is incorrect, you will correct it.
Excellent. Great to have all this confirmed, before I wade in and punch the wrong buttons.

(...and in return, I promise not to say anything bad about Kentucky basketball, since you are True Blue... unless they play North Carolina, another shade of True Blue...) :D

:sharebeer

Topic Author
HeelaMonster
Posts: 22
Joined: Sat Aug 10, 2019 11:46 am

Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Fri Aug 16, 2019 11:01 am

One more update, with one more (hopefully last) question...

First, let me return the favor by sharing something I learned (probably known to most of you, but I have heard from some who are following this thread, dealing with similar situations). I started to reconstruct the cost basis on these 30-year old funds by going through the end-of-year statements, which were close at hand in a single binder. However, I soon learned that the info for reinvested div and cap gains is NOT THE SAME as final info reported to IRS on 1099. In most cases, the reported income was more than shown on those year end statements, presumably after final bookkeeping adjustments were made. So apart from accuracy, in our best interest to track down the higher cost basis. This requires more digging, into each separate tax file for last 30 years, but I do have them (in the attic).

Now to my question: Am I correct that, if I intend to sell all shares of a given fund, I do NOT need to record the number of shares purchased with every reinvestment? That is, I will have all I need for cost basis if I have the dollar amount (year-by-year and total), but do not have the individual number of shares purchased in each of those annual lots.

cas
Posts: 649
Joined: Wed Apr 26, 2017 8:41 am

Re: Paying current taxes vs continued high expenses

Post by cas » Fri Aug 16, 2019 12:39 pm

HeelaMonster wrote:
Fri Aug 16, 2019 11:01 am

First, let me return the favor by sharing something I learned (probably known to most of you, but I have heard from some who are following this thread, dealing with similar situations). I started to reconstruct the cost basis on these 30-year old funds by going through the end-of-year statements, which were close at hand in a single binder. However, I soon learned that the info for reinvested div and cap gains is NOT THE SAME as final info reported to IRS on 1099. In most cases, the reported income was more than shown on those year end statements, presumably after final bookkeeping adjustments were made. So apart from accuracy, in our best interest to track down the higher cost basis. This requires more digging, into each separate tax file for last 30 years, but I do have them (in the attic).
Hmm ... this sounds a little odd. You might want to track down exactly why the difference exists before you decide whether you use the EOY statement number or the 1099-DIV numbers as the cost basis.

For example ...

If any of those funds had significant stakes in international stocks ... it is common for the 1099-DIV to show a higher number for dividends than the amount of dividends that were actually reinvested. (Because part of the dividends were deducted to pay foreign taxes before the dividends ever hit your account. Then you delt with that issue via the foreign tax credit part of your tax return.) But, in this case, the cost basis is going to be the amount of dividends that were actually reinvested (which is what I would guess a statement would show) and not the taxable amount shown on the 1099-DIV.

Or ... some of those funds had short term capital gain distributions in some years. ST-CGD are reported on the 1099-DIV in the "ordinary dividends" column (lumped in with true dividends) rather than in the "capital gains" column. (The "capital gains" column shows only the long term capital gain distributions.) So if the EOY statement has dividends, short term capital gain distributions, and long term capital gain distributions broken out separately ( 3 categories), it might be possible to double count the short term capital gain distributions in the cost basis if you forget that "ordinary dividends" on the 1099-DIV are a conglomeration of dividends + ST-CGD.

Or ... maybe there really is something funky about the EOY statement, it doesn't really go all the way through the end of the year, and the 1099-DIV really is more accurate for determining cost basis.
HeelaMonster wrote:
Fri Aug 16, 2019 11:01 am
Now to my question: Am I correct that, if I intend to sell all shares of a given fund, I do NOT need to record the number of shares purchased with every reinvestment? That is, I will have all I need for cost basis if I have the dollar amount (year-by-year and total), but do not have the individual number of shares purchased in each of those annual lots.
(Mostly) Yes and (a little bit) no.

(Mostly) "Yes" because ... if you are going to sell all shares, all you need to report is the total cost basis. You will confuse yourself no end if you try to track things by per-share cost basis (especially if the Evergreen/Wells Fargo thing involved the merging of mutual funds, rather than a simple change of custodian.)

(A little bit) "No" because ... if the IRS ever audits you on the sale (unlikely, but not impossible), they are going to want to know how you came up with your total cost basis on the uncovered shares. And it will be a lot easier to reconstruct your reasoning if you have a spreadsheet with each transaction and a total at the bottom (or top) for each relevant category (uncovered shares, long term covered shares, short term covered shares). (It is also somewhat reassuring that you have reconstructed the cost basis accurately if your shares totals in the spreadsheet end up matching the share totals that your broker says you actually own.)

Topic Author
HeelaMonster
Posts: 22
Joined: Sat Aug 10, 2019 11:46 am

Re: Paying current taxes vs continued high expenses

Post by HeelaMonster » Fri Aug 16, 2019 6:43 pm

cas wrote:
Fri Aug 16, 2019 12:39 pm
HeelaMonster wrote:
Fri Aug 16, 2019 11:01 am
First, let me return the favor by sharing something I learned (probably known to most of you, but I have heard from some who are following this thread, dealing with similar situations). I started to reconstruct the cost basis on these 30-year old funds by going through the end-of-year statements, which were close at hand in a single binder. However, I soon learned that the info for reinvested div and cap gains is NOT THE SAME as final info reported to IRS on 1099. In most cases, the reported income was more than shown on those year end statements, presumably after final bookkeeping adjustments were made. So apart from accuracy, in our best interest to track down the higher cost basis. This requires more digging, into each separate tax file for last 30 years, but I do have them (in the attic).
Hmm ... this sounds a little odd. You might want to track down exactly why the difference exists before you decide whether you use the EOY statement number or the 1099-DIV numbers as the cost basis. ........
Thanks, cas

Perhaps this is unique to Fidelity, but some version of this explanation/disclaimer appears on the front page of every end-of-year statement, beginning around 2003:

"This investment report summarizes activity in your Fidelity accounts for the past year. We hope you find it helpful, however, keep in mind that it is not intended for tax reporting purposes. Adjustments often occur after this report has been created. Fidelity mails a separate (forms 1099) Tax Reporting Statement, if applicable, to assist you with your tax returns. That statement includes information on.... etc, etc."

I haven't done a head-to-head comparison across other fund companies, but Fidelity totals (dividends, capital gains) are frequently adjusted up, between EOY and receipt of 1099s.

And thanks also for the confirmation on cost basis needs (dollar amounts +/- shares). I have no desire to track on a per-share basis if not required... but will definitely have a spreadsheet, by the time I track 5 different funds across 39 years.
Last edited by HeelaMonster on Fri Aug 16, 2019 7:11 pm, edited 2 times in total.

delamer
Posts: 8430
Joined: Tue Feb 08, 2011 6:13 pm

Re: Paying current taxes vs continued high expenses

Post by delamer » Fri Aug 16, 2019 6:50 pm

Given that your portfolio is about $3.6 million, I’d just let the funds ride (after turning off reinvesting earnings).

Unless you have someone you can gift them to with a 0% capital gains tax, as suggested earlier.

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