Question: During 1978 I cashed in shares of a mutual fund I bought about ten years ago. The fund has been reinvesting the dividends for me all these years. What do I use as the cost figure for Schedule D ?
Answer: For those who don't know, Schedule D is the IRS tax form on which you account for capital gain or loss on the sale of non-business property.
Now to your question. You find the cost basis for a mutual fund account in which capital gains and dividends have been reinvested as follows:
Start with the original amount invested; add the total of all subsequent investments; add the total amount of reinvested dividends and capital gains; and subtract the cost basis of any previous redemptions.
This gives you the total cost of all your shares, which is the figure to use if you cash in the entire account. Comparison of this total cost figure with the net amount received on redemptions will tell you how much of a capital gain or loss you have to report.
For a partial redemption you have a couple of additional steps to take. Divide the total cost basis by the number of shares you owned before the redemption to get cost basis per share at that point. Then multiply this amount by the number of shares you are redeeming to arrive at the cost basis of all the redeemed shares.
Regardless of whether you have a partial or total redemption, there is one further calculation to make. You have to separate those share purchases made (either by additional investment or by reinvestment of dividends) during the 12 months preceding the redemption.
Gain or loss on sale of these recently acquired shares is short-term; all the rest is long-term. They must be accounted for separately, in different sections of Schedule D.
The lesson here is that your should be keeping track of these figures on at least an annual basis. If you haven't then you now must reconstruct the necessary information by using the annual tax statements provided to you by the fund.
And if you can't find all of the year-end statements, most fund managers will provide (for a relatively small fee) a transcript of your account. I pays to work this one out. Aside from the legal requirement to provide accurate data on your tax return, knowing the full costs may make a considerable difference in your tax liability.
Incidentally, there are other, more complex, ways to handle this problem, but this is the simplest method for most people. However, you must advise the IRS that you are using this technique by noting on Schedule D "average basis, single-category method."
Q: What happens to Series E bonds when the new EE bonds come out next year? Will my bonds stop earning interest then?Or do I simply exchange the old bonds for new ones?
A: To answer your last question first-E bonds presently owned cannot be switched for the new EE bonds. The terms of the new bonds are different and a simple exchange won't work.
However, there is no urgency about getting rid of your present E bonds. All those bonds issued from 1941 to April 1952 will continue to earn interest for 40 years from the date of issue (marked on each bond). So, for example, a bond purchased in May 1945 will earn interest through April 1985.
Bonds bought after April 1952 have a shorter life than 40 years, but all of them (including any your may buy this year) will run for at least 25 years from the date of issue.
The following information, provided by the U.S. Saving Bond Division of the Treasury Department, permits you to identify the maturity date of any E bond you own. Find below the period which includes the date of issue of your bond. For each set of dates you will find the life of all bonds issued during that period. Add the specified life to the issue date to get the maturity date.
Period of issue May 1941-April 1952, life 40 years; May 1952-january 1957, 39 years 8 months; February 1957-May 1959, 38 years 11 months; June 1959-november 1965, 37 years 9 months; December 1965-May 1969, 27 years; June 1969-November 1973, 25 years 10 months; and December 1973-December 1979, 25 years.
You should redeem your bonds when they mature because they will stop earning interest at that time; liability for all the accrued interest on the final maturity date. (Most owners of Series E bonds defer the tax on interest until the bonds are cashed in, rather than reporting the interest annually.)
Of course you also will be liable for income tax if you cash in the bonds-even if you use the proceeds to buy new Series EE bonds. But starting in 1980, you will be able to convert your old E bonds to the new Series HH bonds and continue to defer tax liability on the E-bond interest.
Semiannual interest payments on the HH bonds are taxable in the year received (true also of the present Series H bonds). And tax is due on the deferred interest on the E bonds used for the exchange when the HH bond is cashed or matures.