Q: I can't locate the early records pertaining to some stock I bought in 1957, so I am unable to determine the tax basis of the original stock or later shares received in lieu of dividends and splits. Although I have all the dividend and tax records, it seems impossible to reconstruct a proper basis for my shares. Other than donating them to a charity, what alternatives do I have if I want to sell the shares, or at least minimize difficulties for my wife if I leave them to her?
A: The last dozen or so words point the way to the simplest solution to your problem. If it happens that you die before your wife and you bequeath the stock to her, she doesn't have to worry about your original cost. She would pick up as her basis the market value on the date of your death (or -- in rare cases -- an alternate valuation date, if selected by the executor).
If you want to sell the stock, however, you do have to determine the basis for gain or loss -- and since you have all the records except the original cost, it's not an impossible task. If you have the exact date of purchase, stop in at one of the full-service brokerage houses and ask if they will get you the market price for that date.
Lacking the exact date, ask for the average price for the month (or even year) of purchase. Although the Internal Revenue Service wants the precise cost, it will accept an estimate reasonably arrived at. (Of course, if you have a regular broker, ask him or her for the data.)
To that original cost you should add the market value on the date of issue of all shares received as part of a dividend reinvestment plan (which is what I assume you mean by "shares received in lieu of dividends"). These amounts should have been reported as dividend income in the year of receipt. Do not add any amount for stock splits or true stock dividends -- these affect the number of shares and thus the per-share cost, but have no impact on your total cost for the entire holding.
All of this serves to emphasize the importance of keeping cost records on shares of stock (as well as on other capital assets such as a house or condo). For securities, I find the easiest method is to keep in one place the broker's confirmation slips on all purchases. When I sell, it is only necessary to pull out the purchase confirmation and match it with the sale confirmation to come up with all the required data.
Q: I received a Form 1099B showing the amount of money I received from the sale of stock accumulated in a dividend reinvestment plan. Since I have reported the dividends to the IRS as income each year since 1956, what information do I have to report now, and how should I go about it?
A: You must report the sale of these shares on Schedule D and calculate any capital gain or loss on the transaction. The amount shown on the 1099B is the selling price of the shares. The cost is the total of all of the reinvestments since you started the plan.
You can get these cost figures either from the quarterly reinvestment statements, if you have saved them, or from the Schedule Bs on all these tax returns showing the amounts you reported as dividends on the reinvestment plan.
There is a further complication -- you must distinguish between long-term and short-term. For long-term treatment, dividends received and reinvested prior to June 23, 1984, must have been held for more than a year before the date of sale. The long-term period starts after six months for those dividends received after June 22, 1984. Split the shares into two parts and report the short-term portion in Part I of Schedule D, the long-term portion in Part II.
Q: I retired from the federal government on Jan. 3. I received my final paycheck and a lump-sum payment for unused annual leave in 1985. Can these payments be considered as earned income and thus entitle me to make a 1985 deposit to my IRA?
A: Yes and no. Yes, your final paycheck, received in 1985, is 1985 earned income, and qualifies you for an IRA deposit. No, the lump-sum payment for accrued leave is not considered earned income and may not be used as the basis for an IRA investment.