The cost of being lazy about cost-basis
elections seems particularly high right now, given that the markets have
generally been trending upward as the new regulations have gone into effect.
Investing and taxation can be
tricky things, especially if you have been investing for some time. This can
get even trickier when you transfer assets to loved ones or contemplate doing
Taxation hinges on a few
fundamental numbers, one of which is the cost basis. Given some interesting
changes to the law governing cost basis, you may need to rethink your plans.
If you have investment accounts,
then you likely are aware of some of the changes that have begun to take effect
and will continue to roll out through 2013. One of the most obvious changes was
recently addressed in a Morningstar article
titled “Beware the Default Method for
Cost-Basis Elections.” Are you aware of the difference between the
old style of cost basis election and the new possibilities your brokerage firm
or mutual fund company can offer?
Essentially, the old system of
electing a cost basis was typically in the hands of the investor since they had
to track and record their own cost basis on various investments. This meant
averaging out the cost basis when selling various stocks at tax time. Now the
cost basis is directly reported to the IRS from the firm/broker.
Companies tend to offer the
default means of reporting, but since information is going directly to the IRS,
this also means there is enough information for specific-share identification
in the cost basis election. The Morningstar
article offers some interesting math to support why this actually can be
advantageous for the crafty planner.
The bottom line is that any
trimming you can safely accomplish can secure more favorable capital gains
taxation. Why? Because this cost basis carries over into another magic taxation
number, the stepped-up basis, when investment assets are transferred. In short,
small numerical changes add up and may affect your overall wealth-transfer
(March 26, 2012) “Beware the Default Method for