Stalking Those Elusive Financial RecordsJeffrey M. Laderman
The soaring stock market is running into turbulence. And the new tax bill slashes the capital-gains rate to a maximum of 20% on assets held for more than 18 months. Perhaps you want to do some judicious selling, turning those fat paper profits into cold, hard cash.
But the elation you might enjoy over cashing in on a smart investment could turn into a major, and perhaps costly, headache at tax time if your financial records aren't in order. To know how much tax you would have to pay on your gains, you would need to know exactly how much you spent initially. Do you have that information--in tax terms, the "cost basis"--for all of your investments?
OLD SUITCASES. Knowing the amount of capital gains in your portfolio is essential for smart investment and tax planning. Mark Cohen, a CPA with the New York accounting firm of Newman & Cohen, recently sent a client to rummage through old suitcases and file folders for documentation that would establish a cost basis for a six-figure holding. "Depending on how much profit there is, my client may be better off donating the shares to charity than selling them and paying the taxes," says Cohen. "But I just can't advise her until I know."
If your financial records are spotty or if years of data seem to have evaporated, you're not alone. Even many well-to-do folks, the sort that use the services of a major trust company, often fail when it comes to financial fastidiousness. "A lot of people come to us with very poor records," says Edward Peller, a senior vice-president at U.S. Trust Co. of New York. "We start by asking how the stock was obtained: purchase, inheritance, or gift. Depending on the answers, we can direct people to the sources."
It's easier to hunt for those missing numbers now than in those frantic first weeks of April. You'll need that info to complete the Schedule D (Capital Gains & Losses) on your federal income tax return, and most likely for your state form as well. Many mutual-fund companies provide average cost basis in yearly statements or when shares are sold. But if the fund has been held for more than a decade, that basis may not include older investments.
Not having those numbers could cost you. If you report a basis that's too high and thus show a lesser gain and tax liability, you'll risk the wrath of the Internal Revenue Service. You might have to pay not only the back taxes, but penalties and interest. Tax pros say the IRS rarely questions cost-basis reporting by itself, but auditors might ask for documentation if you're already undergoing the agency's scrutiny.
Without good records, you could also underreport your cost basis, and thus overpay your taxes. Accurate records are especially important if you reinvest dividends or the income and capital-gains distributions paid by a mutual fund. Each time you reinvest, you are actually buying new shares, and those purchases roll into your cost basis.
Even if you're not planning to sell right now, it's still a good idea to establish the cost basis for your holdings. In these days of merger mania, you might be forced to sell your stock if the company is bought out. If you receive cash, you'll likely have to report capital gains.
The first step in trying to determine cost basis on shares of stock or a mutual fund is to contact the firm that sold you the investment. Brokers and financial planners often keep their own records of clients' transactions in addition to those of their firms. That's handy if the broker has changed employers. Also, scores of brokerages have folded or merged, and old records don't always make it to their successors.
If you have stock certificates but can't find a brokerage record of the purchase, check the shares for the date they were registered to your name. That's usually done within four to six weeks of purchase, says Rosilyn Overton, a financial planner at Brown & Overton in Queens, N.Y. Once you establish a registration date, Overton suggests a trip to the library to check newspaper stock tables or Standard & Poor's Daily Stock Price Record for the prices four weeks and six weeks before the transfer date. Take one of them, or average them, and use that as a cost basis. "It's not exact, but it's close enough," says Overton. This method may be way off base, though, if there have been stock splits, spin-offs, or other corporate reorganizations over the years.
The business section of a large public library usually has some publications that will may help you trace such events. They include Capital Changes Reporter, published by Commerce Clearing House, and two S&P publications: Corporation Records and Dividend Record. Try calling company shareholder-relations departments for assistance, but often they lose track of spin-offs once they are separated from the parent. Standard & Poor's Central Inquiry (212 208-1199) is a fee-based service that also can assist in searches. The cost depends on the amount of information you need, but there is a $35 minimum. Don't bother looking online. Daily quotes at Web sites commonly go back months, not decades.
Mutual-fund companies are used to getting requests for records, and you can order them by calling the funds' toll-free numbers. Even if you were making monthly purchases, you don't need a statement for every investment. Each year's final statement will include all the year's transactions, including reinvestment of dividends and capital gains. The same goes for the dividend reinvestment programs that many corporations run for shareholders.
Most fund companies will provide the current and previous year's statement gratis, but you may have to pay beyond that. T. Rowe Price Associates charges $10 per year for past statements, with a maximum of $75 for all searches. DST Systems, the transfer agent that handles the recordkeeping for more than 2,000 mutual funds and more than 2,400 companies, doesn't charge for the past five years of records. But going back six to 10 years costs $20; 11 to 16, $40; and 17 or more, $80. You can get computerized records in a few days, but older records on microfilm or ledger cards will take longer.
Suppose you have the cost of your original investment, but are missing reinvestment records. Old tax returns may help. Provided you reinvested all the dividends and distributions, you can assume the dividend and distribution income from each stock or fund reported on Schedule B of the tax return is the amount you invested.
If you're selling inherited stock, the cost basis is probably the stock's price on the benefactor's day of death. Executors have the option of using a valuation date six months after the day of death, so you should check with the executor or seek a copy of the estate tax return.
It gets tougher when you're dealing with gifts. Suppose you're in your 40s and you want to sell the stock your deceased Uncle Joe gave you when you were a tot. If he bought the stock in your name, the cost basis is the same as if you had purchased it yourself. But if he transferred shares from his ownership to yours, your cost basis is his. And who knows when he got those shares? The first place to check is with other family members who may have access to his records. Try the company, too. Exxon, for instance, has nearly 80 years of daily stock price information. If you can provide a purchase date or a stock certificate number, Exxon may be able to fill in the missing pieces.
But even after a long search, you may never solve this mystery. If you still want to sell and can't come up with the exact information, advisers suggest documenting your efforts to find the original cost basis, coming up with a reasonable estimate, and hoping the IRS understands.