Friday, March 16, 2012

Reconstruction Work

Q.  I have been reinvesting my dividends in a mutual fund I've held for years. Now that it's sold, someone told me I need to review my basis to reflect not only the original purchase price, but also the reinvested dividends over the years. I've moved several times and no longer have the paper work. What can I do now?

A.  This can be a complicated issue, but first, let's address the obvious. I like to make extreme examples as they can be easier to understand. Given the poor state of the market in recent years, let's say you're in a 10 - 15% tax bracket, and the entire mutual fund when you sold it, was worth only $500.  In this case, I would simply claim a zero cost basis, and be willing to pay the tax on $500, even though you do have a cost basis, & might even have a loss on the sale. It's possible you won't owe any tax, or very little, and you can save yourself lots of work and grief of reconstructing years of paperwork. To my knowledge, there is no law that says you can't overpay your taxes.

Assuming paying tax on the gross proceeds is out of the question, the only choice you have is to try to reconstruct records. Fortunately, most mutual funds are sold by companies that keep such records. If you know the firm you purchased it from, I would start by contacting them and asking them to research your records. Dividends paid in a public company are public records, so if you know the number of shares you held each year, you can reconstruct the dividends. How much time all this will take and what the fees will be for the research is yet another matter, but this may be the only way to resolve your problem. Given we are now in the latter half of March, if the sale took place in 2011 and you need to report the sale on your 2011 tax return, you better consider applying for an extension!

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