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Tax question - sale of mutual funds

ocowner

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Sorry if this is a little involved...or complicated. It may need Dave M's input:

We have sold mutual funds from a UTMA account earlier this year and are wondering how the tax situation will be after the new year. Here's the scenario... Initial shares were purchased begininning in 1994 from Fund A. There were some annual contributions in subsequent years with the same fund. Then, in 2006 the fund company merged with another fund company. The fund kept its name, just under a new fund company.

Then, later in 2006 we diversified fund A, into 4 funds (of which fund A was one of them)... let's now call them A-D.

In 2007, fund A was merged/assimilated into one of the other 3 (I don't know if it was B,C, or D). So now there is only B, C, and D, all with the new fund company.

Because this was an UTMA account and continued that way, there was never any need to pay tax tax on the dividends or capital gains distributions because of the limited amount. But, in 2007 we were required to do so because of my child had earned income during that year (and the combined unearned income put him "over the edge.")

Now, in 2008, we redeemed all shares of remaining funds B,C, and D for college expenses. The new fund company advises they will send us a year end cost basis from the time of the diversification in 2006. Because of the lengthy history of purchases going back to a now non-existent fund company, they cannot provide the cost basis from the original purchase. They can, however, provide, a separate list of those transactions (including share price and number of shares purchased).

The question is this...do we owe capital gains tax going all the way back to 1994 and all of those purchases? Or, could we just claim the cost basis that the fund company provides us at year end which they say will include that from the 2006 diversification? Or maybe a simpler questions is this...if you are not required to report income and file because of the limited financial amount, does that exempt you for that year, or are you on the hook for those amounts when it all becomes ripe?
 

bobcat

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Sorry if this is a little involved...or complicated. It may need Dave M's input:

We have sold mutual funds from a UTMA account earlier this year and are wondering how the tax situation will be after the new year. Here's the scenario... Initial shares were purchased begininning in 1994 from Fund A. There were some annual contributions in subsequent years with the same fund. Then, in 2006 the fund company merged with another fund company. The fund kept its name, just under a new fund company.

Then, later in 2006 we diversified fund A, into 4 funds (of which fund A was one of them)... let's now call them A-D.

In 2007, fund A was merged/assimilated into one of the other 3 (I don't know if it was B,C, or D). So now there is only B, C, and D, all with the new fund company.

Because this was an UTMA account and continued that way, there was never any need to pay tax tax on the dividends or capital gains distributions because of the limited amount. But, in 2007 we were required to do so because of my child had earned income during that year (and the combined unearned income put him "over the edge.")

Now, in 2008, we redeemed all shares of remaining funds B,C, and D for college expenses. The new fund company advises they will send us a year end cost basis from the time of the diversification in 2006. Because of the lengthy history of purchases going back to a now non-existent fund company, they cannot provide the cost basis from the original purchase. They can, however, provide, a separate list of those transactions (including share price and number of shares purchased).

The question is this...do we owe capital gains tax going all the way back to 1994 and all of those purchases? Or, could we just claim the cost basis that the fund company provides us at year end which they say will include that from the 2006 diversification? Or maybe a simpler questions is this...if you are not required to report income and file because of the limited financial amount, does that exempt you for that year, or are you on the hook for those amounts when it all becomes ripe?
I would say yes. Let Dave help you.
 

Dave M

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The correct answer is that you should add up all of the additions to the account, starting in 1994, including reinvested capital gains and dividends. That's the total basis for purposes of determining capital gain or loss. If you don't have all of those records, you'll have to do the best you can. Using the "cost basis" the firm gives you after year end might be as close as you can get, but using that data could result in paying more tax (or claiming less capital loss) than is appropriate.

Not paying tax in some years because income wasn't high enough actually has a positive impact. That's because, as stated, income from the funds (undistributed capital gains and dividends) still increased cost basis, thus reducing any tax payable now.
 
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