February 2009

What's New in Taxes

Basis reporting will be required soon

2/1/2009 -

In just a few short years, brokers will be required to report basis information to the IRS for stocks, bonds, and other financial instruments.

Do you know how basis is determined for investments and other assets? Here's a review of the basics on basis.

Cost "basis" is fundamental to how gains and losses are figured on your income tax return. Knowing what basis is, and how it is calculated, can help you save taxes.

In its simplest form, basis is what you pay for something. It normally comes into play when you sell an item of value, such as a house or business equipment. The sales price, less the basis, is usually your taxable gain or loss. But basis is often different from the original purchase price. For instance, if you are allowed depreciation on the item, your basis is reduced by the amount of depreciation allowed.

Basis can be adjusted by other means, too. Making major improvements to an asset can increase its basis. Expenses incurred to acquire an asset, such as sales commissions or settlement costs, also add to basis.

What do these rules mean to the average taxpayer? Plenty. Homeowners should maintain a record of their home's purchase price, plus improvements, in case gain on a future sale exceeds the $250,000/$500,000 exclusion amount. Stock and mutual fund investors need to track their investment costs, including commissions and reinvested dividends. Stock splits should also be recorded.

Some assets have basis, even if they cost you nothing. The basis of property given to you is generally the same as the basis of the donor. However, inherited property usually has a basis equal to its fair market value at the time of the owner's death, though special rules apply to certain inherited assets.

Back to the upcoming basis reporting requirement for investments. Reporting begins for stock purchases in 2011, for mutual fund purchases in 2012, and for other security purchases in 2013.



 

For details or for assistance with your tax planning, give our office a call.