For those hoping to be relieved of entering an ex-dividend date when entering dividends, you’re out of luck. The maximum tax rate on dividends went up, but the distinction between qualified and ordinary dividends remains. The ex-dividend date will still be needed to determine whether a dividend is qualified.
For stocks acquired after Dec. 31, 2010, brokers are required to keep and track cost-basis information. These are called covered securities, as they are covered by the new reporting requirements. If these stocks are sold, brokers are now required to report the cost basis and proceeds to the IRS. The IRS also now requires taxpayers to report the broker cost basis of covered securities on the new Form 8949. This requirement brought a lot of club treasurers out seeking information and guidance.
Starting Jan. 1, 2012, the cost-basis reporting became mandatory for mutual fund shares. Brokers were required to start reporting cost-basis information to the IRS for mutual funds sold in 2012 and purchased after Dec. 31, 2011. If a club purchases mutual fund shares, it will be asked how it wants to record cost basis. Unlike stock shares, mutual funds can use the average cost method for tax purposes. If you don’t get asked to designate a cost-basis method, contact the broker or mutual fund company.
With cost-basis tracking and the reporting of cost basis to the IRS, it becomes more important to be aware of block (lot) selection when selling your securities. Most brokers are including ways to select individual blocks even with sell orders originated online. Without a designation, the broker will use the IRS default, which is first-in-first-out, or FIFO. This means your oldest blocks will be sold first. This is the default method for the accounting software also.
Cost-basis tracking has also caused a marked increase in the reporting of wash sales. A wash sale is a sale for a loss that occurs within 30 days of a purchase. The purchase can be before or after the sale. All or part of the loss from the sale is disallowed, and the holding period and cost basis of the purchased shares must be adjusted. Dividend reinvestment plans (DRP) triggered a lot of wash sales owing to the number of purchases from the plan.
Dividend reinvestment plans also caused some headaches with cost-basis reporting. The accounting software tracks each individual purchase. When reporting cost basis to the IRS, brokers often combined all DRP-related blocks depending on the type of capital gain generated and reported the purchase date as Various, and the cost basis reported is the sum of the blocks included in the grouping. This can make it hard for the treasurer to get the broker cost basis to report on the 8949 for individual blocks as the tax software generates.
Clubs need to be asking some questions with the new reporting requirements, such as:
- Does the club match blocks sold in the software with the blocks sold by the broker?
- If mutual funds are purchased, has a cost-basis method been designated, and which one should be chosen?
- Is our DRP plan worth the extra work, with the greater possibility of wash sales and cost basis reporting?