Tax Law (Questions About Taxes)/Reportable/Taxable/Cost Basis?
QUESTION: Hi John - I have used TurboTax to prepare my families returns for as long as I can remember. This go-round is the first time that I've reached an impasse on something that requires outside expertise. Long ago, to avoid probate down the line, we set up everything in our mom's estate to be joint tenancy between her, my brother and myself with her social security number as the one of record. Our mother passed away on May 8, 2012. Her savings of $88,454.27 were in the DWS Strategic Government Sec Fund-A which earned a monthly dividend which, prior to her passing, we always applied to her monthly living expenses. After her passing, we were in no hurry to divide the account balance and my brother agreed to let me draw the dividend check for awhile. On June 20, 2012, we did the account paperwork necessary to remove Mom’s name from the account and reopened a new account keeping the joint tenancy between us two and with my social security number as the one of record for tax purposes. We kept a careful eye on the economy as I drew the dividend check each month from that date until January of 2014 when we clearly noted that the fund was reacting negatively to the possibility of the low interest rate environment ending and we made the decision to liquidate and split the balance. On January 28, 2014 – I asked shareholder services to liquidate the balance of $81,304.02 and send each of us half of the proceeds. They said that they couldn’t do this and would have to send a single check to the soc. security number of record – which was mine. After receiving, I immediately cut a check to my brother in the amount of $40,652.01 and we agreed that we would later worry about any tax liabilities around early 2015 –which is now.
John, are each of the equal amounts from the joint tenancy reportable and taxable? If so, since the proceeds were redeemed under my social security number, how and where on my return, do I show the data and that I am only responsible for any tax on half the proceeds and that the other half will appear on another person’s return so that my tax is not calculated on the full amount? Moreover, if reportable and taxable, how do we calculate the cost basis for us each to declare on our half of the split?
Here is Mom’s purchase information, according to shareholder services, from inception:
First purchase: 1/9/87 $20,023.01 at 10.51/share ---------- 1,905.139 shares
Second purchase: 1/20/87 $5,018.70 at 10.57/share -- 474.806 additional shares
Third purchase: 9/24/92 $15,002.38 at 9.88/share – 1,518.460 additional shares
John, thank you in advance, for any light that you can shed.
Thanks for your question.
Life would be so much simpler if you just kept it all for yourself. 😉
You will need to issue a 1099 to your brother for his share. On your return, show the full amount then deduct the amount on the 1099' indicating "nominee distribution."
Basis would simply be divided in half.
Hope this helps.
John Stancil, cpa
---------- FOLLOW-UP ----------
QUESTION: Thanks John. Sorry for my delay in following up - was out-of-town. For those of us not well-versed in tax preparation and who have grown accustomed to TurboTax automatically plugging in things where they need to go - can you be less general and a lot more specific: 1) On my return, exactly where do I show the full amount and where on the return do I deduct the amount I sent to him and where do I indicate "nominee distribution"? 2) Will I be taxed on the full amount or my half? 3) On the 1099, do I enter his share in box 3?
4)Is a form 1096 needed to summarize the activity on the 1099? 5) Finally, I thought for sure that you would respond by saying that there would be some sort of a reset at the time of our mother's death and that we would be responsible for taxes on any increase in value from that point going forward. Why not so?
Your are asking for several hundred dollars of tax advice, which pretty much outside the scope of this volunteer forum. However, I will give you a brief overview, but not a detailed step-by-step process.
I did not address the issue of basis or as you refer to is "reset," as that was tangential to the questions.
Since it was set up as a joint tenancy, I assume with her funds, she is construed as giving a gift to you and your brother. So the ownership is (unless otherwise specified in a legal document) one-third to each of you. Your basis in that one-third is one-third of the original cost. When she died, you inherited one half of her one-third interest. Your basis in this portion is based on inherited property and is the fair market value as of the date of death.
So your basis is a combination of original cost plus the FMV of her portion upon her death. The difference in this total and the proceeds of the sale is your taxable gain or loss.
The sale is reported on Form 8949 and transferred to Schedule D. On that schedule you will deduct the amount paid to your brother. In completing a 1099, you will need to send a copy to the IRS, along with a 1096 from for the transmission of the form. You can go to http://refer.greatland.com/v2/share/6119915426245752349
and fill in the blanks and Yearli will file the forms for you for a very nominal fee.
Hope this helps.
John Stancil, CPA