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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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My son has a UGMA account with me as the custodian. He

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My son has a UGMA account with me as the custodian. He is now 24 so we liqudated the account this year. Can I add priviously reported and declared LT gains to the original cost plus dividends?
Submitted: 6 years ago.
Category: Tax
Expert:  jgordosea replied 6 years ago.

Greetings,

If you are referring to dividends and capital gain distributions that were reinvested in the same mutual fund or stock then, yes, those amounts add to the cost basis.

For any capital gains from the sale of shares the long tern gain that was included in income is not part of the cost basis. But, you may have bought additional shares with the proceeds from the sale that, of course, would be a cost of those new shares.

I hope this helps.

Customer: replied 6 years ago.
Reply to John Gordos EA's Post: I think you missed my point. Let me be more specific. This is a UGMA account (Aim constellation fund)that was opened in my son's name in 1995 when my son was 12 years old with a $5,000 deposit. In 1998 I was sent a notice that we incurred $280 in capital gains. Since it was less than $750 we did not file. However in 1999 the account incurred $1220 in capital gains so we did file and paid tax. In 2000 we filed and paid on $3005 in capital gains and paid tax on that. No distrubutions were made from this accont until 2003 and 2007. Total distribution is about 14,000. No dividends paid. It seems to me that since capital gains have been paid on undistributed funds, I should get credit for that now that all the funds have been distributed. My thought was to adjust my cost basis upward by the LT Capital gain amount less the taxes that I paid. Ohterwise it seems that I am paying the capital gains tax twice. Please advise.
Expert:  jgordosea replied 6 years ago.

Hello again,

The fact that it is a UGMA account does not change the basic application of the rules for cost basis. Think of this like you would your own brokerage account.

When you sell stocks or funds and report capital gains and pay income taxes the taxes paid are not part of an increase in basis. The fact that you leave the proceeds in your brokerage account will only have an effect on basis to the extent that you reinvest those funds. The reinvested funds may later have more gains that are taxed; but the amount that has already been taxed is not taxed again as the amount that was invested is the cost basis for the later sales. The same will be true for the UGMA account.

I can make gains over and over using the same money investing in one stock or fund later selling and paying tax on the gain and reinvesting in another stock or fund later selling and paying tax on the second gain and so on; but the funds that I have paid tax on are not taxed again in the later sales. Neither in a regular brokerage or in the UGMA account do you have to pay tax twice. Tax is only due on the gains not on any purchases.

When you got your distribution there will be a cost basis for the investments held in the account and not sold at some earlier date. This information is either provided by the broker or can be computed from all of the purchase details for initial purchases and later reinvested amounts.

I hope this helps to clarify for you.

 

 

 

Customer: replied 6 years ago.
Reply to John Gordos EA's Post: Page 8 of 23 of Publication 564, Mutual Fund Distributions under the sub category Adjusted Basis states: "Increase the basis of your shares by the difference between the amount of undistributed capital gain you include in income and the tax considered paid by you on that income."

In 2000 we paid tax on the undistributed shares. I take the above to mean that I may adjust the basis by the undistributed capital gain less the tax I paid on that income.

What am I missing here?



Where a
Expert:  jgordosea replied 6 years ago.

Did you get Form 2349 that reported capital gain distributions that you did include in income and that were not distributed by the mutual fund company to his account? That is not very common. In most cases it is reversed the following year (the gains are distributed or an adjustment is made in the distrbutions for the prior year undistributed amount).

It seems you may be confusing capital gain distributions which you did get from the mutual fund, reported to you on 1099-DIV on which you pay tax and those that are being discussed in that part of the publication (undistributed capital gain on Form 2349) which are not (yet) paid out by the mutual fund company.

Or you may still be thinking that there is a difference in tax treatment between amounts that are not obtainable from the UGMA account (due to the age of the owner) and those in a regular broker account. There is no difference.

You did pay tax on an amount that was not permitted to be given to the minor in the year 2000; but that has nothing to do with amounts that were not distributed by the mutual fund company (undistributed capital gain) to his account.

I hope this helps to clarify for you.

Customer: replied 6 years ago.
Reply to John Gordos EA's Post: Final clarification.

I did in fact reinvest the capital gains that we paid tax on in 1999 and 2000 into the same fund so I can add that to my tax basis. My new tax basis is initial purchase price plus reinvested capital gains plus reinvested dividends.

Right?
Expert:  jgordosea replied 6 years ago.
Yes, your basis is the total of all of the purchases (investments plus reinvestment of gains and dividends).
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3031
Experience: I've prepared all types of taxes since 1987.
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