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Taxpayers with Mutual Fund Sales Create Tax Preparer Jobs


A common situation you encounter when you become a tax preparer is taxpayers with sales of mutual funds. These cases often embody complexities that present opportunities to prove your professional value. You can even teach taxpayers about the impact of capital gain tax and the record keeping required for calculation.

Capital gain tax is a basic aspect of the tax preparer exam. But it’s not a simple matter for most taxpayers. The problem is a consequence of failure to accurately track cost basis.

Cost is required because the taxable gain is the difference between sale proceeds and cost basis. Mutual funds are troubling because they’re often acquired at different dates and prices – especially when dividends are reinvested.

Gain or loss from selling mutual funds is normally calculated by considering the shares held the longest as sold first. If a taxpayer wants to identify specific shares as the ones sold, certain rules are followed when the sale occurs.

By using the oldest shares, the gain is more likely taxed at lower long-term rates if shares were held for more than a year. The disadvantage is that older shares were likely purchased when prices were much lower. The resulting capital gain thus causes a higher tax.

Whatever method a taxpayer chooses for basis determination must continue in use for all future shares sold. So you can’t change the method a taxpayer has previously used for the same mutual fund.

For mutual funds only, there is a special rule available for determining cost basis. This is the average cost method. You can easily figure this for the taxpayer by using an average cost per share held at the time of the sale. Sometimes, tax preparer jobs are simplified when mutual fund companies know and report the average cost basis. But this isn’t available when shares are transferred to the selling broker from the original brokerage where purchased.

When taxpayers have records of account statements, you can help construct the costs for past purchases. But this can involve a cumbersome project for a Registered Tax Return Preparer if dividends have been reimbursed over a number of years. Each of these dividends represents a new purchase.

Taxpayers are often forced to only provide you with the original cost of the first large group of mutual fund shares they bought. In that case you don’t have any subsequent costs to report as additional basis. This causes some of the sold shares to have unaccounted cost basis. You’re stuck having to make the taxpayer owe more capital gain tax.

But at least you can use the matter as a teaching exercise for your future services. By explaining how capital gain tax is calculated, you can deploy your tax preparer certification expertise to help taxpayers maintain accurate cost records. Giving advice to tax clients builds the strong ties that lead to long-term professional relationships as their tax preparer.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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