Rich in America Secrets to Creating and Preserving Wealth PHẦN 6 potx

Date $ Amount Share Price

# of Shares

Purchased

Cumulative

Shares

Avg. Cost

Single

Category

Avg. Cost

Double

Category

Purchase 1–Jan–01 2,500.00 10.00 250.00 250.00 10.00

Dividend Reinvestment 30–Sep–01 75.00 10.75 6.98 256.98 10.02

Purchase 1–Jan–02 2,500.00 11.20 223.21 480.19 10.57

Dividend Reinvestment 30–Sep–02 152.25 12.01 12.68 492.87 10.61 10.61

Purchase 1–Jan–03 2,500.00 10.95 228.31 721.18 10.71

Dividend Reinvestment 30–Sep–03 231.82 11.00 21.07 742.25 10.72 10.95

Assume all shares purchased in years 1 and 2 are long term and all shares purchased in year 3 are short term.

700 shares are sold at $11.50 per share. Sale occurs 10/15/03.

# of

Shares

Selling

Price Proceeds Basis

LT

Gain/Loss

ST

Gain/Loss

Total

Gain/(Loss)

FIFO Method 1–Jan–01 250.00 11.50 2,875.00 2,500.00 375.00

30–Sep–01 6.98 11.50 80.27 75.00 5.27

1–Jan–02 223.21 11.50 2,566.96 2,500.00 66.96

30–Sep–02 12.68 11.50 145.78 152.25 (6.47)

1–Jan–03 207.13 11.50 2,381.98 2,268.06 113.92

Total Gain/(Loss) 700.00 8,050.00 7,495.31 440.77 113.92 554.69

Specific Identification 30–Sep–02 12.68 11.50 145.78 152.25 (6.47)

(High cost lots first) 1–Jan–02 223.21 11.50 2,566.96 2,500.00 66.96

30–Sep–03 21.07 11.50 242.35 231.82 10.54

1–Jan–03 228.31 11.50 2,625.57 2,500.00 125.57

30–Sep–01 6.98 11.50 80.23 75.00 5.23

1–Jan–01 207.75 11.50 2,389.09 2,077.47 311.62

Totals 700.00 8,050.00 7,536.54 377.35 136.11 513.46

Average Cost 492.87 11.50 5,668.01 5,280.98 387.02

(Single Category) 207.13 11.50 2,382.00 2,219.35 162.65

700.00 8,050.00 7,500.33 387.02 162.65 549.67

Average Cost 492.87 11.50 5,668.01 5,227.27 440.73

(Double Category) 207.13 11.50 2,382.00 2,268.95 113.05

700.00 8,050.00 7,496.22 440.73 113.05 553.78

TABLE 3.2 TAX TREATMENT OF MUTUAL FUNDS

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your broker or fund company should confirm this decision, in writing,

within a reasonable period of time to you. If you choose not to use spe￾cific identification, you have a choice between the “first in, first out”

method (FIFO—the default method of the IRS) or the “average cost”

method. FIFO is exactly as it sounds. Shares acquired first are deemed

to be sold first, with the actual tax cost basis of the shares used to cal￾culate gain or loss. Average cost aggregates the tax cost of all shares to

calculate an average cost that is then used for any sales of those shares.

Of course, the average cost of your mutual fund shares will change over

time as new shares are added and old shares are sold. Once you choose

to use the average cost method for a particular fund method, you must

use it for all subsequent sales of that fund. The double category aver￾age cost method requires you to separate all your long-term and short￾term shares and calculate average cost for each category at the time of

the sale while the single category method calculates one average cost

for all your shares, regardless of holding period. (See Table 3.2).

Another advantage of mutual funds is that the fees charged by

the funds and expenses are deducted at the fund level. This generally

is more tax-efficient than fees paid for individually managed accounts

where total miscellaneous expenses (including investment manage￾ment fees) have to be greater than 2% of adjusted gross income.

Other Tax Issues

Alternative Minimum Tax

Yet another significant part of the tax code is something most people

haven’t even heard of. It’s called the alternative minimum tax (AMT).

The AMT is a separate and parallel tax system. It taxes a broader base

of income, with fewer deductions, at an essentially a flat rate. It is the

closest thing this country has to a flat tax.

Taxes 121

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