Individuals are paying too much in taxes!

Capital gains calculations currently being done by individuals, tax-preparers and even major brokerage houses are not always done accurately.  This translates into higher taxes.  Additionally, there are specific IRS regulations that address how the valuations of securities and mutual funds for estate tax purposes must be calculated using unique mathematical formulas.  Again, inaccuracies can cause the assessment of additional estate taxes - at a current federal estate tax rate as high as 55%.

We knew that there had to be an easier, more accurate and low cost alternative to performing these time consuming calculations manually.

The developers of 1040tools, who have been involved in the day-to-day demands and challenges of performing mutual fund basis calculations and valuations for estate purposes for over 25 years, have created two proprietary calculators that address these immediate needs with precision.  Tested against actual client data and re-tested against our enormous custom-made database, as well as those of major independent data providers, these 1040tools calculators are clearly ahead of their time.

Basis Calculation Overview

To determine the gain or loss when you sell (or exchange) mutual fund shares, you must know both the price at which you sold the shares and your cost basis (which is generally the original price paid for the shares).  While it is easy to find the sales price, the cost basis can be difficult to figure out; this is especially true if you bought shares at different times and at different prices. 

Note: Always count reinvested dividends and capital gains distributions as part of your cost basis.  This will raise your cost basis and therefore reduce your taxable gain.  When determining your cost basis, keep in mind that any sales charge or transaction fee you pay when buying shares is part of your cost basis and cannot be deducted.  Any fees or charges paid when you sell shares reduces the proceeds of the sale.  In general, fees paid when you buy or redeem shares reduce your taxable gain or increase your capital loss.  Other fees charged by a mutual fund, such as account maintenance fees, do not affect your cost basis. 

There are four methods that the IRS allows you to use in order to figure the gain or loss on sales or exchanges of mutual funds.  Each of these methods has its own benefits and drawbacks.  Once you begin using an average cost method for the sale of shares of a particular fund, the IRS prohibits a switch to another method without prior approval (however, you may employ different methods for different funds).  To determine your optimal method, you may wish to consult a tax professional.

First-In, First-Out (FIFO)

This method assumes that share sold were the first shares you purchased.  If you do not specify a method for calculating your cost basis, the IRS assumes that you use the FIFO approach.  While this method is fairly easy to understand, it often leads to the largest capital gains, because the longer you hold shares, the more time they have to rise in value. 

Average Cost (Single Category)

This method, used by most preparers, considers the cost basis of your mutual fund investment to be the average basis of all the shares you own---a figure that changes as you continue investing in a fund.  Most mutual fund companies use this method to calculate average cost.  For holding-period purposes, sales are considered to be made on a FIFO basis.

Average Cost (Double Category)

This approach differs from that of the single-category method in that you must separate your shares into two categories---shares held for a year or less and shares held for more than a year.

Selling short-term shares means basing the gain (which is taxed at the ordinary income rates of up to 39.6%) on the difference between the average short-term basis and the sales price.  By contrast, the gain on the sale of long-term shares (which is taxed at the maximum rate of 20%) is based on the difference between the average long-term basis and the sales price.  If you choose this method, you must notify the fund company in advance of which category of shares to sell.

Specific Identification

This method provides the most flexibility and therefore the best chance to minimize taxable gains.  The first step is to identify the specific shares you want to sell---in most cases, these would be the shares bought at the highest price so that you can minimize your gain.  However, this method is not necessarily the best choice because it can be complex and also imposes the heaviest record keeping burden.  Also, the shares with the highest cost basis may be the ones you purchased most recently---which could mean having to pay taxes at a higher rate if the gains that result are short-term.

To use the specific identification method, notify your mutual fund company in writing and provide detailed instructions about which shares you are selling each time you sell or exchange shares.

Why a High-Low-Mean Value Calculator

Good question!  The IRS never seems to make things easy.  The regulations are very specific with respect to the required valuation calculations that need to be performed when an estate is valued as of the date of death or the alternate valuation date (six months later).  Specifically, IRS regulation 20.2031-2 states that the valuation of stocks be made by computing the mean between the highest and lowest quoted selling prices on the valuation date (or alternate valuation date).  If there are no sales on the valuation date (i.e. week-ends and holidays) the value is determined by taking a weighted average of the means between the highest and lowest sales on the nearest trading date before and after the nearest date after the valuation date. 

As you can see, simply asking a broker or utilizing a reference publication or website for the closing price for a particular stock is not correct - close (maybe) but not correct!  The 1040tools High-Low-Mean Value Calculator is the only answer!

Our Data Tests

The developers of 1040tools continuously strive to maintain the most accurate database possible. Our data is compiled from a number of major independent financial data providers whose data is tested against our in-house database. Only after we have thoroughly tested and satisfied ourselves as to the integrity of the data for each security or mutual fund will we integrate it into one of our calculators.

With this in mind it should be understood that, while we make every attempt to keep the database current with respect to each security or mutual fund (on an individual basis), these calculations are made on a best efforts basis and there will be instances when we will have to withhold a security or mutual fund from our monthly update process. We will, of course, add the data to our database as soon as we are satisfied with respect to its integrity. If a calculation is needed on a security or mutual fund after a valid date in the existing database you may contact us and we will gladly research the data and provide you with our manual calculations.