Stock Splits And Dividends

Stock splits - and dividends paid in stock instead of in cash are another tax-related portfolio problem. Each year a rash of new splits is announced, usually during the annual corporate-meeting "season" in early springtime.

First, note that the tax rules are exactly the same for splits and stock dividends. In both cases, generally, you pay no tax simply for picking up the added shares. And you needn't report the deal on your form 1040. But there's one exception - and it's rare: If you have a choice of either cash or stock, you pay tax - even if you decide to take the shares.

When you sell split or dividend shares, you have to figure your cost basis to arrive at taxable profit. Here's how: When you pick up the same class of shares, say, common on common, simply divide your new total number of shares into the original cost of your old shares. This gives you the adjusted cost basis per share.

When you pick up a different class of stock, it's trickier. For example, say you originally paid £10,000 for 100 common. You now get 20 preferred as a tax-free dividend. Ex-dividend, the common is worth £150, the preferred £250. Thus, your 100 common are worth £15,000, and the 20 preferred £5,000 total £20,000. To get the cost basis, allocate in the same ratio: that is, 75% of cost, or £7,500, to the 100 common, and 25%, or £2,500, to the 20 preferred.

Note: When you sell split or dividend shares, you get capital gains - up to 35% maximum.

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2012 Woes: Investors' Deductions

Speaking of taxes in relation to handling a portfolio, there's much confusion in the average stockholder's mind over the question of investment-related tax deductions. A recent local court case, for instance, points up the frequently forgotten rule that if you spend money to inspect a possible investment - as opposed to one you already own--you cannot deduct the expense. In this case, the taxpayer tried to deduct his travel expenses. All he could do, it turns out, was to add these items to his cost basis - if and when he actually paid his money to make the investment.

It's understood that you can deduct the cost of a safe deposit box - but you can go further. Fees for investment advice are... see: 2012 Woes: Investors' Deductions