The IRS is always going to want its cut and if you don’t keep good records of your investments, you may end up paying Uncle Sam way more than you have to. Find out what your basis is and how it can impact your investments and retirement.

• Wayne got a call from a client who was panicking due to a particularly scary letter from the IRS. They recalculated their taxes owed and determined that the client owed an additional $9,000.
• Wayne got a call from a client who was panicking due to a particularly scary letter from the IRS. They recalculated their taxes owed and determined that the client owed an additional $9,000.
• When you sell investments, you get a copy of your 1099 and so does the IRS. The trouble is all the IRS sees on their copy is what you sold the investment for. That’s only half the story, and this is where the concept of basis comes in.
• Your basis determines how much tax you owe when you sell something. You only owe tax on the difference between what you sold it for and how much you paid for it.
• The general rule is: if you pay tax on the money you used to buy an investment, you don’t have to pay tax on those dollars ever again.
• The converse to that rule is that if you didn’t pay taxes on investment dollars, then someday you will have to pay taxes on those dollars.
• There is always a triggering event, although the IRS doesn’t refer to it that way. For example, if you have a retirement account, taking money out of the account is a triggering event.
• For non-retirement accounts, the triggering event is when you sell the investments within the account.
• With common accounts like IRA’s and 401(k)’s you don’t typically pay any income taxes on the money you invest. The triggering event is when you take money out of that account, and at that point it becomes taxable income. There are also complications when you take the money out early.
• Let’s say you have an investment account. You get paid, having paid taxes on your income already, and then you put after tax income into your investment account. You buy a stock for $100 and it grows to $1000.
• In that situation, the $100 is your basis. When you sell that investment, the IRS only sees the $1000 and assumes that’s all income unless you tell them otherwise. You have to keep records and let the IRS know at that point.
• Real estate is treated the same way, but gifts and inheritance are not. If you are gifted a $100 stock from Grandma that is now worth a $1000, her $100 basis carries over to you. With inheritance, if the investment is not in a retirement account your basis resets to the value of the investment on the day that she died.
• Another exception is a Roth IRA since you don’t get a tax deduction when the money goes in but when you take it out, you don’t pay any taxes on whatever growth you had.
• Basis is money you paid taxes on, so outside of a retirement account, your basis is whatever you paid for the initial investment. It also includes any additional deposits you make to that investment that are after tax.
• The best way to protect yourself is to keep good records. Consider the tax implications of any investment transaction because it can affect your social security or your eligibility for deductions.

 

To explore working with Wayne Firebaugh to fireproof your money, please call 855-WAYNE KNOWS or check out at fireproofyourmoney.com.