Q I own stock in a company that offered me a choice of taking a dividend in cash or in additional shares of stock. It’s my understanding that since I took the stock, instead of cash, I will not have any taxable income. Is this assumption correct?
A No. Since you had a choice as to whether you would receive cash or the stock dividend, you must pay tax on shares that you received, based on their fair market value at the time of distribution. However, on a later sale or disposition of these shares, your tax cost is also equal to the fair market value of the shares at the date of distribution.
If you had not been offered the choice of cash or shares of stock, the stock dividend would have been received tax-free. In that case, however, you tax basis for future sale would not have changed as a result of receiving the stock dividend.
Q Two years ago I bought shares in a mutual fund for $10,000, and elected to have all dividends and other income reinvested. Over the past two years, I have paid taxes on approximately $2,000 of dividend and capital gain income that was invested. As a result of the stock market’s volatility, I elected to sell my shares for approximately $11,000. Will the gain I made be eligible for long-term capital gain treatment?
A You have no gain. In fact, you should report a loss on the sale of the mutual fund shares for this year. One of the most common mistakes that mutual fund investors make is failing to increase their cost basis by the amount of dividends and capital gains reported while owning the shares, but which are invested. In your situation, it appears on the surface that you have a gain of $1,000. However, you actually have a loss of an identical amount, since your cost basis was increased from $10,000 to $12,000 as a result of the capital gain income and dividends previously reported as taxable income on your return.
Q I heard a speaker recently who said that through purchasing certain types of business cars, I could get larger write-offs and avoid some other taxes. How does this work exactly?
A While there are significant restrictions on tax deductions for “luxury automobiles,” these restrictions do not apply to vehicles with gross vehicular weights of 6,000 pounds or more. Business vehicles that fall within these exceptions receive three tax benefits: 1) the purchase of the vehicles is not subject to the 5% luxury excise tax applied to the cost of the vehicle in excess of $36,000; 2) the purchase of the automobile is eligible for the $20,000 expensing election under Section 179 of the tax law; and 3) the remaining cost of the business vehicle (after the application of the expensing election) can be written off over a six-year period.