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Figuring gains for losses on stock splits

By: Julian Block

The Tax Adviser

Q. A company in which I own stock declared a 50-percent stock split, an action increasing the number of my shares from 200 to 300. I plan to keep 150 of the post-split shares and sell the other 150. The original investment cost me $3,000. How do I figure my cost for the shares I sell?
A. The split makes it necessary to recalculate your cost basis. First, divide the amount invested ($3,000) by the total number of shares (300) to determine the adjusted cost per share ($10). Then multiply the adjusted cost by the number of shares sold ($10 times 150 equals $1,500). To determine your gain or loss, offset the $1,500 against the sales price.

Q. I placed money in a mutual fund that is part of a family of funds. There is no charge if I shift from one fund to another. What if I choose to switch and show a capital gain? Is the tax deferred to the time I sell the new shares?
A. No. The gain is taxable as of the date you switched. It makes no difference that the funds are under one management. The law treats any switch as a separate sale and purchase, a ruling that means you have to report your gain or loss each time you switch. However, you are excused from this reporting requirement when the fund holds money stashed in a traditional IRA or some other kind of tax-deferred retirement plan; nothing need be reported in the event a switch occurs.

Q. My parents gave me 100 shares of stock 12 years ago, and six years ago I bought another 50 shares. This year I sold them because we bought a house. How do I figure how much gain I have to pay tax on? I do not have exact figures, but I can look them up.
A. The usual rules apply for the shares you bought. Gain or loss is the difference between your basis, that is, what you paid for them, and your net selling price.

Different rules determine your basis for the shares that your parents gave you. If you sold at a gain, your basis is the sum of (1) what the stock cost your parents and (2) any gift tax attributable to the excess of the market value of the stock at the time your parents gave it to you over what they paid for it. In most cases, your basis is what they paid. If it turns out that you have a loss, your basis is the lower of either (1) the market value of the stock at the time of the gift or (2) what they paid.

Q. For my second marriage, my first husband surprised me with an additional alimony payment, a gesture not required by our divorce decree. According to his attorney, my ex-mate gets a deduction and I have to report the payment. My new husband disagrees. Who is right?
A. The attorney gave bum advice. As your former husband is under no legal obligation to pay that money to you, it is a gift; nothing is deductible by him or reportable by you.