This week we will talk about some ways to cut down your taxes by making sure your basis on your investments is correct. Did you buy property for your business last year? Did you sell stocks or mutual funds? Did you receive an inheritance? In all of these events, your total investment or inheritance in assets is known as basis that can affect your tax return. For instance, if you purchased a copy machine for your business and began to use it in the year, the amount of depreciation you can deduct depends on your basis. In this case, basis can affect future year returns since depreciation may be spread over the life of the equipment. Sell the copier before it’s totally depreciated and the remaining basis affects the gain or loss you report on your return. As you can tell, basis is important. So how do you establish it? The answer depends on the way you acquire the property. For business assets, such as a copy machine, basis is usually what you pay for it, including sales tax and freight. For stocks, the purchase is your cost plus commissions. Mutual fund purchases can be more difficult to calculate because you report dividends and capital gains, but oftentimes dividends and capital gains are simply put back into the mutual fund. Reinvestments in mutual funds will increase your basis. Property you inherit is typically valued at Fair Market Value (FMV), at the date of death. This amount which is reported to you by the personal representative or trustee is the basis you will use when you sell or dispose of the property (like Mom’s house or Dad’s car or furniture). Here are some points to remember:
Basis is defined in numerous ways (Either what you paid for assets or what others paid for it, if gifted to you. But basis is stepped up to Fair Market Value, FMV, if inherited)
Basis is important to determine gain or loss when you sell or dispose of something
The higher your basis, the lower your capital gain (thus the lower your taxes)
Mutual fund basis increases as capital gains and dividends are reported if they are reinvested (add each year to your mutual fund cost) Now, brokerage houses keep this information for you, even if you transfer or move your investments to another brokerage firm.
Reduce your capital gains by keeping track of your basis (keep an annual log of what you pay for something plus what you reinvest. If you are gifted or inherit assets, then get a basis value from either the estate or the one who gifted it to you)
Don’t delay! Schedule an appointment with our office today to find out how to maximize tax saving opportunities. We can be reached at (602) 264-9331.