Dividend Expert's Year-End Tax Tips

Yes, it is getting to be that time of year — and here are some year-end tax tips to consider for 2020.

Remember to include reinvested dividends in your cost basis. When you sell an investment in a taxable account, you incur a potential tax liability if you sell the investment at a profit.

You determine the profit or loss based on your “cost basis,” which is the amount of money you invested in the investment. Determining the cost basis on an investment can be challenging if you keep shoddy records. However, you will need to compute a cost basis for tax purposes on any security that is sold in a taxable account.

The easiest way to compute the cost basis (and this method works best if you sell the entire investment) is by adding up your total investments — 1) the amount of your initial investment; 2) the amount of any additional investments you made while owning the stock; and 3) the total amount of dividends that you reinvested.

For example, let’s say you bought a stock that cost you $5,000. And over five years, you invested an additional $5,000 in the stock. And let’s say you reinvested dividends each year that totaled $400 over the five years you owned the stock.

Your cost basis would be $5,000 plus $5,000 plus $400, or $10,400. You would deduct this amount from the sale proceeds to determine your gain or loss for tax purposes.

Forgetting to include reinvested dividends in the cost basis is a common mistake made by investors, especially those in dividend reinvestment plans.

Remember — by excluding reinvested dividends, you reduce your cost basis, thereby inflating your profits and taxes on those profits. If you maintain good records, the amount of reinvested dividends is available on the DRIP statements you receive from the transfer agent.

You are not required to take required minimum distributions from IRAs in 2020. Of course, if you need the money, you can take those distributions from your IRA. However, you are not required to take them this year if you previously were required to take RMDs.

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