TAX QUESTIONS FROM READERS
Q: In a recent column, you wrote that it is important to determine the cost basis of securities you sell, taking into consideration dividends you have already paid taxes on, so you don’t report a higher profit than you should on your tax return. Doesn’t the financial institution holding the securities have to report the amount of profit you made, if any, based on the updated basis?
A:
Good question. The answer depends on whether your securities are “covered” or “noncovered.”
If you own covered securities, your mutual fund company is required to report the cost basis to both you and the IRS after you sell them. If you own noncovered securities, your mutual fund company only has to report the cost basis to you.
What determines if the securities are covered or noncovered is the date of purchase. Financial firms were required to report cost basis to the IRS for individual stocks beginning Jan. 1, 2011, and for mutual funds, exchange-traded funds and dividend reinvestment plans (DRIPs) beginning Jan. 1, 2012. If you bought your securities before those respective dates, the securities are noncovered. If you bought them on or after those dates, they are covered.
If you do have to compute the basis of securities you sold after receiving dividends/capital gains, see IRS instructions for Form 1099-B. You should also consider using an experienced tax preparer.
Please note this warning about noncovered securities from the financial firm Wealthfront: “If you do not report your cost basis to the IRS, the IRS considers your securities to have been sold at a 100% capital gain, which can result in a higher tax liability.”
Wealthfront also cautions, “Your employer stock may also be considered a noncovered security.”
Q: I spent a great deal of time being treated for cancer, visiting locations very distant from my home. Can I deduct the car expenses associated with these trips on my tax return?
A:
You will be able to deduct the car expenses, as well as other expenses such as lodging and meals, if you itemize your deductions on your 2021 tax return. However, it will benefit you to do so only if the total amount of your itemized deductions is greater than the standard deduction you are entitled to.
You should determine all your allowable deductions, such as charitable deductions, state and local taxes, interest paid, medical and dental expenses, casualty and theft losses. The amount of deductions that exceed 7.5% of your adjusted gross income is deductible. See if that amount is greater than your standard deduction. If not, then you should take the standard deduction. The mileage allowance for car expenses for medical reasons on Schedule A for your 2021 return is $0.16/mile.
Q: I would like to e-file my 2021 tax return using Turbo-Tax software. However, the IRS has still not processed my 2020 return, so the system will not allow me to e-file. Any solution? I would rather not file on paper, because I want my refund quickly.
A:
According to some taxpayers, the IRS advocate office recommends entering zero for your prior-year adjusted gross income. Sometimes that works, and the system accepts e-filing. Try it. You have nothing to lose. If you have to paper file, send the return by certified mail to ensure that you can prove you filed on time to receive interest if the IRS does not process your return in a timely manner.