Jane was over 59 ½ and had retired a couple of years before and not taken any distributions from her 401k. On November 1, 2022, she took a total distribution from the 401k and elected to take 3000 shares of XYZ stock to a taxable brokerage account under NUA rules while rolling the remaining balance to her traditional IRA.
The plan administrator provided a statement of the 3000 shares distributed with a share price of $100 at the time of distribution, a market value of $300,000, a cost basis of $75,000, cost price of $25/share and unrealized appreciation of $225,000 and the rest of the account was rolled over to her IRA.
Jane’s account statement from the day before distribution has additional cost basis information about the 3000 shares with 1500 shares with cost basis of $30,000 ($20/share) and 1500 shares with cost basis of $45,000 ($30/share) (actual details included a wider range of values by dollar range but this illustrates the concept).
On December 15, 2022, Jane wants to donate 200 shares of XYZ stock now worth $110/share to her Donor Advised Fund. Because the $10 gain after distribution is short term, she is only able to deduct her cost basis (in this case the post NUA cost basis which was LT?) of $100/share. On the same day she sells 200 shares for living expenses.
- Can Jane use the lower cost basis (higher NUA) portion of these shares for the donation and use the higher cost basis shares (lower NUA) to sell with a smaller capital gain on the NUA? If one simply had a brokerage account with these long-term shares, one would manage tax lots this way to minimize recognized capital gains so this seems reasonable, but I cannot find clear answer about specific shares vs average cost basis regarding NUA.
- When reporting the charitable contribution on form 8283, the extra $10 of appreciation would be part of the Fair Market Value (FMV = (hi+lo)/2 on the date of donation) had it been held outside the 401k for more than a year but since it was short term gain, her deduction would be limited to the cost basis of $100. In tax software, does this shift in deduction from FMV to cost basis simply “happen” with 8283 because the donation date (12/15/22) and acquisition date (11/1/22) are less than 1 year? Is any further explanation required by the IRS?
- Jane also sold 200 shares on December 15,22. Does Jane simply keep a separate spreadsheet of dispositions (low cost for donations and high cost for sales) until all shares have been disposed of vs handling all at average cost? (this assumes a positive result to question 1)
- When listing the individual sales, the brokerage account 1099B would presumably not report basis to the IRS since Jane would have to provide that information to the brokerage and the brokerage would not be able to independently verify that information. Is that correct?
- I also want to verify that the short-term sale would require creating two entries – one for the ST gain/loss and a second one for the NUA with a note on both that says the basis was not correct? (if the short term is a loss, then it actually cannot be claimed but instead simply reduces the NUA which would be reported as long-term)
