Want to give your kids one of the best gifts you could ever give them? Teach them how to handle their money. And do NOT teach them the following lessons:
1) Pick a career you love, with no consideration of earning power.
Many parents tell their kids "do something you love and the money will take care of itself." That sounds nice. Everyone deserves to be happy. But can you be happy if you don't find a job? Or get into a career that doesn't give you the life you want? There's no easy answers to those questions, as many people live happy lives doing social service work, missions, or even volunteer work. And this is not to say you should discourage your kids to use their talents as actors, artists, or the like. But you should teach them some kind of balance. And if they decide to go to college, make sure to discuss the benefits of a degree, and who will be paying back the student loans, if there are any. Encourage your kids to do volunteer work, job shadowing, internships, or get a part-time job in the field they want to build their career BEFORE they make any significant investment, so they can see what the working life is really like.
2) Money comes easy, so don't worry about how you'll get it.
When it comes to teaching kids about money, giving an allowance is a debatable topic. Should you give your kids an allowance, either for doing some basic chores or just out of the goodness of your heart, so they have some money they can learn how to manage? Or not? Tough question! Here's one way to think about it - is it better to just give your kids money, or to teach them how to earn it? Just doing the same chores every week for the same amount of money doesn't really do it. Instead, think about giving them the choice - do the work and get paid, or don't do the work and don't get paid. Have them do jobs around the house - real jobs that require some work, like painting or window washing or fixing something that is broken. And teach them that to GET money they have to GIVE some sort of service and effort.
3) Keep all your money in the same place.
When you're a kid having all your money in one account is no big deal. You make a few bucks, put it in your savings account, and take it out when you need it. But as your kids get older, and as they become adults, this becomes a bad strategy. Because in 2011 if you put all your money in your bank checking or savings account, you're earning very little interest. It may be safe, but it isn't doing much for you. Or if you invest it all aggressively into a single stock or type of investment, you risk losing a LOT when the market changes. Even as a kid, if you put your money in your drawer or in a box, you risk big brother or sister taking your money, or your parents "borrowing" from your stash of cash. And none of these are things you want to have happen. So teach your kids to diversify their money early on. Need money quickly? Keep some in your bank savings account. Want to save long term? Put money in U.S. savings bonds, mutual funds, stocks...you get the idea. The more kids know about the different types of investments the better.
4) Hope is a good thing...
Hope you win the lottery. Hope you get a good job. Hope social security will be around when it's your time. Hope that mom and dad will bail you out when things get bad. And if none of these come true, don't worry, something good will happen. Obviously, this is a bad strategy when it comes to managing money, and a bad lesson to teach your kids. Instead, teach them how to set themselves up well financially long-term. Teach them how to save on a regular basis. Teach them how to start their own business or get a job when they need money. Teach them how to protect their money and not to spend all their money just because they have it right now. Then, if you want to buy a lottery ticket for fun, good luck!
5) If you want it, buy it now, worry about paying for it later.
When you're young, ask mom and dad to buy it for you. When you're older, use plastic. Same concept - buy now, pay later. Bad lesson, very bad lesson. Kids need to realize that money is a thing, not an idea. Meaning that you need it to spend it. Credit cards are a way of life for many adults, but for most people they are little more than an illusion. An illusion that you have money that you might not have. OK, if you use credit cards responsibly, or if you use them for the rewards and then pay them off every month, that's not so bad. But if you buy something on a credit card because you don't have enough cash, then what happens next? First, you get a bill for the entire balance. Then, next month there's some interest added on. Before you know it, the monthly payment keeps getting bigger and bigger...do your kids a big favor, and teach them that if you want something then you should wait until you have enough cash to buy it. Otherwise, keep saving until you do.
The best time to teach your kids about money is when they are young enough to want to start spending it. That means they understand that money is a means to getting what they want. Of course, you don't need to force them to read Forbes or the Wall Street Journal when they are 3. But it's never to early to learn the balance between spending, saving, and earning!
About the Guest Author
Kris Bickell started www.Debt-Tips.com to share the lessons he learned about getting out of debt, fixing credit problems, and saving money. Learn how to get the type of debt help you need and get your finances back on the right track.
Wednesday, July 20, 2011
Monday, July 18, 2011
Guest Post: Reverse Mortgage and Credit Card Debt
Retirement used to be a time for people to enjoy life without a mortgage or high credit card bills, a time when heavy debts were mostly a thing of the past. Increasingly, that's no longer true. Some seniors are taking on debt in retirement to fund a trip they've always wanted to take. But a growing number are in debt because they have no choice, according to debt counselors and a growing body of research.[i]
Reverse Mortgages can solve a lot of problems for people facing financial hardship due to the rising costs of medical bills on a fixed income. A qualified consumer can enter into a reverse mortgage which has two major benefits. The first, you no longer pay a monthly mortgage payment. This allows you to free up cash flow to pay your medical expenses and credit card debt more comfortably. The second is a source of income you can receive in monthly disbursements or a lump sum of cash. The extra income can help you become more comfortable during your retirement years and alleviate the stress of bills you are facing and the burden you may feel you are placing on your immediate family to care for you.
What many people don’t realize is that a certified debt specialist may be able to work with your reverse mortgage specialist to involve you in a plan to not only alleviate your financial troubles and burden but help to eliminate your credit card debt for less than the full amount owed. This can further assist you in preserving your precious resources for medical bills and cost of living increases you face on a fixed income.
The need for these two services is at an all time high as every single day more than 10,000 Baby Boomers will reach the age of 65. That is going to keep happening every single day for the next 19 years.[ii] Baby boomers are retiring under the umbrella of $790.1 billion of U.S. Consumer Debt.[iii] A large portion of which are adjustable rate credits cards while the largest population in US history is on or going on a fixed income. A recipe for disaster coupled with an underfunded social security program.
Because a reverse mortgage is not driven by credit it does not matter if you are falling past due on your credit card accounts, have late payments in the past, or cannot show enough income. You are facing a financial hardship on fixed income so a certified debt specialist may be able to put a plan in place for you in conjunction with your reverse mortgage to assist you in paying off your debts all at once or over time.
These two specialists working together can help turn your retirement years around by preserving more of the precious resources you need to last the rest of your life. You can move beyond the monthly cycle of medical bills and unhealthy stress of credit card debt. Working with a reverse mortgage specialist and Certified Debt Specialist can help.
[i] http://www.usatoday.com/money/perfi/retirement/2007-01-22-senior-debt-usat_x.htm
[ii] http://endoftheamericandream.com/archives/in-2011-the-baby-boomers-start-to-turn-65-16-statistics-about-the-coming-retirement-crisis-that-will-drop-your-jaw
[iii] http://www.federalreserve.gov/releases/g19/Current/
Reverse Mortgages can solve a lot of problems for people facing financial hardship due to the rising costs of medical bills on a fixed income. A qualified consumer can enter into a reverse mortgage which has two major benefits. The first, you no longer pay a monthly mortgage payment. This allows you to free up cash flow to pay your medical expenses and credit card debt more comfortably. The second is a source of income you can receive in monthly disbursements or a lump sum of cash. The extra income can help you become more comfortable during your retirement years and alleviate the stress of bills you are facing and the burden you may feel you are placing on your immediate family to care for you.
What many people don’t realize is that a certified debt specialist may be able to work with your reverse mortgage specialist to involve you in a plan to not only alleviate your financial troubles and burden but help to eliminate your credit card debt for less than the full amount owed. This can further assist you in preserving your precious resources for medical bills and cost of living increases you face on a fixed income.
The need for these two services is at an all time high as every single day more than 10,000 Baby Boomers will reach the age of 65. That is going to keep happening every single day for the next 19 years.[ii] Baby boomers are retiring under the umbrella of $790.1 billion of U.S. Consumer Debt.[iii] A large portion of which are adjustable rate credits cards while the largest population in US history is on or going on a fixed income. A recipe for disaster coupled with an underfunded social security program.
Because a reverse mortgage is not driven by credit it does not matter if you are falling past due on your credit card accounts, have late payments in the past, or cannot show enough income. You are facing a financial hardship on fixed income so a certified debt specialist may be able to put a plan in place for you in conjunction with your reverse mortgage to assist you in paying off your debts all at once or over time.
These two specialists working together can help turn your retirement years around by preserving more of the precious resources you need to last the rest of your life. You can move beyond the monthly cycle of medical bills and unhealthy stress of credit card debt. Working with a reverse mortgage specialist and Certified Debt Specialist can help.
[i] http://www.usatoday.com/money/perfi/retirement/2007-01-22-senior-debt-usat_x.htm
[ii] http://endoftheamericandream.com/archives/in-2011-the-baby-boomers-start-to-turn-65-16-statistics-about-the-coming-retirement-crisis-that-will-drop-your-jaw
[iii] http://www.federalreserve.gov/releases/g19/Current/
Friday, July 1, 2011
The 2011 San Francisco Money Show
Each year, The Money Show is held at the San Francisco Marriott Marquis Hotel in the city's downtown. This a literal carnival of investing. Every year The Money Show brings in a large collection of speakers, most of whom have some sort of investing product or service to sell, who pitch their advice in 30-45 minute speaker sessions. Over the years, though, I have seen some notable speakers. The ones that I remember most vividly are Bambi Francisco (formerly of Marketwatch), James Jubak (of MSN Money), and William J. O'Neil (founder of Investor's Business Daily).
The seminar sessions are broken out into many of the hotel's subterranean meeting rooms. The SF Marriott Marquis is a huge hotel with dozens of meeting rooms that can be re-sized for practically any group of speakers. It is well suited for conventions such as The Money Show. At any given time, several speakers will be talking about different topics. Many of the speakers do have something to say about important topics. I think that the speakers representing larger firms are often trying to share their knowledge with people. But having said that, there are a lot of speakers who are just giving a sales pitch and fishing for new business.
The exhibitors at The Money Show range from large mutual fund companies and brokerage houses to individual newsletter writers and penny stock promoters. All and all, one has to pick and choose which booths are worth stopping by for more than quick glance. If you linger too long at any one booth, you might find yourself in the middle of an unwanted sales pitch. There is no shortage of reading materials for the numerous offerings that the exhibitors have. This brings me to another reason I like going to The Money Show: freebies.
I can usually cart off a couple of bags worth of sample newsletters, magazines, pens, notepads, key chains, refrigerator magnets, mouse pads, and candies. In a few cases, I have been able to come away with a USB flash drive or two. One time, I was lucky enough to get a copy of William J. O'Neil's book, 24 Essential Lessons for Investment Success. And occasionally, exhibitors will invite you for lunch or cocktails, but that usually involves listening to a sales presentation for the duration.
Oh, and did I mention that admission to The Money Show is free as well? I generally make a trek into the city for The Money Show event. Unfortunately, I am not going the year because the organizers have decided to hold the 2011 San Francisco Money Show on weekdays (Wednesday through Friday) from August 10-12, 2011. I still have a regular job to hold down, so I will have to miss it. Maybe next year.
PFS
The seminar sessions are broken out into many of the hotel's subterranean meeting rooms. The SF Marriott Marquis is a huge hotel with dozens of meeting rooms that can be re-sized for practically any group of speakers. It is well suited for conventions such as The Money Show. At any given time, several speakers will be talking about different topics. Many of the speakers do have something to say about important topics. I think that the speakers representing larger firms are often trying to share their knowledge with people. But having said that, there are a lot of speakers who are just giving a sales pitch and fishing for new business.
The exhibitors at The Money Show range from large mutual fund companies and brokerage houses to individual newsletter writers and penny stock promoters. All and all, one has to pick and choose which booths are worth stopping by for more than quick glance. If you linger too long at any one booth, you might find yourself in the middle of an unwanted sales pitch. There is no shortage of reading materials for the numerous offerings that the exhibitors have. This brings me to another reason I like going to The Money Show: freebies.
I can usually cart off a couple of bags worth of sample newsletters, magazines, pens, notepads, key chains, refrigerator magnets, mouse pads, and candies. In a few cases, I have been able to come away with a USB flash drive or two. One time, I was lucky enough to get a copy of William J. O'Neil's book, 24 Essential Lessons for Investment Success. And occasionally, exhibitors will invite you for lunch or cocktails, but that usually involves listening to a sales presentation for the duration.
Oh, and did I mention that admission to The Money Show is free as well? I generally make a trek into the city for The Money Show event. Unfortunately, I am not going the year because the organizers have decided to hold the 2011 San Francisco Money Show on weekdays (Wednesday through Friday) from August 10-12, 2011. I still have a regular job to hold down, so I will have to miss it. Maybe next year.
PFS
Monday, June 20, 2011
PerkStreet Financial
I want to take a couple minutes here to talk about a unique checking account offered by PerkStreet Financial: the PerkStreet Financial Deposit Account. Coupled with a PerkStreet debit card, they offer one of the most rewarding cash back programs in America by offering up to 2% cash back on all non-PIN debit card purchases.
You typically earn at least 1% cash back on non-PIN purchases with a PerkStreet card debit. But whenever your account balance is over $5,000 for a day, they double that to 2% cash back on all non-PIN purchases. Additionally for the first 90-days after opening a new account, they are offering 2% cash back on every non-PIN purchase regardless of your account balance.
The average family earns $600 cash back every year with PerkStreet – substantial rewards that can be redeemed for gift cards at places like Starbucks, Amazon, Target or Best Buy. But PerkStreet Financial isn't just about offering a checking account with cash back, it can be a great tool to improve your financial life. Use your cash back to pay down debt, save for the future or even reward yourself. To start earning cash back with PerkStreet, sign up today!
You typically earn at least 1% cash back on non-PIN purchases with a PerkStreet card debit. But whenever your account balance is over $5,000 for a day, they double that to 2% cash back on all non-PIN purchases. Additionally for the first 90-days after opening a new account, they are offering 2% cash back on every non-PIN purchase regardless of your account balance.
The average family earns $600 cash back every year with PerkStreet – substantial rewards that can be redeemed for gift cards at places like Starbucks, Amazon, Target or Best Buy. But PerkStreet Financial isn't just about offering a checking account with cash back, it can be a great tool to improve your financial life. Use your cash back to pay down debt, save for the future or even reward yourself. To start earning cash back with PerkStreet, sign up today!
Saturday, June 18, 2011
Pandora: A Broken IPO
Shares of Internet music service Pandora Media (NYSE: P) began trading Wednesday, June 15 after the stock's initial public offering (IPO) at $16 per share. Pandora's shares rose on their first day of trading, and peaked as high as $26 on Wednesday. The hype surrounding a new IPO is usually the main driving force behind a rapid run up such as this one.
However in the first day of trading day after its IPO, Pandora closed significantly lower than after the initial pop at $17.42. Yesterday, June 17th, Pandora dropped to close at $13.40 after dropping below its initial $16 offering price on Thursday. Traders call an IPO that has dropped below its initial offering price a "broken IPO". So, Pandora is now considered a broken IPO.
The recent LinkedIn Corporation (NYSE: LNKD) IPO has brought a new focus on IPOs. LinkedIn's IPO price was $45, and started trading on 5/19/2011. LNKD skyrocketed upward going as high as $122 at one point. However, it closed this past Friday at $65.53. While this is still greater than it's IPO price, LinkedIn's stock price is still much less than its peak.
On this blog, I have written about buying IPOs before. While getting into an IPO can be a way to make money quickly, I have warned that not all IPOs go up in price. A point that I will again underscore is that buying an IPO can involve significant risk! This is certainly appears to be the case with Pandora.
Disclosure: I do not own any interest in Pandora Media or LinkedIn.
PFS
However in the first day of trading day after its IPO, Pandora closed significantly lower than after the initial pop at $17.42. Yesterday, June 17th, Pandora dropped to close at $13.40 after dropping below its initial $16 offering price on Thursday. Traders call an IPO that has dropped below its initial offering price a "broken IPO". So, Pandora is now considered a broken IPO.
The recent LinkedIn Corporation (NYSE: LNKD) IPO has brought a new focus on IPOs. LinkedIn's IPO price was $45, and started trading on 5/19/2011. LNKD skyrocketed upward going as high as $122 at one point. However, it closed this past Friday at $65.53. While this is still greater than it's IPO price, LinkedIn's stock price is still much less than its peak.
On this blog, I have written about buying IPOs before. While getting into an IPO can be a way to make money quickly, I have warned that not all IPOs go up in price. A point that I will again underscore is that buying an IPO can involve significant risk! This is certainly appears to be the case with Pandora.
Disclosure: I do not own any interest in Pandora Media or LinkedIn.
PFS
Wednesday, June 1, 2011
Free Walmart Gift Card?
Has anybody heard of a company called Buyers Advantage? They recently sent me an offer to receive a $40 Walmart gift card, and the offer was made through a bank that I used to do business with. Apparently, if I sign up for Buyers Advantage, they will send me a free gift card, and I can cancel within 30 days. Otherwise, my bank account will automatically be debited a $14.99 monthly fee for the service.
But, they left the biggest question unanswered: What exactly is Buyers Advantage? Is it a type of purchase insurance, or a discount program? This point was not clearly spelled out in the offer materials. But in the very fine print on one of the inserts, separate from the reply form that you have to sign, is a brief mention that the service is a price protection guarantee program. It says that they'll refund "the difference between the original purchase price and sale price when items go on sale within 90 days of purchase in the same retail store". The program is offered through a company called Trilegiant Corporation (TLG).
So, the funny part of this marketing campaign is that they are not even trying to sell you the product, but instead are promoting the free Wal-Mart gift card offer. Also in the fine print is that they don't actually send you the Walmart gift card when you enroll. Instead you have to return another form that in included in the membership materials they send, and allow four to five (more) weeks for delivery.
After I saw how many hoops there are to jump through to get a $40 gift card, I decided not to enroll in this program. But, I'm curious if any of my readers have signed up for Buyers Advantage, and what experiences they had. I am wondering if there are complaints about this company, or if this is a scam? Did you get charged for something you didn't really want?
PFS
But, they left the biggest question unanswered: What exactly is Buyers Advantage? Is it a type of purchase insurance, or a discount program? This point was not clearly spelled out in the offer materials. But in the very fine print on one of the inserts, separate from the reply form that you have to sign, is a brief mention that the service is a price protection guarantee program. It says that they'll refund "the difference between the original purchase price and sale price when items go on sale within 90 days of purchase in the same retail store". The program is offered through a company called Trilegiant Corporation (TLG).
So, the funny part of this marketing campaign is that they are not even trying to sell you the product, but instead are promoting the free Wal-Mart gift card offer. Also in the fine print is that they don't actually send you the Walmart gift card when you enroll. Instead you have to return another form that in included in the membership materials they send, and allow four to five (more) weeks for delivery.
After I saw how many hoops there are to jump through to get a $40 gift card, I decided not to enroll in this program. But, I'm curious if any of my readers have signed up for Buyers Advantage, and what experiences they had. I am wondering if there are complaints about this company, or if this is a scam? Did you get charged for something you didn't really want?
PFS
Wednesday, May 25, 2011
Motorola Spinoff
At the beginning of 2011, Motorola Incorporated was split into two companies: Motorola Solutions and Motorola Mobility. I have been a long time holder of Motorola stock. When I checked my stock portfolio on TD Ameritrade, I noticed two new stock symbols: Motorola Solutions, Inc. is NYSE: MSI, and Motorola Mobility, Inc. is NYSE: MMI. The old stock symbol MOT has been retired.
This spin off was a little bit more complicated than the usual spinoff. First, holders of the old Motorola Stock (MOT) were given 1 share of Motorola Mobility (MMI) for every 8 shares of MOT that they owned. Then, the remaining MOT shares underwent a 1-for-7 reverse split and the remaining entity was renamed Motorola Solutions (MSI). If this sound confusing, I will work through an example of what happened.
I usually don't get too excited about spin offs because they require me to re-calculate the tax basis of the stock shares that I own. In this case, I need to find the cost basis for both the MSI and MMI shares that I now own. Also when I finally sell the stock, I will be charged two sets of commissions -- one for Motorola Solutions (MSI) and another one for Motorola Mobility (MMI). The purpose of this post is to work through an example and help readers understand the tax basis calculations.
To start the process, one needs to know the opening prices of MSI and MMI on January 4, 2011 immediately following the spinoff. For MSI, the stock opened at $37.30 on January 4. For MMI, the stock opened at $31.17 on January 4. To further complicate matters, we need to adjust the stock prices to account for the split ratio from the original Motorola (MOT) stock. To do this, we need to divide the prices of MSI and MMI by 7 and 8 (the split ratio), respectively. For MSI this is ($37.30/7) = $5.33, and for MMI this is ($31.17/8) = $3.90.
Knowing this information, we can calculate the percentage of the original Motorola (MOT) cost basis to allocate to each of the two new stocks. For MSI, this is $5.33/($3.90+$5.33) = 57.75%. And for MMI, this is $3.90/($3.90+$5.33) = 42.25%. Note that the denominator in each case ($3.90 + $5.33) = $9.23 represents the value of a single share of the original Motorola (MOT) at the opening on 1/4/2011. MOT closed on 1/3/2011 at $9.11, so in essence Motorola stock gained 12 cents in value at the time of the spinoff.
Okay, so we've made it this far. Now, let's work through an example. Suppose that you owned 1000 shares of MOT that you bought at $8 per share ($8000 total cost basis). Following the distribution, you would end up with (1000/7) = 142.857 shares of MSI, and (1000/8) = 125 shares of MMI. Using the ratios that were calculated above, the allocated tax basis for MSI is (57.75% * $8000) = $4620. And the allocated tax basis for MMI is (42.25% * $8000) = $3380.
I've seen that people often do web searches using terms like "Motorola spinoff cost basis." Unfortunately, you won't be able to find your cost basis in this way as everybody's situation is different. Your own cost basis has to be calculated for your personal situation.
I will note that most cases, you will end up with fractional shares of either MSI or MMI after the spinoff. (The only exception is if the number of original MOT shares you owned was a multiple of 56 shares.) In this case, there is also a small portion of the cost basis that may be paid out as "cash in lieu" (CIL) of fractional shares. For cash-in-lieu, you would subtract that amount from the portion that is allocated to each stock.
Motorola investor relations has a webpage with additional information about the spinoff. It is located here: http://investors.motorolasolutions.com/separation.cfm
In the case of my brokerages, both TD Ameritrade and Morgan Stanley Smith Barney calculated the cost basis for me. In both cases, there was a slight difference between what my the basis would be if I calculated using the method above. My suggestion is that if your broker already calculated the the basis for you, you should go with that number unless you believe that they made a mistake in the process.
One last note is the question of whether the cash-in-lieu (CIL) distribution is taxable. In general, CIL received for fractional shares of stock is a taxable event. However last year, after Verizon spun off Frontier, I received 6 cents in CIL that was not reported. However, I got this message from my broker: "A cash-in-lieu payment is reported on Form 1099-B if the payment exceeds $20. If your payment was less than $20, it is not reportable."
So, is this explanation as clear as mud?
Update 1: On August 15, 2011, Google Inc. announced that it plans to acquire Motorola Mobility (MMI) for $40 per share in cash. They expect this transaction to close by the end of 2011 or early 2012. The acquisition will, of course, require regulatory approvals in the US, the European Union and other jurisdictions, as well as the approval of Motorola Mobility shareholders. But if everything goes through, this will provide a closing transaction for MMI shareholders. It will also require the selling stockholders to calculate their tax basis as this type of cash acquisition generally triggers a taxable event.
Update 2: For information about reporting the Motorola spin off on your taxes, see this post: Do I Need to Report the Motorola Spinoff on My Taxes?
Disclaimer: The example provided here is for illustrative purposes only. I am not providing tax advice, and I encourages readers to consult with a tax adviser if they have specific questions about cost basis calculation.
PFS
This spin off was a little bit more complicated than the usual spinoff. First, holders of the old Motorola Stock (MOT) were given 1 share of Motorola Mobility (MMI) for every 8 shares of MOT that they owned. Then, the remaining MOT shares underwent a 1-for-7 reverse split and the remaining entity was renamed Motorola Solutions (MSI). If this sound confusing, I will work through an example of what happened.
I usually don't get too excited about spin offs because they require me to re-calculate the tax basis of the stock shares that I own. In this case, I need to find the cost basis for both the MSI and MMI shares that I now own. Also when I finally sell the stock, I will be charged two sets of commissions -- one for Motorola Solutions (MSI) and another one for Motorola Mobility (MMI). The purpose of this post is to work through an example and help readers understand the tax basis calculations.
To start the process, one needs to know the opening prices of MSI and MMI on January 4, 2011 immediately following the spinoff. For MSI, the stock opened at $37.30 on January 4. For MMI, the stock opened at $31.17 on January 4. To further complicate matters, we need to adjust the stock prices to account for the split ratio from the original Motorola (MOT) stock. To do this, we need to divide the prices of MSI and MMI by 7 and 8 (the split ratio), respectively. For MSI this is ($37.30/7) = $5.33, and for MMI this is ($31.17/8) = $3.90.
Knowing this information, we can calculate the percentage of the original Motorola (MOT) cost basis to allocate to each of the two new stocks. For MSI, this is $5.33/($3.90+$5.33) = 57.75%. And for MMI, this is $3.90/($3.90+$5.33) = 42.25%. Note that the denominator in each case ($3.90 + $5.33) = $9.23 represents the value of a single share of the original Motorola (MOT) at the opening on 1/4/2011. MOT closed on 1/3/2011 at $9.11, so in essence Motorola stock gained 12 cents in value at the time of the spinoff.
Okay, so we've made it this far. Now, let's work through an example. Suppose that you owned 1000 shares of MOT that you bought at $8 per share ($8000 total cost basis). Following the distribution, you would end up with (1000/7) = 142.857 shares of MSI, and (1000/8) = 125 shares of MMI. Using the ratios that were calculated above, the allocated tax basis for MSI is (57.75% * $8000) = $4620. And the allocated tax basis for MMI is (42.25% * $8000) = $3380.
I've seen that people often do web searches using terms like "Motorola spinoff cost basis." Unfortunately, you won't be able to find your cost basis in this way as everybody's situation is different. Your own cost basis has to be calculated for your personal situation.
I will note that most cases, you will end up with fractional shares of either MSI or MMI after the spinoff. (The only exception is if the number of original MOT shares you owned was a multiple of 56 shares.) In this case, there is also a small portion of the cost basis that may be paid out as "cash in lieu" (CIL) of fractional shares. For cash-in-lieu, you would subtract that amount from the portion that is allocated to each stock.
Motorola investor relations has a webpage with additional information about the spinoff. It is located here: http://investors.motorolasolutions.com/separation.cfm
In the case of my brokerages, both TD Ameritrade and Morgan Stanley Smith Barney calculated the cost basis for me. In both cases, there was a slight difference between what my the basis would be if I calculated using the method above. My suggestion is that if your broker already calculated the the basis for you, you should go with that number unless you believe that they made a mistake in the process.
One last note is the question of whether the cash-in-lieu (CIL) distribution is taxable. In general, CIL received for fractional shares of stock is a taxable event. However last year, after Verizon spun off Frontier, I received 6 cents in CIL that was not reported. However, I got this message from my broker: "A cash-in-lieu payment is reported on Form 1099-B if the payment exceeds $20. If your payment was less than $20, it is not reportable."
So, is this explanation as clear as mud?
Update 1: On August 15, 2011, Google Inc. announced that it plans to acquire Motorola Mobility (MMI) for $40 per share in cash. They expect this transaction to close by the end of 2011 or early 2012. The acquisition will, of course, require regulatory approvals in the US, the European Union and other jurisdictions, as well as the approval of Motorola Mobility shareholders. But if everything goes through, this will provide a closing transaction for MMI shareholders. It will also require the selling stockholders to calculate their tax basis as this type of cash acquisition generally triggers a taxable event.
Update 2: For information about reporting the Motorola spin off on your taxes, see this post: Do I Need to Report the Motorola Spinoff on My Taxes?
Disclaimer: The example provided here is for illustrative purposes only. I am not providing tax advice, and I encourages readers to consult with a tax adviser if they have specific questions about cost basis calculation.
PFS
Subscribe to:
Posts (Atom)
