We use QW 2003 Deluxe. We have been re-investing in a security for
several years. Is the cost of re-investing the dividends added to our
cost basis although we have paid taxes on the dividends that were
re-invested. Thank-You

Yes. More correctly, reinvested dividends are added to the cost base
*because* you have paid tax on them. This way, you don't pay tax twice. A
higher cost base gives a lower capital gain when sold.

--
Regards,
Fred

Hi, dmorri.

As discussed frequently here, the typical "reinvest dividend" transaction is
actually two transactions, and should be recorded that way in Quicken.

First, record the cash dividend. Then record the purchase of additional
shares, using the cash from the dividend.

The "other side" of each of these transactions should produce the answers
you are looking for. Recording the cash dividend should increase your
Dividend Income category (while temporarily increasing your cash balance in
your broker account). Recording the purchase of new shares will increase
your cost "basis" in the security (while reversing the temporary increase in
your cash balance, bringing it back to zero).

At each year-end, you should have the proper income amount in your dividends
category. And at any time, your Portfolio should show the correct number of
shares and cost basis, including the reinvested dividends. (Click the Plus
sign in front of that security to see the list of lots, including a lot for
each reinvested dividend.)

If you've recorded your past dividend reinvestments differently, you
probably need to go back and, working chronologically, delete each old entry
and record each pair of transactions properly. For each transaction, be
sure to record cash amounts to the penny. And record fractional shares
exactly as they are recorded in your account. In most plans that I have
seen, fractional shares are recorded to 3 decimal places. There will almost
always be rounding differences; be sure those are in the transitory numbers
(per-share prices), not in the permanently-pertinent numbers (dollars and
cents, and number of shares). Otherwise, you will sooner or later have the
oft-reported problem of Quicken either saying you are trying to sell more
shares than you have, or saying that you still have shares of the security
after you know you've sold it all; in either case, it's because of rounding
errors too small to display (trying to sell 100 shares when you have only
99.999999, or having sold 100 shares when you had 100.0000003 in the
account).

If I've misinterpreted your question, please post back and correct my
understanding.

RC
--
R. C. White, CPA
(Retired - no longer licensed to practice)
San Marcos, TX
rc@corridor.net

I thought I remember hearing here that using the single ReinDiv
transaction was the way to go because it gave a better reporting of ROI,
but I may have mis-remembered.

--

Mike

Mike L is correct. It is better to use a single transaction for
reinvestment of dividends. This allows Quicken to correctly track the
amount you have invested in a security. This amount shows up as "$
Invested" or "Amount Invested" (depending on your Q version) in various
portfolio views.

Any view which displays "Amount Invested" -- or uses it internally as
part of a further calculation -- will show incorrect results if you
separate out the Div and the Bought transactions. Using two transactions
causes Q to believe that you have invested more money than you really
have.

- Bob

I must be wrong here, but I don't ever remember (again, I might not
remember!) anyone suggesting this double entry. Why do you say this vs.
simply using the REINVEST DIVIDEND transaction? What does your method
provide that the use of this (simpler, it seems to me) single entry provide?

Now saying that, I will let you know that (at least for Vanguard Brokerage),
they DO issue a DIV followed by a BUY transaction for stock dividends, so
they do it your way.

So I'm not trying to be cute here, merely trying to understand and learn
from your suggestion. Obviously Vanguard too thinks it's the way to go!
--

--
Regards -

- Andrew

Well ReInvest doesn't work quite right. For my Money Market Fund, I
paid the tax caused by the 1099-DIV for each year. No more should be
due. But Quicken is handling each reinvested dividend as an individual
lot. So when I sold a bunch of the MMF, it caused TurboTax to do a
capital gains calculation on the many, many individual lots. I don't
know why the "Average Cost" method is not taking care of everything.

Hi, Andrew - and all.

It's not that I object to using the single-transaction ReinvInc entry. In
fact, back when I owned some mutual funds, I used that ReinvInc (or ReinvDiv
or ReinSh or similar) entry regularly. But it's important to recognize that
two transactions have taken place, even though the recording has been
collapsed into one entry.

There are several ways that a stockholder can end up with more shares
without buying them with cash from other sources. One is a "stock
dividend". That is, a dividend that the company pays in shares of stock,
rather than in cash. It's much like a stock split, but instead of splitting
3-for-1, we could think of it as a 200% stock dividend. But stock dividends
are usually much smaller, like a 5% stock dividend, giving us an additional
5 shares for each 100 shares owned. In these kinds of stock dividends, no
cash changes hands, except for fractional shares.

Many stockholders hold shares in a "dividend reinvestment plan". In some
plans, the company itself may hold your stock; in others, a third party,
such as a trust company, holds the shares. In these plans, when the company
pays a dividend in cash, the trustee receives the money, then buys shares
with it. It may buy shares from the company treasury, or it may buy them in
the market. There may or may not be transaction fees for each purchase;
there may or may not be an annual or other management fee charged by the
trustee. The stockholder may be entitled to buy shares for less than
open-market value. There are many variations in all these terms of the
plans. But in each one, the stockholder must recognize and record each of
the steps of the transaction currently, paying tax on the dividend income
and recording the number of shares purchased, the dates and the cost of
each. Otherwise, some poor CPA is going to get the job of straightening it
out someday when the accumulated shares are sold. And if only SOME of the
shares are sold, the job is even tougher!

Mutual funds typically offer the dividend reinvestment option. Periodically
(quarterly or monthly, usually), the fund pays a dividend but the
shareholder receives no cash, just a statement that says he now has more
shares. Some shareholders are shocked to receive a 1099 at the end of the
year that says they have dividend income, because they never got any cash.
And when they sell all (or - shudder! - some) of those shares, they have
great difficulty in calculating their gain or loss. Many of them forget to
add in all those dividends on which they had to pay taxes. And they have
this vague feeling that they are paying taxes twice on that income -
because, often, they are.

Sometimes the mutual fund pays dividends that are not "ordinary income".
These dividends might be from long-term or mid-term or short-term capital
gains. In unusual cases, they might be non-taxable dividends. These
dividends might require special handling in recording the income side. But
the cash from any of them is "just cash"; when that cash is used to purchase
more shares, the taxpayer's basis is increased by the amount of cash paid.
And the holding period for each lot starts on that dividend date.

So long as you recognize both parts of the transaction, it's more efficient
to use ReinvInc. But if you don't understand it, you'll end up like the OP,
who asked, "Is the cost of re-investing the dividends added to our cost
basis although we have paid taxes on the dividends that were re-invested."
If the dividend and purchase transactions had been recorded separately, he
would have understood that he had received taxable income and had used the
cash generated by that income to purchase more shares - and that THAT cash
(from the dividends) is just as much a part of his basis as the cash that
came from his bank account to buy the original shares.

You say that Vanguard fund managers "DO issue a DIV followed by a BUY
transaction for stock dividends". Perhaps other managers combine them into
a single line on their reports, but the underlying facts are that those
managers also created two transactions, or at least a two-step transaction.

There is an important tax difference between (a) dividends paid in shares
and (b) cash dividends used to buy more shares. Stock dividends and splits
are not taxable; the tax code recognizes that you simply own what you owned
before, even though that wealth is represented by more shares. But cash
dividends are generally taxable to you, whether you use that cash to buy
dinner or a new car or more shares.

I tried using and understanding Quicken's reports of investment returns when
I first started using Quicken back in the early 1990s. I never could make
sense of their calculations, so I haven't tried to calculate ROI in at least
a decade. I'll let someone else explain how Quicken calculates returns on
reinvested dividends. Is my investment different if the company sends me a
check, which I deposit, after which I buy more shares, than if the company
keeps my check and buys more shares with it without letting me see the
check? Should my ROI calculation be different?

My recommendation is to use ReinvInc if you can remember that it really
represents two transactions. But if you get confused, then show the two
transactions separately to help you understand and remember what really
happened.

RC
--
R. C. White, CPA
(Retired - no longer licensed to practice)
San Marcos, TX
rc@corridor.net

For those than can't remember, their year end 1099s will correct this
deficiency very nicely. Whatever the best way to record for Quicken
purposes is probably the best way to go here for everyone using the
product; seems to me this has been settled previously.

--
Mike

FWIW, I ran a test.

(and as always R.C. White, thank you for a most illuminating reply!)

I created two securities (SEC1 and SEC2) and 'bought' 100 shares of each on
the same day using the same price per share.
I entered a dividend for both, one using the single REINV DIV function, the
other using a two-transaction DIVIDEND/BUY sequence.
I then 'sold' all shares (using Q's 'Sell All Shares' function) following
that.

I then ran a series of reports against both securities at various times
(after the dividend, and after the sale) and found absolutely no differences
between all the items that I would consider significant, including:

- Cost basis
- Value of each security after receiving the dividends
- # of shares after receiving the dividends
- Price Per Share during all the transactions
- Investment Income report yielding dividends received for both securities
- Gross Sales Proceeds
- Cost basis per share of the securities sold
- Realized Gain Received

So IMHO, Quicken handles both exactly the same in terms of what it does
regardless of whether you enter a REINVEST DIVIDENT or a DIVIDEND received
followed by a BUY as far as reporting is concerned for taxes, values,
capital gains, what-have-you.

But, as was pointed out, the method that your own security firm uses should
be the one that you might wish to emulate if manually entering...and as I
also mentioned, Vanguard indeed does it 'twice', once for the Dividend
received followed by a repurchase of those shares.

--
--
Regards -

- Andrew

Try this: delete the "Sold" transactions so that your account still
holds the securities. In a Portfolio view (not a report), customize the
view to include a column called "Amount Invested". (Or, if you have an
older version of Quicken, "$ Invested".)

Then compare the two displays for the ReinvDiv vs. the Div/Buy.

I believe you will find the "Amount Invested" will differ in these two
cases.

The single ReinvDiv transaction version will accurately display the
amount of money you have actually invested. The Div/Buy version will
incorrectly add the amount of the cash dividend to your "Amount
Invested".

- Bob

Bob - What you explain is indeed true, but ....

You are right to a point - when I added the AMOUNT INVESTED column as you
describe, it is indeed true that the DIV/BUY added that cash in, whereas the
REINVDIV did not. *But* I also added a COST BASIS column as well, and in
both cases, the amounts agree (!).

The Quicken help file does describe the AMOUNT INVESTED as:
"Amount Invested (Portfolio column)
By default, this is the actual dollar amount that you have invested in a
security to date. It includes any expenses such as commissions and fees. It
does not include reinvested amounts, such as reinvested dividends, interest,
or capital gains distributions. "

So Q's behavior is NOT incorrect. It is doing exactly what their definition
of AMOUNT INVESTED means...Quicken is calculating the amounts correctly for
both AS IT DEFINES THE TERM (it specifically excludes BY THEIR DEFINITION
"reinvested amounts".)

So perhaps the column is almost meaningless...one needs to look at COST
BASIS for tax purposes!

--
--
Regards -

- Andrew

Andrew, we're not really in disagreement. Cost Basis is clearly what you
need to look at for tax purposes. And I'm not saying that Quicken is
behaving incorrectly; it's just doing what it's told.

However, there are other things people use Quicken for besides taxes.
Keeping track of their Return On Investment (ROI) is a good example.

My contention is this:

If you use the pair of Div/Bought transactions instead of the
single ReinvDiv transaction, your "Amount Invested" will be
reported incorrectly in Portfolio views. Furthermore -- and this
is the important part -- any calculation which uses "Amount
Invested" as input will also be wrong.

I agree that in both cases, Cost Basis will be identical. This is as it
should be. However, any calculation based on Amount Invested, for
example, ROI, will be wrong if you use two transactions instead of one.

Try it. Add an ROI column to your Portfolio view. The numbers will be
different. The security with the Div/Bought pair will show a lower ROI
than the security with the single ReinvDiv transaction.

Even though you may find Amount Invested "almost meaningless" by itself,
it has a visible effect on Quicken's display of your investments'
performance.

Now, of course, any user is free to use Quicken any way s/he likes. I do
not insist that everyone has to use it the same way I do. But my
interpretation of ROI is that it should reflect the amount of money I
have invested out of my pocket, and that dividends are part of my return
on investment as opposed to being dollars I have invested.

In my view, using ReinvDiv instead of Div/Bought preserves the correct
amounts for displaying meaningful numbers such as ROI. If others
interpret Quicken's displays as I do, then they should use the single
transaction rather than the pair.

- Bob

With Quicken 2003 I could enter commissions with the ReinvDiv all on the same line.

With Quicken 2005 When I do that it creates two line entries, one is the ReinvDiv and the second is the commission as MiscInc.

Also if I edit an old entry that was done with the commission added it removes the commission from the ReinvDiv line and adds an new line entry as MiscInc with the commission.

I have had to go in and change these to the two line method of Div and Bought.

Also when I left the company I was at the sold the fractional shares that where in the my company stock plan account. These entries were in the old one line form with the commission added. When they transfered over to TurboTax the commission was missing. I had to go in and manually enter the TT data.

Trading emails with Quicken support they say that there is no bug and that is how Quicken is supposed to work.

It looks like I am stuck with going back and removing the one line entry in favor of the two line Div/Bought. That worries me because because a dozen entries have been recalculated because the prior company was bought and there was a .675-to-1 share conversion.

In the past I could unload to qif files my newer data, revert to older backup, fix the stuff, then inport. Well there is no more qif import into the the investment side of Quicken. I should never of upgraded to 2005.

Just to show what is going on now, I exported a backup version of the single line ReinvDiv and what happens on the edit or new entry that causes two line entries for the transaction.

---- This is how it used to work ---
!Type:Invst
D10/ 5' 5
NReinvDiv
YHP - CPQ ESOP
I27.730392
Q3.0014
U87.15
T87.15
O3.92
^
---- This is what it does now ----
!Type:Invst
D10/ 5' 5
NReinvDiv
YHP - CPQ ESOP
I27.730392
Q3.0014
U83.23
T83.23
^
D10/ 5' 5
NMiscIncX
YHP - CPQ ESOP
U3.92
T3.92
M3.92 paid as fee
L_DivInc|[HP (CPQ ESOP)]
^
--------

Any thoughts?

gene