This isn’t a tax deduction, but it is an important subtraction that can save you a bundle. And former IRS commissioner Fred Goldberg told Kiplinger’s that missing this break is what costs millions of taxpayers a lot in overpaid taxes.
If, like most investors, you have mutual fund dividends automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends—once when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale. Don’t make that costly mistake.
If you’re not sure what your basis is, ask the fund for help. Funds often report to investors the tax basis of shares redeemed during the year. In fact, for the sale of shares purchased in 2012 and later years, funds must report the basis to investors and to the IRS.
Read more at http://www.kiplinger.com/slideshow/taxes/T054-S001-the-most-overlooked-tax-deductions-slide-show/index.html#VEZBsOUlI37hCSHd.99