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Q. I own both covered and noncovered shares. What year-end tax reporting will I receive?
A. Shareholders who own covered (shares purchased after January 1, 2012) and noncovered shares (generally shares purchased prior to January 1, 2012) of a fund will be considered as owning a bifurcated (split) account. This means that for tax reporting purposes only, the shareholder’s investment in the fund will be split and grouped into covered and noncovered shares. Each group of shares will be treated as a separate account (for tax reporting purposes only), and the tax reporting will differ as described below:
Q. Will my reporting to the IRS change?
A. No. You have always been, and continue to be, responsible for reporting cost basis to the IRS. What’s changed is that we are now required to report cost basis to you and the IRS on covered shares. The reporting on noncovered shares has not changed. See the diagram below:
Q. I own an account that has both covered and noncovered shares, and I intend to continue using the average-cost method. What will change?
A. As described above, there will be no change in how we report the cost basis on noncovered shares. However, the cost basis on covered shares will now be reported on Form 1099-B instead of the average- cost-basis statement. In addition, because the fund will be considered bifurcated (contains both covered and noncovered shares), we will compute two, average-cost-basis per share amounts—one for covered shares and the other for noncovered shares.
Q. Which shares are sold first in a bifurcated account?
A. Noncovered shares will always be redeemed before covered shares. The cost-basis method on your account will only be used on covered shares after all noncovered shares are completely sold.
Q. Can I use a method other than average cost on noncovered shares?
A. Yes. However, we can only provide cost-basis information on noncovered shares using the average-cost method. You are not required to use the information provided on the average-cost-basis statement and may compute your cost basis using any other IRS-approved method. Please note that if you intend to compute the cost basis manually, you should maintain detailed records of all transactions in addition to your calculation. Also, if you redeemed/exchanged out of a fund in the past using the average-cost-basis method, you may be restricted by the IRS in changing to another method.
Q. Can I specifically identify shares to sell?
A. Yes. Regardless of the cost-basis method on your account, you can specifically identify shares you would like to sell by calling the Lord Abbett Service Center. It is important to note that if you specifically identify shares to sell, you will no longer be provided with an average-cost-basis statement on noncovered shares for this fund. Therefore, before you sell specific shares, please ensure that you have all the information necessary to compute the cost basis on noncovered shares manually, as we can no longer provide you with an average-cost-basis statement.
Q. When should I specifically identify shares to sell?
A. In addition to the fund’s default method of average cost, you may choose FIFO (first in, first out), LIFO (last in, first out), LOFO (last out, first out), HIFO (highest in, first out), and LGUT (loss/gain utilization) as your method of selecting shares. We believe that most tax lot–selection strategies can be accomplished by using one of these methods. In the rare case your lot-selection strategy cannot be accomplished by using one of these methods, you may specifically identify shares to sell by calling the Lord Abbett Service Center. Please note that if you specifically identify shares to redeem, we will no longer be able to provide you with an average-cost-basis statement on noncovered shares.
Q. Can I change the method I used on a transaction at a later point in time?
A. No. In accordance with IRS regulations, once a transaction has settled, you cannot change the method used for that transaction. Because of this, it is important to consider the cost-basis method used at the time of the transaction.
Q. What method will be used on a new account that I open?
A. Generally, when you transfer to a new fund, your personal information, including the cost-basis method, is copied form the “old fund” to the “new fund.” To the extent the old fund does not have a cost-basis method assigned, the fund’s default of average cost will be assigned to the new fund. You may change the method at any time.
Q. What if I don’t agree with the cost-basis information on covered shares reported to me and the IRS on Form 1099-B?
A. It is ultimately the shareholder’s responsibility to report the correct cost basis to the IRS. The new IRS Form 8949 provides you with an opportunity to adjust the cost basis reported on Form 1099-B. In addition to the numerical adjustment, you must also provide a reason for the adjustment based upon the standard reasons supplied by the IRS. For more information, please refer to the instructions for Schedule D.
Q. Which cost-basis adjustments am I required to make?
A. We will only adjust the basis of shares held in an account due to activity that occurs within the same account (covered and noncovered shares are considered separate accounts). A shareholder is required to consider all potential adjustments, including across accounts, when reporting to the IRS. Some examples of potential adjustments you may need to make are listed below:
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.