Tax Preparation Tools Make Life Easier For Equity Investors


Active traders used to dread tax season, and not just because of the money they owed the government.

Moving in and out of the market, cutting losses, pyramiding your positions and taking solid profits added up to a lot of trades each year. And getting all that data organized for the IRS wasn't easy.

But now the best brokerages make downloading your transactions into tax prep programs nearly effortless.

"This is a virtual necessity for investors," said Jim Buza, vice president of advice and guidance products for Fidelity Investments. "It saves a potentially huge amount of work. And automating the process cuts opportunities for errors."

Investors should check to see if a brokerage they're thinking of using downloads to the tax-prep program they use.

Very active traders should make sure the brokerage they're considering offers a high-volume record-keeping program such as GainsKeeper or TradeLog.

Other resources include extensive tax education and information you can use in preparing your own return. Information is strongest in some areas related to the mutual funds and retirement accounts that many of the brokerages have long focused on.

Fidelity Investments' page on "Answers to Your Top Tax Questions" features links to explanations of contribution deadlines for individual retirement accounts for the 2012 tax year and of the contribution limits for 2013.

Taxing Queries

That same Fidelity site starts with the basics. It answers questions such as:

When will shareholders receive tax forms from the firm? Those forms range from the 1099-DIV for dividends, to the 5498 for contributions, conversions, re-characterizations and rollovers to an individual retirement account. -- cited in the Best Online Brokers survey -- also reviews new regulations that affect your tax filing. And the site has a link to a page that lets you view year-end distributions from your Fidelity funds.

Yet another link leads to a discussion of how you can convert a traditional IRA to a Roth, or vice versa.

Type "taxes" in TD Ameritrade's ( AMTD ) search window, and a live-chat window opens. A list of links to the brokerage's posting on tax-related topics also appears.

Charles Schwab 's ( SCHW ) Rodney Prezeau, senior vice president of client experience, reminds investors: "We are not a tax provider. We train our financial consultants and portfolio consultants to be aware of tax-efficient investing ."

If you are self-employed and are trying to decide whether to open a solo 401(k) plan, Simple IRA, SEP IRA, profit-sharing plan or money-purchase plan, you can check out E-Trade's chart comparing all of their features.

Tax strategy plays a role in deciding whether to buy bonds and which type. Many brokerages offer information about the pros and cons of fixed income securities and approaches, like bond ladders. Several, including E-Trade and Fidelity, also let you trade bonds.

Cost-basis information is widespread. Scottrade explains the new federal rules and their starting dates for stocks, mutual funds, ETFs , options, bonds and other securities. The brokerage also describes how the rules are reflected in changes to cost-basis tax documents it provides to customers.

In And Out

Schwab explains the pros and cons of cost-basis methods such as first in, first out (known as FIFO) and last in, last out (LILO). FIFO is often the default method used by brokerages.

Why the reminder? When you make money investing in stocks and want to sell part of a position, your gut instinct might be to sell the oldest shares first, aiming for the lower tax rate on long-term capital gains. But older shares might have cost much less than newer ones, resulting in a bigger cap gain.

Fidelity and USAA provide links at their tax centers that may let you buy TurboTax tax-prep software at a discount.

USAA also posts a list of 13 often-overlooked tax deductions.

Investors in Vanguard's municipal-bond funds can find a state-by-state breakdown of their tax liability at the fund giant's tax center.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: AMTD , SCHW

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