Contrary to popular belief, having investments doesn't mean only an accounting genius can prepare your tax return. Investors can easily do their own taxes while maximizing tax savings by following a few simple tips.
"Gathering all forms and information beforehand makes preparing taxes easier and faster for everyone, but especially for investors," says Jessi Dolmage, TaxAct spokesperson. "In addition to tax forms from brokerages, employers and financial institutions, you'll also want documentation about your transactions handy. That information will help prevent you from overpaying or underpaying taxes on your investments."
Many DIY tax preparation solutions import transactions directly from brokerages or provided data files. TaxAct also offers a fast spreadsheet-style entry tool for Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, information that allows you to enter and review up to 2,000 individual transactions.
If you have hundreds or thousands of transactions, Dolmage recommends obtaining Form 8949, Sales and Other Dispositions of Capital Assets, that lists your transactions individually, from your brokerage or a service that will generate the form for you. You simply submit this form with your tax return.
Use these additional tips from TaxAct to save more time and money at tax return filing time.
Don't rely solely on your Form 1099s
When you receive your Form 1099-Bs in February and March, verify the information in each against your records. Look specifically for cost basis and date acquired. Whether that information is included on your form depends on how long you've held the asset and where the investment originated.
If your cost basis and acquisition date isn't included on your Form 1099-B, you still have to report that information on your tax return. Without it, any sales proceeds without a cost basis will be taxed as a capital gain.
If you're still waiting for 1099s or other investment information, Dolmage recommends preparing as much of your return as possible now, but wait to file until you receive it to avoid amending your return.
Report the correct cost basis
The cost basis is the purchase price of an asset adjusted for stock splits, dividends, return of capital distributions and any other basis adjustments. Using the correct cost basis is key to accurately reporting and calculating a capital gain versus a loss, the difference between the asset's sales proceeds and the cost basis.
Even if your cost basis is reported on Form 1099-B, check your investment records to verify it's correct. The cost basis reported on your Form 1099-B is based on the information available to your brokerage, which may not include data needed to calculate the true cost basis. For instance, the sale of certain employer stock options may be reported on your Form W-2 and Form 1099-B. If you don't adjust your cost basis for this, your sale may be taxed as ordinary income and as a capital gain.
If you need to report adjustments to cost basis amounts on your tax return, you'll include the adjusted amounts and an adjustment code next to each that explains the reason for the change.
Know the difference between short and long-term
Assets held for more than 12 months are considered long-term and benefit from reduced capital gains tax rates of zero, 15 and 20 percent based on your tax bracket. Conversely, short-term gains for assets held for less than 12 months are taxed at ordinary rates.
Verify the asset's purchase date before selecting the short-term or long-term reporting category for the transaction on your tax return. Remember, the date acquired may not be on Form 1099-B. Incorrectly reporting the term may result in overstating or understating your total tax liability.
When making future investment decisions, consider waiting to sell assets with large gains or holding periods approaching one year. Get more investment tax tips at www.irs.gov, and learn more about TaxAct's affordable filing solutions at www.TaxAct.com.