The Investor’s Secret Guide to Understanding Your Account Tax Statement

April 11, 2016

It’s spring time again, that magic time of year when investors with brokerage accounts come face to face with the dreaded Year End Tax Reporting Statement. All over the country, tax filers are cursing at their computer screens. How do they dig through eleven pages of legalese to find out how much they actually paid for the 100 shares of stock they sold in 2015? Why is it that they received a capital gains tax distribution on a mutual fund which actually lost money? What in Heaven’s name is a “qualified dividend” and why is it also ordinary?

Most importantly – is there a hidden meaning in “This Page Intentionally Left Blank?” and what do they do with all the entries that say, “n/a?” It’s enough to make taxpayers throw in the towel, file an extension and head for the stash of stale Halloween candy to ease the anxiety. While I’m not an accountant and I can’t give you tax advice, I can shed some light (or at least light humor) on investment tax challenges.

What is Your Cost Basis?

Your cost basis is what you paid for an investment plus any commissions paid to acquire it. Why is this important? If you sold a security in a taxable investment account, you must report a capital gain or loss on Schedule D, summarizing all the transactions you list on Form 8949. You’ll need the sale price (minus commission if applicable) and the adjusted purchase price to figure out your capital gains and losses. The good news is that if you made a profit and you held the investment for more than a year, you’ll pay long term capital gains tax rates on the profits, which are lower than ordinary income tax rates.

Seems simple to calculate, right? Not always. This can get more than a little complicated if there has been a merger, acquisition, spin-off or stock split. Also, what if your brokerage firm doesn’t list your cost basis on your tax reporting statement? This could happen for a number of reasons:

You inherited the securities. What if your grandfather left you his 1000 shares of Big Oil Company, and you decided to sell 100 of them last year? The cost basis of those shares received a “step up” on the date of his death.

If you don’t have the actual record from the settlement of the estate, you could consider using the market low on that date as your basis. You can generally find that by entering the symbol on market data sites like Yahoo Finance or asking your brokerage firm. Make a printout of the data showing your price and keep it in your tax file in case of an audit.

You transferred them in from another brokerage firm. Technically, you are expected to keep a record of your purchase prices of securities. Did you keep your old statements from previous years? Possibly not, unless you’re the kind of person that also kept your childhood report cards.

While brokerage firms have been required to include purchase data on statements since 2011 – and many firms have been back filling data from previous years – this data isn’t necessarily going to show up on your new statement if you switched firms. As you can guess, your old financial advisor’s team isn’t going to prioritize your 11^th hour call seeking information about your long ago cost basis. This Forbes article has some helpful tips about how to reconstruct cost basis using tools like Netbasis.

You bought the securities at your current firm before they used their current statement software. Good news here. If it’s your current firm, they’ll be likely to prioritize answering your cost basis question. Call early though because they are inundated with these kinds of calls the last few weeks before the tax filing deadline. A firm will generally have old records on microfilm if they haven’t back filled data on customer files.

Please be considerate when you call. There’s an administrative person on the other end who’s been taking outrageous last minute requests for account information for a few weeks now. If you don’t get an answer, you can consider using the low market value for that date (even if the purchase price was less than a few dollars per share) – better to err on declaring slightly more gain than you needed to in case of an audit.

Why Do I Have to Pay Taxes on a Mutual Fund That Lost Money?

No, this is not a Kafka novel. This happens all the time. Investors who hold mutual funds in taxable brokerage accounts have taxes to pay on those investments, even if the fund performance was negative for the year, and even if they didn’t sell any shares. I know it seems cruel. Taxable distributions from mutual funds are likely if you own the fund in a non-retirement account and can take the form of capital gain or dividend income.

This is because the mutual funds must pass dividend income and net short and long term capital gains and losses that happen during the year through to fund shareholders proportionately. Fund managers buy and sell securities over the course of the year, either as part of active portfolio management or to meet fund redemptions. Yes, folks, it’s true…you can even get dividend and capital gains distributions when you own index funds.

There’s good news, though. Many dividends are taxed at a low rate. (See below). Even if they are not, the max you’ll pay is your marginal income tax rate.

Even better, you can net all capital gains and losses from security investments (“active” investments) against each other – short losses against short gains, long term losses against long term gains, and net short term against net long term. If you consistently have net capital gains in your taxable investment portfolio, you may want to consider switching to a more tax-efficient investment strategy. Check out these tips from Morningstar on capital gains tax season.

What is a Qualified Dividend?

A dividend is a distributed share of corporate earnings. According to NASDAQ, a qualified dividend “is a type of dividend that is taxed at the capital gains tax rate. Generally speaking, most regular dividends from U.S. companies with normal company structures (corporations) are qualified.” Not sure if your dividends are qualified? See this description from the IRS.

Why is This Page Intentionally Left Blank?

Despite appearances, it’s not for taking a meditative pause to regain your composure during tax time. This is one of the true mysteries of the universe. Is this disclaimer there to inform us that there is not a printing error? Could we not have figured this out on our own? Wikipedia even has an entry on this topic, which goes to show you that others also see this as an enigma.

You Might Need a Tax Preparer

By the way, if your tax filing seems so tricky that you can’t figure it out on your own, this is a sign that you need to see a tax professional. That’s what they’re there for, people. A tax preparer has chosen to help people with their taxes as their life’s work. Seriously – they love this kind of thing!

If you’re looking for ongoing tax guidance and advice, consider engaging a Certified Public Accountant (CPA). Less complex or one-time tax preparation can generally be handled by an Enrolled Agent (EA). Tax preparation fees are usually tax deductible.

How about you? Do you have a financial topic you’d like me to address on the Monday blog? Email me at [email protected] or Tweet me @cynthiameyer_FF.

Why HSAs Are the Most Underrated Employee Benefit

March 24, 2016

In one of the chapters in her new book, What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need to Know About Your Money, our founder and CEO, Liz Davidson wrote about how the best place to invest your money is often where you earned it in the first place: your employer. Last week, I wrote about how to avoid common mistakes when investing in your employer’s retirement plan. This week, I’m writing about some common myths causing people to under-utilize one of their most valuable employee benefits: the health savings account (HSA).

HSAs are generally a bad deal. In order to contribute to an HSA, you have to be enrolled in a high-deductible health care plan. The downside is that these plans require you to spend more out-of-pocket before the insurance kicks in. If you have a lot of health care costs, they may not make sense for you. Otherwise, when you add up the premium savings (high-deductible plans tend to be cheaper), any employer contributions you may receive to your HSA, and the taxes saved on your HSA contributions (contributions are pre-tax), you may be surprised to find that they cost you less money overall.

HSAs are use it or lose it. That’s true for FSAs or flexible spending accounts. But whatever you don’t spend from an HSA, you get to keep in the account even if you leave your job or switch to a non-high deductible health insurance plan,. If you like your HSA, you can keep it.

HSAs are only for health care expenses. It’s true that HSAs are only tax-free when used for qualified heath care expenses but if you really needed the money, you could use it for other things. Be aware that you’d have to pay taxes and a 20% penalty in that case. Even better, you can use the HSA for any purpose once you turn 65 so it can be part of your retirement funds. (It’s still tax-free for health care expenses in retirement, including qualified long term care insurance and some Medicare premiums so unlike your other retirement accounts, you can contribute pre-tax AND make tax-free withdrawals.)

HSAs don’t grow. Many plans allow you to invest your HSA as long as you keep a certain amount (generally around $1k) in cash. Just be sure only to invest any money you don’t plan to spend within the next 3-5 years. In fact, I invest as much of my HSA as I can and make it a point not to use it even for health care expenses. After all, I figure that I’ll have health care expenses in retirement so why not let that money grow tax-free as long as possible?

HSA withdrawals for health care have to be in the same year as the expenses. If you have a health care expense and keep the receipt, you can withdraw that amount tax-free in any future date. That flexibility is one more reason to consider not making HSA withdrawals even for qualified health care expenses unless you need to.

Wish you contributed more to your HSA last year? One more myth is the idea that you have to contribute by the end of the year. Like an IRA, you have until April 18^th to contribute for 2015. You’ll just have to write a check rather than contribute from your paycheck and if you’ve already filed your taxes, you’ll have to amend your return to get the tax deduction. What are you waiting for?

Did You Contribute Too Much to a Roth IRA?

March 09, 2016

Updated June 14, 2017

One of the downsides of the Roth IRA is that there are income limits that preclude high income earners from contributing to these accounts. But for people on the cusp or for those who unexpectedly end up earning more than they planned (or who get married during the year and only discover after the fact that they now exceed the limits), it’s actually quite common to find out after they file their income taxes that they were actually ineligible to contribute the year before.

Luckily, the IRS understands that this can happen so there are ways to fix it, but you have to take certain steps to minimize the tax consequences and avoid penalties. Here are your choices if you contributed to a Roth IRA and then found out later that you were ineligible for the contributions because you made too much money in the year of contribution: Continue reading “Did You Contribute Too Much to a Roth IRA?”

Don’t Make Jeb Bush’s Mistakes…With Your Investments

March 03, 2016

A couple of weeks ago, former Republican presidential front-runner Jeb Bush tearfully exited the race. The self-described policy wonk’s economic proposals may not have won him the election, but they might actually help him with his investment portfolio. Here were some of his policies during the campaign and how they might apply to his finances: Continue reading “Don’t Make Jeb Bush’s Mistakes…With Your Investments”

Roth IRA or Roth 401(k)?

February 18, 2016

We’ve recently received several calls on our Financial Helpline from people who entered their Roth 401(k) contributions as Roth IRA contributions in tax software and were told that they had over-contributed. Since Roth 401(k) plans are relatively new, it’s easy to get these mixed up but the differences are important and not just when filing your taxes. Let’s start with the similarities. Both accounts allow you to contribute after-tax dollars that can grow to be tax-free after age 59 ½ as long as you’ve had the account for at least 5 years. Now let’s look at the differences: Continue reading “Roth IRA or Roth 401(k)?”

How To Make That 1099 Less Taxing

February 12, 2016

One of the TV moments that I still find absolutely hilarious a long time after its first airing is Reverend Jim from “Taxi” taking his driver’s license exam. This clip STILL cracks me up every time I see it. While Rev. Jim not knowing what a yellow light means is not a big financial issue (although, I swear that A LOT of drivers I’ve seen lately have absolutely no clue what it means either), not knowing what a 1099 means could provide quite a shock to the recipient. Continue reading “How To Make That 1099 Less Taxing”

5 Reasons Not to Put Off Your Taxes

February 04, 2016

By now, you should have received the documents you need to file your taxes. I know it’s easy to procrastinate though. After all, I’ve had my share of late night runs to the post office on April 15^th.(You actually have until April 18^th to file your taxes this year because the IRS will be shut down on April 15^th for “Emancipation Day.”) But there are some very good reasons not to put off filing your taxes: Continue reading “5 Reasons Not to Put Off Your Taxes”

Fix These Expenses Before They’re Fixed For You

January 28, 2016

Last week, I wrote about the importance of reducing so-called “fixed” expenses and not just discretionary ones like that morning coffee at Starbucks.The important thing is to reduce them before they become fixed. Here are some of the key decision points in which you can make that happen: Continue reading “Fix These Expenses Before They’re Fixed For You”

The Easiest Way to Save On Your Taxes

January 20, 2016

I think one of the reasons these mid-January and February days are so dreary is that it’s also tax time. Your mailbox and even your email inbox these days are being graced with tax forms, reminding you that preparing your income taxes is looming over your head. One of the reasons I dread tax time is because I can no longer procrastinate getting my records organized, and in doing so, it inevitably adds a bunch more to-do’s to my list of things I’d rather not be doing in my free time. Continue reading “The Easiest Way to Save On Your Taxes”

How Would You Take the Powerball Winnings?

January 14, 2016

What would you do if you won yesterday’s $1.5 billion Powerball jackpot? Before you start thinking about how to spend a billion and a half dollars, understand that you won’t get it all at once. Instead, it’s paid out in 30 installments over 29 years. If you want the money now, you only get $930 million. Then there’s taxes. Continue reading “How Would You Take the Powerball Winnings?”

Should You Convert to a Roth IRA Before Retirement?

December 03, 2015

I recently saw this article titled “Why Boomers Should Convert to a Roth IRA” that argues why Boomers should convert to a Roth IRA a few years before retirement. It makes sense at first. Why not pay taxes now and have all your future income from the Roth IRA be tax-free? Continue reading “Should You Convert to a Roth IRA Before Retirement?”

5 Questions to Ask About Your Employer Tuition Benefit

October 21, 2015

Despite the inflation of college tuition far outpacing the growth of wages, having a bachelor’s degree is still one of the best ways to boost earning power and job opportunities. A 2014 report found that a person with a bachelor’s degree earns over $20,000 more per year on average than someone with just a high school diploma. One way to help defray the cost of college is to take advantage of your employer’s tuition reimbursement program, but before you do, here are some questions to answer: Continue reading “5 Questions to Ask About Your Employer Tuition Benefit”

10 Ways To Celebrate Financial Planning Week

October 05, 2015

Did you know that this week is the Financial Planning Association’s® 14th annual “Financial Planning Week?” The purpose of the week is to raise awareness of the financial planning process and to enable individuals and families to make prudent financial decisions. You can visit FinancialPlanningDays.org to see if a one-on-one financial planning advice event or educational workshops is being offered in your area. In the spirit of smart financial decision making, here are 10 ways to celebrate Financial Planning Week along with some of our thoughts on how finesse your personal finances: Continue reading “10 Ways To Celebrate Financial Planning Week”

Good Things Come To Those Who Wait

October 01, 2015

I was recently talking to my parents about Social Security and was surprised to discover that they had no idea they could delay their benefits past their retirement.This is important because it’s usually the best strategy yet most people collect at the earliest age of 62. Here are some reasons why delaying might make sense: Continue reading “Good Things Come To Those Who Wait”

Whose Name Should A 529 Account Be In?

September 24, 2015

With school back in session, you may be thinking about putting away some money for future education expenses in a 529 savings plan.These accounts can be invested and used tax-free for post-secondary education expenses. However, one question that many people take for granted is whose name the account is in. After all, the account doesn’t have to be in the name of the contributor or the beneficiary (the student). Here are a few things to consider: Continue reading “Whose Name Should A 529 Account Be In?”

3 Under-Rated Retirement Accounts

September 03, 2015

One of the most common questions we get is how to prioritize funding different types of retirement accounts.In an ideal world, we would max them all out but most of us need to figure out which ones should take priority. I recently read this article that attempts to answer that question. While I generally agree with the points, there are three things that this article and many similar articles I’ve read tend to underestimate: Continue reading “3 Under-Rated Retirement Accounts”

When Does A Roth IRA Or 401(k) Work Best?

August 03, 2015

As a financial planner, I find people are pretty predictable about their feelings on income taxes: hardly any of them want to pay more than is absolutely necessary, and they feel like other people don’t pay enough! The US tax code has incentives and rules meant to encourage us to do specific things like buy a home, make charitable gifts and save for retirement. But is there any value in actually paying taxes up front rather than put them off if you can? Continue reading “When Does A Roth IRA Or 401(k) Work Best?”

How My Tax Preparation Software Let Me Down

July 22, 2015

For the last seven years, I have used tax preparation software to help me file my federal and state income tax returns, and I’ve never had a problem…until now. You see, each year I’ve been entitled to tax refunds, and each year when the tax preparation software asks me if I want to have my tax refund directly deposited into my bank account, I would say yes, but this year was different. This year, instead of getting a tax refund from the state, I ended up owing the state more money, so instead of asking me if I wanted my tax refund directly deposited into my bank account the software asked me if I wanted to have my tax payment debited from my account. Continue reading “How My Tax Preparation Software Let Me Down”

Should You Buy or Rent a Home?

June 11, 2015

Summer is often a popular time for people to buy a home. In fact, I was recently talking to an employee who wanted to buy a place but she noted that the mortgage payment would be more than the rent for similar priced homes in the area she was looking at. However, after looking at the tax breaks and possible home appreciation, we discovered that owning would actually be cheaper for her. Continue reading “Should You Buy or Rent a Home?”

How New Online Tools Will Save One Woman Tens of Thousands of Dollars Per Year

April 30, 2015

Last week, I wrote about my three favorite online investment services. This week, I’ll show you an example of how a couple of those tools saved a friend’s mother tens of thousands of dollars. When I spoke to my friend, his mother had just retired with a $1 million portfolio and he wanted to know how she should invest it for retirement. Since we can’t provide specific investment advice at Financial Finesse, this was a rare opportunity for me to be more hands-on. Here’s what we did: Continue reading “How New Online Tools Will Save One Woman Tens of Thousands of Dollars Per Year”