We here at It's Only Money think it's never too early to start preparing your taxes.
Especially this year, if you're an investor.
New tax laws require those with taxable accounts to decide how to calculate something called cost basis.
They'll also force you to spend more time or money reporting investment gains and losses on your 2011 federal return and beyond.
Got tax questions?
This year, I plan to devote a couple columns to helping you prepare your tax returns.
I'll help you distinguish the differences between types of tax preparers and how to choose one.
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"The IRS is saying drown us in information because we're not getting enough," said Greg Rogers, accountant and owner of Rogers Financial Services in Oregon City. "It's not going to be fun."
Starting this year, brokerage firms and mutual fund companies have to report to both you and the IRS the cost basis of most stocks bought and sold in taxable accounts as of Jan. 1, 2011.
Basis is the original price you paid for the stock. You often pay taxes on the gain between your cost basis and the stock's sale price, or reduce your tax liability with the loss if it was sold below basis. Brokerages will report basis to you on
Next year, brokerages will report basis of mutual funds, most ETFs and dividend-reinvestment plan shares bought after Jan. 1 of this year. In 2013, they must report basis on fixed-income securities.
This differs from the past, when brokerages only reported basis to you. It was up to you to report it accurately on your return. But Congress and the IRS want to make sure you don't fudge those numbers.
For you or your tax preparer, it means more time, paperwork and diligent recordkeeping.
Even though mutual-fund share basis won't be reported until next year, your brokerage likely has asked you to pick from one of three methods for determining your cost basis.
Average Cost.
This is the total cost of all shares you own divided by the total number of shares you own. It's the easiest way of accounting for them. Most brokerage firms already figure it for you. The drawback is that it's not as accurate an accounting, and you might end up paying more in tax on your gains.
First in, first out (FIFO).
In this case, the first shares you bought will be the first your brokerage sells when you place an order, and it will be reported that way to the IRS. This makes things simple. But in any given year, depending on your tax circumstances and market returns, you might not want to get rid of your longest-held shares.
Specific identification.
With this, you choose which shares you sell when you place an order. This gives you more control and could save you more in taxes. You'll just have to keep more detailed records.
Bottom line:
If you're an infrequent trader, do nothing. Most brokerages will pick average cost as your default method, and that'll work fine.
"While there are potential benefits for specifically identifying shares, those benefits aren't that great for most retail investors," said Joel Dickson, tax specialist with
.
You can always switch methods later, but you'll have to do it in writing or online if you're in average cost,
.
For sales of individual securities, the average cost method isn't available. The default for the IRS is FIFO; make sure you're OK with that.
, the form you use to list capital gains and losses, will look a bit different this year. More importantly, you'll have to fill out a new accompanying form.
Or two.
Or six.
New Form 8949.
That's the new form, called
. Depending on the types of security or property sales you made this year, you could have to submit up to
.
For example, you'll fill out separate forms for short-term gains or losses and for long-term gains or losses. You'll also fill out separate forms for individual stocks bought and sold this year (so-called "covered" shares) and individual stocks bought before 2011 that were sold this year (called "non-covered" shares).
If your brokerage firm sends you an incorrect 1099-B, which does happen, it'll need to be corrected on Form 8949 with the proper coding.
This is all stuff you might want to hire a tax preparer to help with. If you bought stocks and sold the same stocks this year, prepare to spend an hour digging up details, "even if you have someone else doing taxes for you," Rogers said. "Because we're going to ask you for this stuff."
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