It's a common misconception that if you have investments you need to shell out a large chunk of change to have your taxes prepared by an accounting genius. The truth is, it's easy and affordable to do your own taxes and maximize tax savings — even if you're an investor.
"First and foremost, gather all of your tax forms and financial information before you get to work on your return. It will save you time when you prepare your return and the process will be much easier," says Mark Jaeger, director of tax development for online tax preparation software provider TaxAct. "In addition to tax forms from brokerages, employers and financial institutions, you'll also want to have all documentation about your transactions readily available. 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, for example, offers electronic import for most common tax forms including W-2 (Wage and Tax Statement), 1099-B (broker transactions), 1099-INT (interest income), 1099-OID (Original Issue Discount), 1099-DIV (dividend income) and 1099-R (retirement income).
However, if you have hundreds or thousands of transactions and you can't electronically import the related brokerage statements, Jaeger recommends entering your total short- and long-term gains on Form 8949, Sales and Other Dispositions of Capital Assets. Then, you'll simply attach the statements that list your transactions individually when you e-file your return.
The following helpful tips from TaxAct can help you save time and money when you prepare your tax return this year.
1. Don't rely solely on your Form 1099s.
Verify the information shown on your Form 1099-Bs aligns with your records. It is a good idea to review cost basis and date acquired. Whether that information is included on your form depends on where the investment originated and how long you've held the asset.
Keep in mind even if you don't see your cost basis and acquisition date 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, Jaeger recommends preparing as much of your return as possible now, but wait to file until you receive it to avoid amending your return.
2. Make sure you 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. It is important to use the correct cost basis to accurately report and calculate 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, it is a good idea to 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 example, 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 to account 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.
3. Short- and long-term gains: Make sure you know the difference.
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. On the other hand, 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.