Fidelity Sets the Standard for Brokers at Tax Time

Usually when I evaluate brokers on one specific feature -- say mutual funds -- it's a struggle to find a standout firm.

In This Column

The TurboTax Connection Maxing the TurboTax Features High Tech's Low Points TurboTax Future Tomorrow: More on the Best Brokers at Tax Time

But when I looked for the best online broker at tax time, I had no such problem. If you are a computer-comfortable investor who craves more tax automation, either because you do your own taxes or want to trim your accountant's bill, Fidelity is your best bet. Today's column focuses on how Fidelity and a few other brokers allow you to download information directly into tax preparation software. But, among the biggest brokers, Fidelity is the top choice tax-wise based on several other key services as well, which I'll discuss in a column tomorrow.

More than any other broker I researched -- with aid from my tax-savvy colleague, Tracy Byrnes -- Fidelity tries to make and succeeds at making tax time as easy as possible. Interestingly, low-profile Cititrade, the online brokerage of Citigroup (C), was a strong second contender. For the online investor (and maybe even offline!), all other brokers trail Fidelity.

I'm still interested in hearing from readers about what you're finding from your broker this tax season. Let me know if you agree with my analysis with an email to [e-mail].

The TurboTax Connection

To winnow down the field of the most helpful tax-season brokers, I focused on one main feature: which brokers let you import info into Intuit's TurboTax, a leading tax-prep program that's available online and in PC software form.

With this service, investors can download their 1099s, which include that year's sales data, directly into TurboTax. Some brokers permit an even broader download that includes key details like when you purchased the security and what you paid (your cost basis). That's the stuff you need to complete your Schedule D report of capital gains and losses.

Readers who've used this download service confirm its benefits as a time- and money-saver and headache avoider. "Fidelity made my tax preparation almost a pleasure. All you have to do is fill in the blanks with personal info and they automatically download your tax data and calculate and process it your way via TurboTax," wrote Cleo Boyd. "I'm having my accountant check it because of certain special situations, but it should be very simple, and my bill to him very small!" Writes Audrey Harvey, "Fidelity is really helpful. I can download statements online into TurboTax on my home computer. This really helped us last year -- we were just thrilled because we had lots of transactions."

The four brokers hooked up to TurboTax for 2000 taxes are Fidelity, TD Waterhouse, Cititrade and Salomon Smith Barney. Smith Barney, under the Citigroup umbrella with Cititrade, is not an online brokerage but has a site for its regular full-service customers. Its tax services are identical to Cititrade's. (Three mutual fund firms are connected to TurboTax for fund holdings -- T. Rowe Price, Vanguard and Invesco -- but they weren't part of my broker-focused evaluation.)

Maxing the TurboTax Features

Stars go to all of these firms for hooking up with Turbo Tax. But the gold stars go to Fidelity and the Citi sites for the amount of downloading they permit. You can download not only your 1099s, but also purchase date, cost-basis and realized gain-loss information, so you can complete your entire Schedule D. At Waterhouse, the downloadable detail is more limited. For example, you'll only get cost-basis information for securities you bought and sold that calendar year.

Fidelity TurboTax Highlights

Can download cost basis, gain/loss info in addition to 1099s Can download tax info for options Free for Fidelity customers

Fidelity has a slight edge over the Citi sites. The biggest reason: Fidelity permits downloading of options trades, while the Citi sites currently don't. That's a key benefit because there are no 1099s for options to begin with. Second, Fidelity offers its customers TurboTax on the Web (though not the software version of TurboTax) for free. That's a savings of $14.95 for the federal prep and e-filing and $9.95 for the state. (For active traders with more than 125 trades per year, Fidelity will spring for the PC deluxe version, a $39.95 value before rebates. The same holds for Mac users: $49.95 retail, no rebates.) At the Citi sites, it's 30% off the Web product. Waterhouse, no discount.

High Tech's Low Points

While I commend brokers who offer the TurboTax tool, I urge readers not to rely solely on technology without a human check by yourself or your accountant. There are too many nuances and too much room for glitches.

Take the issue of broker tax-lot accounting, in which a broker keeps records of the specific lots of stocks you buy and lets you choose the ones you want to sell. For example, you might build a position in Intel (INTC) over time at different prices; each purchase represents a "lot." Specifying lots helps you to manage the tax gains and losses you incur.

Fidelity started letting customers specify lots online late last year for stocks. Citi does lot accounting not only for stocks but also for mutual funds. While Citi gets an A for the mutual fund effort, the extra level of detail caused some glitches this year in the TurboTax download of mutual fund data. The firm says the problem has been addressed. Fidelity warns, on its site, that because it only started with tax-lot accounting on Fidelity.com in November, any specification intended for trades before then may not be reflected in a download. (A spokesman makes the point even more clear: Specific-share trading through a broker in calendar 2000 will download, but not prior to then.)

Which brings up another point. Kudos to Fidelity for outlining this wrinkle and many other potential TurboTax trouble spots on its Web site. What Works readers may recall that I have no patience for Web sites that don't inform customers clearly. A couple more good examples from the Fidelity site: The site says its download does not send data onto the forms that let you calculate if you're an "alternative minimum tax" payer. Then there's the thorny wash-sale rule, which essentially erases tax losses if you buy too soon after a sale. The site says the download will account for wash sales if you sell the same security in a single account, but it won't match up "substantially identical securities" or washes that span more than one account.

Compare Waterhouse. Not only do you not get any such list of pitfalls, if you went to the public Waterhouse Web site, you'd never even know that the broker offered a TurboTax hook up. I even went so far to input "TurboTax" into the "Ask Jeeves" search "help" function (which readers of this column know I loathe at all Web sites that use it). The result: nada.

TurboTax Future

Why don't more brokers hook up with Intuit? It's not Intuit's fault, according to the software firm. Intuit welcomes any and all comers, says spokeswoman Julie Miller. If brokers were worried about being guinea pigs for the Web product, that time has come and gone. Next year, there's no excuse for a broker that does not have this capability.

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