Editor's Note: This is the second part of a two-part series on the best brokers at tax time. Be sure to read Part 1.
Fidelity is a real tax-time standout with its TurboTax download feature, as I featured in
Thursday's column. But even if you're not the TurboTax type, there's plenty your broker can do to help you at tax time. Plenty more, unfortunately, than many brokers do now.
Tax time is when the service side of a broker really shows its strengths or shortcomings. If you've been paying fancy commissions all year, now's when you should be getting something for your money. If you've gone the ultra-discount route, any broker hassles you encounter trying to prepare your taxes should make you rethink whether the savings are worth it.
-- one of the costliest brokers commission-wise -- sets the tax-service standard among the biggest online brokers.
- the cheapest of the pack trail in the tax-service area, although mid-priced
doesn't do too well by its regular, nonprivileged account holders either. Below are some of the key features -- gathered with guidance from my tax-savvy colleague
-- that brokers should provide. As always, please let me know if you agree with an email to
firstname.lastname@example.org, and tell me what you're finding.
Let's start with year-end information. Frankly, it's amazing to me that some brokers don't offer summary year-end information in addition to the 1099, which generally shows only your sales data. Taxwise, a year-end statement should detail, at a minimum, the cost basis of securities sold, realized gains/losses and whether gains are short- or long-term.
Does an annual summary tell you anything you couldn't extract from monthlies or trade slips? Not necessarily. And ultimately, those sales slips are what's most reliable. But a year-ender gives you a point of reference -- a way to double-check that you didn't lose any trading slips and to figure out what the heck happened if, perchance, you didn't keep perfect files of the year's worth of monthlies.
Among the brokers you won't get a year-end summary from are Datek and CSFBdirect (if you're a regular account holder).
and Ameritrade provide year-end statements, but they don't show your realized gains/losses on individual transactions or cumulatively, nor do you get any long- short-term gains breakout.
Some brokers don't send a hard-copy statement, but they do make it easy to get key tax information online.
, for example, both post a running tally of your realized gains and losses. (Same goes for the
sites, both part of
SSB Access is the Web site for
Salomon Smith Barney's
full-service clients.) This feature should be more commonplace than it is. Datek and TD Waterhouse, for example, have 1099s online, but no cumulative tax tally. CSFBdirect provides the running summary only for its active and high-end accounts. At Ameritrade, you'll get neither. Fidelity takes the prize: 1099s online, the running online summary and the year-end hard-copy statement.
Tax lot accounting is a seemingly arcane feature that can actually make a big difference in your tax bill. It's all about identifying
shares of a holding you want to sell. Say you've been building a position in
for two years. Maybe you paid $33 in July 1999 and $50 in December 1999 (split-adjusted). Now the stock's near $26.
You'd have a loss either way if you sold now, but the size of that loss would be bigger if you specified that you were selling the December lot. You can make this specification by keeping your own records, indicating to the
you sold this lot rather than that lot. But some brokers actually will work with you to make the paper trail easier. At Fidelity, for example, you can identify which lots you are selling as you place your trade online. That information shows up on your confirmation. The Citi services also do tax lot accounting, even for mutual funds, which Fidelity doesn't. E*Trade apparently offers online lot specification as well.
Datek and CSFBdirect don't track lots for you. You can report specific lots to the IRS (per certain rules) but you're on your own records wise. At Ameritrade, TD Waterhouse and Schwab, you can identify lots through a live broker only.
(Tax lot accounting is treated in
TheStreet.com's Guide to Smart Investing in the Internet Era, page 252, and also in this
Transfer of Shares
With all the switching of brokerage accounts these days, you'd think it would be simple to transfer your cost basis (what you paid for, say, a stock or fund) along with your shares. But under industry rules, that information isn't included as part of the transfer process. Brokers should make it easy for their new customers to bring that info over to their new firms, but many don't.
At CSFBdirect, for example, only high-end account holders can input their cost basis on transferred shares into the broker's system, but regular folks have to rely on their own paper records. Ameritrade, TD Waterhouse and Datek also have systems that don't accept cost basis information from the customer. By contrast, Fidelity, E*Trade and Schwab allow their customers to input that info online.
If your new broker won't track prior-purchase cost bases (and frankly, even if it does), make sure you get that information from the broker you're leaving while you're a customer and they still have a vested interest in assisting you.
One interesting tax-time site is
National Discount Broker
says that in the next week or so it'll offer a deal where account holders can download their Schedule D-efense transaction spreadsheet from the broker directly into GainsKeeper, which will generate all that's needed for a
Schedule D report of capital gains and losses. The broker will give you a 20% discount on the basic GainsKeeper subscription, $49/year. If you try this, please let me know what you find with an email to