Home

Yucky Tax Stuff

Nothing says stop reading further than the word "tax."  Nonetheless, please take 60 seconds to quickly review the following important information.

Your friends at the IRS have imposed new requirements on the companies that hold your investments (think Schwab, Merrill Lynch, etc.).  These custodians must now report the cost basis for certain stocks sold during 2011 and for other types of investments beginning in 2012.  Because of this, the Form 1099 that you receive each year from custodians will be different than in the past.


Moreover, custodians will now default to using the first-in, first-out (FIFO) method for determining cost basis for the sale of stocks unless you tell them in writing otherwise.  (Oh no!  You haven't taken accounting since your sophomore year of college and you weren't quite sure what FIFO meant back then.)  The default method for mutual funds is average cost.

Has your head exploded yet?  If not, please continue to see what this means to you:

1.  Your custodian's Form 1099 will include items arising from the sale of securities, some of which will be reported to the IRS and some of which will not.  You are nonetheless responsible for making sure all taxable events are reported to the IRS.

2.  Your financial advisor may provide you with information regarding the gains and losses incurred as a result of the sale of your investments.  You should make sure that this information is consistent with your custodian's Form 1099.

3.  Don't worry.  Your accountant and financial advisor can assist you with any questions.  This is why you hire them.  Make sure you discuss how you want your custodian to keep track of cost basis going forward.

If you are interested in learning the nitty-gritty details, you can see what Schwab, Fidelity, and Vanguard have to say about these matters.


Words of Wisdom

The hardest thing in the world to understand is income tax. -- Albert Einstein