I write a lot about taxes because taxes and investing go hand-in-hand. If you manage your taxes well, you get to keep more of the gains from your investments.
There are many ways to minimize one’s taxes while investing. Contributing the maximum to all tax-advantaged accounts would be the most obvious. In a recent E*TRADE StreetWise survey, 45% of respondents said they believe investing in tax-advantaged accounts such as 401(k), 403(b), IRA, and HSA is effective for limiting the amount of taxes they pay. That number is way too low. As I wrote in Traditional > Roth > Taxable, the taxable account comes last. In addition to the tax deduction or tax free withdrawals, you won’t have to worry about accounting for dividends or capital gains while the money is inside a tax-advantaged account. That alone eliminates many of the tax headaches in addition to shielding your dividends and capital gains from taxes.
After you exhaust your tax-advantaged accounts, you venture into a more complicated world. You will have to learn many terms and strategies: cost basis, tax lots, capital gains and losses, realized vs unrealized, short-term vs long-term, tax loss harvesting, wash sale, taxable vs tax-exempt income, tax efficiency of mutual funds and ETFs, and so on. It’s a lot, but it’s essential knowledge for an educated investor.
Some brokers offer good education materials to their customers and the general public. If you go to the E*TRADE Education Center you will see articles, videos, and courses from reputable third-party sources such as Morningstar and Investopedia. The materials are categorized into different topics and levels, from the basics to intermediate to advanced. These educational resources are open to all investors, whether you are an E*TRADE customer or not.
My employer uses E*TRADE for its Employee Share Purchase Program (ESPP). The IRS made changes to how the cost basis is reported for shares bought under an ESPP starting in the 2014 tax year. E*TRADE sent me a heads-up e-mail as early as in November 2014. That’s how I knew I needed to adjust the cost basis reported on the 1099-B form.
As an E*TRADE customer, I have access to E*TRADE’s Tax Center. Not only am I able to download the 1099 forms, I also have access to supplemental data which provide further details on what made up the numbers on the 1099 forms.
E*TRADE did an especially good job in showing how the cost basis should be adjusted for each ESPP sale. The IRS mandated that brokers must report only the acquisition cost on the 1099-B form, which is incorrect and understated. E*TRADE shows the necessary adjustment in its Tax Center, not just in generic terms, but in actual dollars and cents for each sale. That made my life much easier.
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