Over 120 million individual taxpayers file returns every year. Wednesday I meet with five of them, talk on the phone with a half dozen others, and get e-mails from three.
What's on the minds of American taxpayers with the filing deadline only five days away? If today's sample of one ten-millionth of all individuals is statistically valid, some 25 percent are perplexed by the proper tax treatment of investments.
I don't mean reporting interest on Line 8, dividends on Line 9, and capital gains distributions on Line 13 of the Form 1040. My clients, at least, are not doofuses, and the statements from the brokerage house marked "Important Tax Documents Enclosed" present this information clearly enough. I'm talking about the tax consequences of selling stock or shares in mutual funds—the reason why four client folders have been languishing for weeks on my dining-room table.
The problem usually arises when a client hands me the envelope from Fidelity Investments. All goes smoothly until I get to Form 1099-B, which reports the proceeds of sales. I say, "I see you sold some shares in a mutual fund."
"That's right," they answer. I continue, "You don't get taxed on the proceeds of the sale. You're taxed on the difference between what you bought it for and what you sold it for—the gain."
They nod in agreement. Next I ask, "How much did you pay for these shares?"
That's when they start looking concerned and say, "You mean that information isn't in there?" I suggest, "It may be in your year-end report from Fidelity. Did you bring that?"
"Well, no," they'll typically answer. "The envelope didn't say 'Important Tax Information Enclosed.' "
I'd like to nominate Fidelity as the most taxpayer-unfriendly brokerage house in America. What's missing from its client tax reports is the "average cost basis in shares sold"—vital information which other investment firms, including Scudder and Vanguard, painlessly provide right in their tax-time mailing.
Is this the result of some misguided cost-saving effort at Fidelity? All it usually takes is a phone call to get the missing information, but I'm billing the client for my time. And the voice-mail system on at least one of their 800 numbers won't even let you talk to a human being unless you enter a PIN. One might call Fidelity a brokerage disservice.
Shareholders' worst tax headaches occur when their account regularly reinvests dividends and capital gains in additional shares of the mutual fund. Then the investors' cost basis is no longer just $6.33 per share, or whatever they originally paid when they started the account. Each time a dividend is reinvested, the price per share can be different. And with every additional investment, the dollar amount of their basis increases and the eventual tax bite is lessened—if they can keep track.
That's why I've been getting so many phone calls from Bob, one of my table people. He's owned shares in a mutual fund since the early '80s, before the investment industry became fully computerized. The dividends were reinvested every quarter, as the stock market soared, sank, then soared again. Bob finally sold some shares.
However, the brokerage house's mainframe has no idea what his average cost basis might be.
Worse still for Bob, his doting grandmother more than once contributed gifts of shares in the same fund to his account. So, he has to figure out what her average cost basis was too, assuming it's legal for him to get copies of her year-end statements, which in any case may stretch back to the 1960s.
Bob is an honest taxpayer, trying to do the right thing. Should he take an extension, assemble the needed records, and devote his weekends over the next few months to figuring out exactly what his basis is? Or will he just call tomorrow and give me an arbitrary figure? And shall I pretend to believe he assiduously calculated it?