Investing has never been easier than today with all the options available for people to really use their savings to achieve the dreams and goals for the future. No savings to become a smart investor? Consider your tax refund to start investing in the stock market like a professional.

According to the IRS, the average tax refund in 2012 was about $2,803 and that is more than enough to open a brokerage account and start investing your savings for the future. In fact you can start investing with a lot less.

It is an interesting year for investors. After the Financial crisis of 2008 and 2009 the stock market has recovered and now we are in what experts call a “bull market”, a market in which prices of company’s stocks are rising and investors are encouraged to buy shares.

The performance of the stock market is remarkable. From the bottom of the market in March 2009 to February 2013, the price of stocks has risen 89% based on the S&P 500, the stock index composed by the leading 500 companies in the US. That represents an impressive average annual return of 17% in the last 4 years.

That return outperforms by far other investment alternatives such as bonds, money market funds, certificates of deposit or real estate. However, there is more risk involved when investing in the stock market. That means the returns change a lot from one month to the next or even from one day to the next.

But the stock market is a good alternative to achieve long term goals such as retirement when the risk is properly managed and balanced with your age and goals.

Your tax refund could be your pass to the world of investments:

-As soon as you get your tax refund this year, go to an investment brokerage firm or even your own bank and open an Individual Retirement account (IRA). An IRA is a vehicle in which you can invest your money and obtain a tax advantage: every dollar you put  in the IRA is reduces  your taxable income so you pay fewer taxes as you invest your savings.

-When you have your IRA, you can pick mutual funds to invest your money in. A mutual fund is a collection of stocks, bonds and cash alternatives. The Mutual Fund manages the money from many investors (hundreds or thousands) and that allows the small investor to have their money managed by professionals.

-You can pick among thousands of different funds with different objectives. There are funds for stocks, for bonds or funds that invest in a mix of stocks and bonds.

-Your selection of the fund depends on the risk you are willing to take with your money. For instance, stocks are riskier than bonds. However, in the long run the annual return for stocks tends to be higher. And you will need a higher return to achieve long term goals like retirement.

-How much risk can you take? It all depends on the time you have to achieve the goal. If you have 20 years for retirement, you can take a lot more risk than if you plan to retire next year.

-The tax refund is only the starting point. Once you open the IRA account you should sign up for automatic investments to contribute every month to the IRA account.

-Your finances are going to be transformed because you will be officially an investor with real long term goals.

- Haven’t filed your taxes yet?  Go online and file your taxes so that you can get your tax refund as soon as possible, make these smart investment moves with your tax refund, and keep more of your hard-earned money.

You: But the title­—

Sorry, but that refers to rental properties you own.

You: Now how could I possibly own the property if I am renting it?

If you’re the landlord.

You: I knew that.

There are many tax benefits available to those who own rental properties.  As an important example, most modifications you make to your rental property result in tax savings of one kind or another.

You: How so?

It depends.

You: On?

Whether the changes you make to the property are considered improvements or repairs.  Whereas repairs may be immediately tax deductible, improvements must be depreciated over time.

You: What’s the difference?

What’s the difference between improvements and repairs? Or what’s the difference between an immediate tax deduction and depreciation over time?

You: Actually, both.

Fair enough.

Home Improvements

Improvements vs. Repairs

Like they sound, repairs don’t make any permanent changes to the property; they simply put the property back to a previous state.  Said another way, repairs don’t add to the value of the rental property.  Consequently, expenses such as the cost for a plumber to go fix a toilet or for an electrician to replace a circuit are textbook examples of repairs.  But, so too, are far more expensive costs, like the expense of painting your property or fixing up part of a roof where it might be leaking (again).

On the other hand, expenses you incur which increase the life of the property or add value to it are considered improvements.   Replacing the whole roof, for example, is an improvement. Although you wouldn’t necessarily think of a new roof as immediately increasing the value of the property, it certainly increases the expected useful life of it and consequently is considered an improvement.  Obviously, additions and similar major upgrades are considered improvements as well.

Tax Deduction vs. Depreciation

Repair expenses may be immediately tax deductible from rental income. This means you’ll reduce your taxable income from the rent you collect by the exact amount of the repair expense.  On the other hand, costs for improvements must be depreciated or divided over their useful life.  As a result, improvements add to the amount you can already depreciate related to your rental property on an annual basis.

You: What does that mean?

Say you decide to add a new piece of furniture to the property. Furniture typically has a five-year life, at least according to the IRS (that you and your tenants might have completely different opinions is not relevant).   If the price of the furniture is $500, you can depreciate $100 a year for five years.  Since a couch is not a repair, you cannot immediately expense it.

Between improvements and repairs, there’s plenty of tax savings opportunities if you’re in the mood to get to work (and to spending) this summer.

A new tax law took effect on Jan. 1, 2011 as a part of the Emergency Economic Stabilization Act of 2008, and it requires brokerages to report certain cost basis information to the IRS. This is a good thing for investors because it makes tax preparation easier and places more responsibility on your brokerage to accurately track your cost basis.This tax legislation impacts your brokerage account in a number of ways, so check with your brokerage to find out more. For example, Scottrade streamlined their information into an easy-to-use online Cost Basis Education.

What is Cost Basis?

Let’s back up for a moment and define cost basis. Cost basis is the original value of an asset that is used to calculate gains and losses for tax purposes. For most positions, your cost basis will be the purchase price plus any commissions, and it will be adjusted for wash sales, corporate actions and/or return of capital during the time you hold it.

Cost Basis Reporting

The new legislation rolls out in phases. This tax year, your brokerage will report to the IRS the cost basis for all equities you acquired on or after Jan. 1, 2011. These are called “covered” positions. All your other investments, including equities purchased before 2011, are considered “non-covered” positions. Equities include stocks, American Depositary Receipts (ADRs) and Real Estate Investment Trusts (REITs).

Over the next two years, other types of investments will be covered:

Where Cost Basis is Reported

Your cost basis information will appear on your Form 1099. Keep in mind that not all brokerage accounts will receive a Form 1099. To learn more about the different tax forms generated for brokerage accounts, check out last month’s blog, What to Expect from Your Brokerage at Tax Time .

 Capital Gains & Losses

Cost basis information is used by your brokerage and the IRS to calculate capital gains or losses when you close a position. Some brokerages, like Scottrade, allow you to choose how your capital gains and losses are calculated.

For example, Scottrade’s default calculation method is first-in, first-out (FIFO), which means the first shares you acquired will be the first sold. Think of it like the milk aisle at a large grocery store – the shelf is loaded back-to-front from the refrigerated room in back, so the first gallon of milk that the grocer slides into the shelf is the first one a customer sees. The first gallon of milk put in is the first gallon of milk that is taken out.

Shares of stock can work the same way. Here’s an example:

Monday:         Buy 50 shares XYZ @ $9 ($450 total)

Wednesday:   Buy 50 shares XYZ @ $11 ($550 total)

Thursday:      Buy 50 shares XYZ @ $10 ($500 total)

Friday:            Sell 50 shares XYZ @ $10 (500 total)

With FIFO, your total realized gain would be $50. The first shares you bought (50 @ $9 on Monday) would be the first shares sold. Subtract your investment of $450 from your sale price of $500, and you gained $50 on the transaction.

FIFO is one of several calculation methods your brokerage can use. Check with your brokerage to find out more about the methods available and how to set a tax strategy in your account.

To learn more about cost basis, visit Scottrade’s Cost Basis Education.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax software or tax/legal advisor(s) for questions concerning your personal tax or financial situation.

Jaci Devine is a free-lance writer with experience in the financial services industry who specializes in investment education.

What to Expect from Your Brokerage at Tax Time

As the number of envelopes labeled “Important Tax Information” pile up in your mailbox, it’s easy to get overwhelmed. Rather than getting discouraged this year, take control of your taxes. When you know what to expect in those envelopes, you can make sure you get the information you need.

Scottrade offers customers several in-person and online educational opportunities to learn more about their tax forms, and the information presented is useful for all investors, no matter which brokerage you’re with.

Form 1099

If you have one or more brokerage accounts, you may be receiving a variety of forms. The most common one is your Form 1099. At Scottrade, the following types of brokerage accounts will typically receive the Form 1099:

• Individual or Joint Brokerage Accounts
• Retirement Accounts (IRAs and Roth IRAs)
• Trusts and Estate Accounts
• Investment Club Accounts
• Partnership Accounts
• Sole Proprietorship and LLC Partnership Accounts
• Custodian Accounts

Reportable Transactions

Keep in mind that even if you have one of these accounts, you will only be issued a Form 1099 if you had reportable transactions in your account in 2011. For non-IRA accounts, reportable transactions include:

• Closing a tax lot (selling a long position or buying to close a short position)
• Interest and dividends
• Taxable corporate actions (e.g., tenders, mergers, cash in lieu of fractional shares)
• Royalty trust income
• Brokered CD sales, and CD redemptions if the certificate matured more than one year after it was issued
• Principal interest on unit trusts and corporate bonds
• Original issue discounts (OID)
• Bond redemptions

If you had one of these reportable transactions in your account, but the aggregate proceeds were less than $10, the proceeds are not reportable, and your brokerage typically will not issue you a Form 1099.

Composite 1099

The Form 1099 is actually a composite form made up of several subsets that each address a specific type of reportable information.

Here is a breakdown of the components of the Composite 1099:

Retirement & Education Savings Accounts

If you have an individual retirement account (IRA), a Roth IRA or a Coverdell Education Savings Account, you will be issued different variations of the Form 1099.

IRAs and Roth IRAs:

• Form 1099-R – Reports distributions, including conversions and recharacterizations
• Form 5498 – Reports contributions, fair market value (FMV)as of Dec. 31, 2011, and required minimum distributions

Coverdell ESAs:

• Form 1099-Q – Reports distributions, transfers out and fair market value as of Dec. 31, 2011
• Form 5498ESA – Reports contributions and transfers in

Mailing Dates

Even though you may want to get an early start on your taxes, keep in mind that brokerages mail your 1099s and other forms on different schedules, depending on IRS mailing dates and information availability. Check with your brokerage for their tax form mailing calendar.

Take Control

When those tax forms start to pile up, don’t just set them aside this year. Armed with the right information about what you should receive from your brokerage firm, you can take control of your taxes and get the information you need.

To learn more brokerage-specific information about your taxes, visit Scottrade’s Tax Guide.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax software or tax or legal advisor(s) for questions concerning your personal tax or financial situation.

Jaci Devine is a free-lance writer with experience in the financial services industry who specializes in investment education.

Bad Investment

The IRS won’t give you back the money you lost, but Uncle Sam will let you take a deduction for the loss. But there some rules you must know.

1. You can’t take an investment until the year the investment becomes worthless, so you’ll have to show that the stock had value at the beginning of the year, but not at the end of the year. If you bought stock in a company that went bankrupt, until the bankruptcy is discharged you might not know whether you can collect anything, so you get no deduction until then.
2. You can deduct losses on the sale of securities. If you believe that the stock won’t ever pay off, but you can’t prove it is worthless, sell it on the open market for a few pennies or a dollar to nail down your deduction.
3. If you can’t sell the security, you can abandon it. You do that by giving up all rights in the security and not receiving anything in return.
4. If you learn your investment became worthless in a prior year, file an amended tax return for that year to claim a refund. Though usually you have just three years to file an amended return, in the case of worthless investments you have up to seven years from the date your original return was due to claim a deduction.
5. You report the loss on Schedule D of your tax return, and list it as though it were an asset sold on the last day of the year.  TurboTax easily guides you through the interview and puts your tax information on the appropriate forms so you can take this deduction.

You are also entitled to deductions on your tax return for ongoing expenses in connection with your investments. These are listed on Schedule A of your return as miscellaneous deductions and are deductible to the extent they exceed 2% of your adjusted gross income. Here are a few of the investment expenses that qualify for deduction:

Investment advice. If you pay a fee to have your investments managed, or consult periodically with an investment advisor or accountant, those fees are deductible. That doesn’t include commissions that you pay to buy or sell a security, though. Commissions are added to the cost basis of the security and reduce the gain when you sell the asset.

Publications. If you are an active investor and subscribe to investment magazines, newspapers and newsletters, the costs of those publications are deductible.

Investment interest. If you have borrowed on margin or against other assets such as your home to invest in stocks or bonds, you may be able to claim a deduction for the interest you pay each year. Your deduction is limited to the amount of investment income you have for the year, which includes interest and dividends. Any investment interest expense you can’t use this year can be carried over to future years.

Other investment costs. You can deduct safe deposit box rental fees you pay to safekeep your stock certificates or other investment documents. You can also deduct IRA and retirement account fees, if you pay them out-of-pocket rather than having them deducted from your retirement account.

Finance

Here are a few tips to help you get started:

Reduce Your Credit Card Debt

Did you know that 14 million Americans are still paying off their holiday bills from 2010? Or that the average household currently has about $15,000 in credit card debt? As you rethink needs versus wants in 2012, regain control by paying down the balance of the credit card with the highest interest rate first.  There are free sites out there like Mint.com that will help you establish a budget and goals.  Alternately, look into doing a balance transfer which will help you consolidate high-interest rates to less expensive cards.

Save More & Spend Less

Get this: About 60% of overall purchases are spontaneous, and the average cost of an impulse buy is about $100. Stop the madness!  You can put more cash in your pocket in 2012 by separating your wants from your needs.  Need cash immediately or want to kick start your savings? File your taxes now! Tax refunds are averaging about $3,000 and if you choose e-file and direct deposit you may get that money back in your pocket in as few as 7 days versus 4 – 6 weeks for a paper return. You can also save on fees and learn about your fiscal health by using TurboTax.

Boost Your Credit Score                  

These days, you need a score of about 720 or higher to get the best rates. Score high and you can save thousands of dollars; score low, and it’s not only tough to get a loan, but also rent an apartment or even land a job. Make 2012 the year you improve your credit score. You can do this by paying your bills on time (that accounts for 35% of your score), paying down your debts (the amount you owe is 30% of your score), and keeping the credit card spending under control. You should utilize no more than 30% of your available credit and ideally only 10%.

Fund An Emergency Account

Fewer than four in ten Americans have a fully funded rainy day account! That’s a scary prospect, given how fragile this recovery is. You need a cushion: if possible, at least six months to a year’s worth of salary set aside in an accessible account (such as a money market account) to cover unexpected expenses or replace interrupted income.

Get Serious About Retirement

First, run the numbers to see just how much money you’re going to need to live comfortably in your retirement. Then, get to work. Stash away as much as you can into an employer-sponsored plan (the contribution limits have gone up from $16,500 in 2011 to $17,000 in 2012; $22,500 for those 50 years of age or older), and take full advantage of company matches.  You should also consider spending less, working longer and redefining your vision of retirement.

Contributions to Your 401(k)

The 401(k) plan contributions you elect to make come directly out of your salary. Since the contributions are made with pre-tax dollars, your employer does not include these amounts in your taxable income for the year. At the end of the year, when you receive your W-2 form that shows your earnings, you will notice that your wages subject to federal income tax are lower because of your 401(k) plan contributions. Since the wages are not counted in your taxable income to begin with, you do not take a deduction when you file your return. However, when you prepare your tax return, it’s possible to calculate how much income tax your 401(k) contributions saved you. For example, if you contribute $8,100 to your 401(k) during the year and that amount would be taxed in the 33 percent bracket if included in taxable income, then your tax savings is $2,673.

Increase in Your Take-Home Pay

Your 401(k) plan contributions also reduce the amount of your income tax withholding. Each time you get paid, your employer withholds money for your federal income taxes based on your expected taxable income. However, if you make 401(k) plan contributions, the amount of money subject to withholding will decrease since your taxable income is less than your actual salary. The result is more money in your take-home pay each pay period.

The Savers Tax Credit

In addition to the tax savings available for your contributions to a 401(k), the IRS also offers the Savers Credit if your Adjusted Gross Income (AGI) doesn’t exceed certain maximums. This credit offers a dollar-for-dollar reduction of your federal income tax bill. In 2010, single taxpayers whose AGI doesn’t exceed $27,750 can receive a credit up to $1,000 and married taxpayers with an AGI of $55,500 or less can receive up to $2,000. If your AGI doesn’t exceed these thresholds, you are at least 18 years of age and are not a dependent to another taxpayer, then you need to prepare IRS Form 8880 with your tax return to claim the tax credit.

Misconceptions About 401(k) Contributions

The contributions that you make to a 401(k) plan only reduce your income taxes, not your Social Security and Medicare taxes. These two taxes only apply to your earned income, but you do not get to claim any deductions before these taxes are assessed. For example, if your gross wages for the month are $2,500 and you contribute $400 to your 401(k) plan from it, there is withholding on the full $2,500 for Social Security and Medicare even though for federal income tax purposes, there is withholding on $2,100.

• Salary or hourly wages
• Interest income
• Self-employment income (e.g., freelancing or otherwise running your own business)
• Rental income

Capital gains income result from the selling of certain items for more than you paid for them.  Examples of transactions which often trigger capital gains include:

• Stocks sales
• Mutual fund sales
• Home sales

There are two kinds of capital transactions: short-term and long-term. Short-term transactions occur if the sale happens a year or less after the purchase. Short-term capital gains are taxed as ordinary income. However, long-term capital gains (where the taxpayer owned the asset for more than one year), are taxed at capital gains tax rates.

At most times in our history including today, top ordinary income tax rates exceed top capital gains tax rates. Consequently, you’d prefer income from a capital gains transaction over the same event triggering ordinary income.

Calculating Capital Gains Tax

To determine the extent of a capital gain or loss, you simply subtract your basis in the asset you sold from its sales price. If your basis is less than the sales price, you have a capital gain. If your basis exceeds your sales price, you have a capital loss.  Let’s take an example.

Say you sold 101 shares of the stock HLMA on November 10, 2010 for $15/share.  You used a discount broker, so your commission on the trade was just $7.  The net proceeds from the stock sale are $1,508 ((101 shares x $15 price) – $7 commission).

You originally purchased 100 shares on April 26, 2008 for $12/share also paying a $7 commission.  Your total purchase price is $1,207 ((100 shares x 12 price) + $7 commission).

Since you paid $1,207 for a stock you sold for $1,508, you have a capital gain of $301 ($1,508 – $1,207), right?

While many would calculate their gain that way, it might lead to an overpayment of tax, because your basis is not always exactly equal to your purchase price. Perhaps you noticed our example features a sale of 101 shares but a purchase of only 100. Where did the other share come from? It turns out HLMA paid a $20 dividend on December 13, 2009. At that time, HLMA was trading for $20/share (Yes, last December would have been a better time to sell our fictional stock but, alas, there is no crystal ball). Upon your instructions, your broker took the $20 dividend and bought another share of HLMA, otherwise known as reinvesting your dividend.

When you calculate your basis in the HLMA stock you sold, add the $20 to your basis. Therefore, your total capital gain is actually $281 ($1,508 sales price – $1,227 basis).  Your capital gains tax rate currently varies based on your total income, but the highest current rate is 15%, so the most tax you’d owe on this hypothetical stock sale is $42.50 (15% x $281 capital gain).

Note:  the maximum capital gains tax rate is set to rise to 20% on January 1, 2011. Whether and to what extent tax legislation passes affecting 2011 tax rates is currently anyone’s guess. Hmm, sounds like a future blog posting at the TurboTax blog.

Avoid Unpleasant Withholding Surprises

If you’ve earned extra money this year, say from a side business you didn’t pay taxes on, you might end up owing money come April 15.  Married couples who both work and have one or more side jobs are at particular risk this year because of 2009 withholding changes under the stimulus plan.

How do you know if you haven’t paid enough withholding?

Use our slick 2009 TaxCaster to estimate your taxes. Increase withholding if you expect your tax bill will be much more than what you’ve paid in.

Many employers let you bump up your withholding for the last one or two paychecks of the year if you revise your W-4.

Free up your own money for the holidays

On the flip side, if you expect a big refund for this year, you can get some of it early, by decreasing withholding. This puts money in your pocket now, just in time for the holiday season.

Get a tax deduction when you buy a new car

A tax deduction for buyers of new cars expires on December 31, 2009. So if you plan to buy a new car, purchasing by year’s end could save you as much as $1,000 on your taxes.

This tax break, created by the stimulus plan, allows taxpayers to take a deduction on the sales tax paid on new car purchases between February 17 and December 31. And you get this tax break even if you claim the standard deduction—as most taxpayers do—rather than itemizing deductions on your tax return.

The amount of the credit depends on the car price, your local sales tax and your income tax bracket. The higher each of these numbers is, the greater your tax savings.

Give Gifts to Reduce Gains

Any individual can give another person as much as $13,000 in 2009, without triggering a gift tax. One strategy is to give appreciated stock instead of cash. You won’t have to pay taxes on your gain, and your recipients won’t be taxed until they sell theirs.

For the children in your life, you could set up a Coverdell Education Savings Account or a 529 College Savings Plan. These allow college savings to grow tax free, and with some 529 accounts, you get a state tax deduction.

Tax tip: Give a gift that pays later. Money you give to a child or other person with earned income can be used by them to kick start an Individual Retirement Account and contribute to their long-term retirement savings.

Give Now,  Save at Tax Time

Cleaning out your closets and donating unused items to charity is good for the charity and it can help reduce your taxes. If you itemize your deductions, every dollar’s worth of goods you donate can be taken off your income.

Use our free product, ItsDeductible, to value and record your used items, then import your contributions into TurboTax.

Take Investment Losses, Get Tax Benefits

Given the tumult in the stock markets,  you might have some big losers in your portfolio. If you have stocks that tanked since you bought them, you can take a tax loss that can offset taxable gains. (This applies only to taxable investments, not those in your 401(k) or IRA.)

Don’t have taxable gains? You can deduct $3,000 from your earned income in 2009 and again in future years until the loss is used up.

Sock It Away

Increasing contributions to your employer-sponsored retirement plan not only gives you a boost for the future, it saves taxes by lowering your taxable income.

Not necessarily.

There’s nothing to report on your tax return if your investment lives — like most everyone’s does — in a 401(k) or an IRA. These are special no-taxes zones, where you can buy and sell securities and mutual funds without having to report the capital gains and losses on your tax return. When you eventually take your money out, however, you’ll have to pay income taxes on some or all of it (unless it’s coming from a Roth IRA.)

Stocks/Investments

But what about the investments you own outside of your retirement accounts?

Let’s say your 200 shares of the Bank of What Was I Thinking have fallen by 50 percent.

You can’t deduct your loss, however, if you haven’t sold those shares. Until you sell, you have what’s known as a “paper loss,” not an actual loss.

Now then, even if you sold your shares after watching them lose half their value, you still might not get to claim a loss. Let’s say you bought the shares at $50 each, they climbed to $140, then fell to $70 at which point you decided to sell them. However, you don’t have a loss. You have a gain of $20 per share. And you need to report that on your tax return.

Here’s another puzzler. You might have a taxable gain even if you didn’t sell any of your investments. How is that possible?

Because a mutual fund you own sold some stocks and bonds it had in its portfolio. Here’s what happens when the markets climb steeply then fall precipitously, as they did in recent months:

When the markets were booming, your mutual fund held stocks that had shot up value. And when the markets fell, some investors decided to bail. The managers of your mutual fund had to pay those investors, so the managers sold highly appreciated stocks to raise the cash. That generated capital gains for the mutual fund, which are passed on to you as capital gain distributions.

Unless, of course, your mutual fund is in your retirement account. You don’t have to report your “gain” to the IRS.

For more information on about taxes and your investments, read Capital Gains and Losses.