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Doing my taxes: silly investing mistakes I made that you can avoid

I teach and study taxation for a living, so you might think I enjoy doing my taxes so much that I’m an early filer. The truth is just the opposite. I know the whole process of tax assessment is much more complicated than it could and should be. And that’s one of the many excuses I use for my chronic procrastination.

Some of my academic colleagues have told me they always apply for a filing extension, because spring is the busiest time of the academic calendar. That’s true, but I’ve been unwilling to allow my procrastination to go that far, and I’ve always managed to file my taxes by the April deadline.

In times past I actually drove to the 30th Street Post Office just before midnight to get my returns mailed and postmarked by the deadline. For the last decade or so I’ve used computer tax-preparation software that lets me file with a click, though my unbroken record of timely filing still hangs in the balance this week.

As I assemble all my bits of paper tax records, I’m reminded of all the investing mistakes I’ve made. If only I knew then what I know now, I would have avoided the mistakes which make my annual tax filing unnecessarily complicated, one more reason for my aversion to tax return preparation. Here’s my advice:

1. Don’t invest in too many mutual funds. I believe in investing in the lowest cost, no-load mutual funds you can find, which will include index funds. But too many funds produce too much paper at tax time. If you can’t settle on a single fund for your investments, at least settle on a single family of funds offered by a single company in the hope of getting everything you need for tax preparation on a single document.

2. Don’t invest in individual stocks. If you can’t resist picking stocks yourself, at least invest through a single discount brokerage that can send you a single document for all your investments with them at tax time. Never take delivery of stock certificates. Leave all investments with the brokerage.

3. If you do buy individual stocks, do not sign-up for dividend re-investment plans. These plans for automatic reinvestment of dividends are now quite common and have their advocates who, I am convinced, completely overlook the tax consequences. These plans greatly complicate your determination of gain or loss when you sell.

4. Never invest in publicly-traded partnerships. There are now many publicly-traded partnerships that allow investment through units traded on the New York and other stock exchanges. They often produce a high income paid on the investment, and may have a tax advantage compared to corporations. I teach partnership taxation and thought it would be fun to invest in some partnerships. Suffice it to say that such investments result in mind-numbing complexity at tax time.

Those were a few of my many investing mistakes. I advise everyone to make your own mistakes and not repeat mine. Now back to finishing my taxes.

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