1099, Good Buddy!
Understanding your year-end tax documents
You buy mutual funds because you want the returns they produce. But once a year, they produce something else: tax documents.
The flood of documents is enough to make anyone bleary eyed, and that’s why we highly recommend that you give them to your tax professional to sort through. The tax code is complicated, and only a qualified tax preparer — not a piece of software and not a temp worker employed by a strip mall outfit — should be asked to prepare your taxes. [But wait until March 1 to file your taxes, because many firms are delaying the release of 1099 forms again this year. For more information on this topic go here.]
So what exactly are all those documents, and why does your brokerage firm insist on sending them? If you’re interested in learning more about the contents of those envelopes (i.e., you’re a glutton for punishment), keep on reading. Otherwise, just give those documents to your tax preparer.
One of the most common tax forms is Form 1099. You should receive a 1099 for each taxable account you have. If yours is a brokerage account, you’ll get one 1099 for each account; if you hold your accounts directly with a mutual fund company, you will receive a separate 1099 for each fund.
If you moved your accounts from one firm to another during the year, you will likely get separate 1099s from each firm (for the period your accounts were at each one).
Each 1099 reports dividends, capital gain distributions, interest, sales and withdrawals. This information must be reported on your tax return.
Some of the information gets reported on Schedule B; information about gains and losses from the sales of securities made during the year is to be reported on Schedule D. This form is quite complex, and many do-it-yourself taxpayers overpay their taxes by completing it incorrectly. (You’ll find a complete description of cost basis and how to report it in my book, The Truth About Money.)
To help our clients avoid this problem, we provide them with a Substitute Schedule D-1. But if we sold assets for you that you purchased from a different firm, we don’t have the historical information necessary to create an accurate Substitute Schedule D-1. If that applies to you, give your tax advisor your old statements so he or she can prepare your return accurately. If you don’t have those documents, try contacting the firm that handled your account, as it might be able to provide you with the information you need.
Edelman Financial Services (EFS) does not provide advice pertaining to tax matters. Information regarding tax matters which may be provided by EFS is of a general nature only, and is not to be construed as constituting specific advice. Such information can be provided only by a tax professional and EFS recommends that individuals consult a tax professional for advice concerning tax issues.