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Ron Finke is president of Stewardship Capital, a registered investment adviser. Reach him at rcfinke@stewcap.com.
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Independence, MO
You are now receiving a boatload of 2011 income tax forms from financial institutions with which you do business. There have been some changes to the Forms 1099. Surprise!
Since Congress introduced another complexity for us called qualified dividends a few years ago, each new year has brought amended Forms 1099 from your mutual fund companies. By now these should be fewer, but don’t be surprised if you get an amendment in late February or even March because of this.
The mutual funds have to decipher which company dividends they received during the year are qualified. In some cases, it is apparently tricky to determine, and recharacterizations have often occurred. If your mutual funds are held in a taxable brokerage account, this requires the broker/dealer to send you an amended Form 1099. The total dividends number usually has not changed, just the division between qualified and non-qualified. It doesn’t affect IRAs or other non-taxable accounts.
The new Form 1099-B, Proceeds From Broker and Barter Exchange: Transactions may also confuse you since it now contains boxes for the date of purchase, your adjusted cost basis, and whether the gain or loss is short or long term. The problem lies not with the boxes but the fact they will probably be blank. Do not panic. The issuer is only required to supply information for stocks purchased after Jan. 1, 2011, and mutual funds purchased after Jan. 1, 2012.
Reporting for bonds, options or private placements will be required for those purchased after Jan. 1, 2013. If you did not sell during 2011 any stocks purchased in 2011, then Box 6 should have a checkmark by non-covered security.
Despite the fact the IRS thinks too many cheat on capital gains, this will probably be a good thing in the long run. One other point is that the broker will be reporting gains on a first-in, first-out basis unless you designated another method at the time of sale. But because your broker might make a mistake in reporting these to the IRS, be sure to keep an annual record of purchases forever or at least until you die.
Upon death, your investment basis jumps or falls to current fair market value so the tax slate is wiped clean. Besides, you don’t have to worry about it. On the other hand, if you have losses and you are stricken with what may be your last illness, call your broker before you call 911. Your losses will do you and your family no good after you’re gone.
So when would be safe to file your Form 1040? If you have a taxable investment account affected by these items, personally I wouldn’t file before the first week of April. Have your accountant prepare it and then hold it. See if amendments come since it is easier to recalculate than to file an amendment.
If you file early because this is your annual savings plan and you receive a giant refund, just bite the bullet and refile if you have to. Since you are making a loan to 330 million of your closest friends, rework your W-4 for 2012, go to your local bank and set up a Christmas savings account for your monthly savings. This would be a good emergency fund.
(We do no tax preparation, this is not designed to be personal tax advice, each person’s situation might be different, and you should consult your own tax accountant with regard to these matters.)