Investors' Year End Papers

Disclaimer and Warning - From Bob Parrish CPA, P.C.

Remember........"You can have everything in life you want, if you just help enough other people get what they want." -Zig Ziglar.

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Investor - Year End Papers

Gathering information - what you will need: All year end statements. You will need 1099-INT, 1099-DIV, 1099-B, 1099-OID and other statements and attachments (including booklets or pamphlets) that you receive from those that hold your investments or the broker.

Where to start - Stocks, Mutual Funds, Bonds:

First get your 1099-B.

Gather all the buy confirmations (this will show you your total costs) of all the securities that are listed on the 1099-B

Gather all the statements showing dividends reinvested for the securities (or mutual funds) listed on the 1099-B

If you have a sheet or ledger for those same securities from the previous year, then obtain that form - you will need it.

At this point - arrange all the documents in order of the items listed on the 1099-B

Next - attach all the documents to each 1099-B that you have received

THEN - either fasten those groups and send to the accountant OR prepare your-self for doing the mathematics according to Uncle Sam!

I will add instructions for the mathematics and relating to the IRC code AND what you must tell your broker whenever you sell securities to make some different tax election on computing the basis of the securities.

Non-Engagement Letter

This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. You have not engaged the corporation, officers or other parties to represent you. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. .......

Wednesday, September 22, 2010 02:17 PM

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Learning Objectives

What it does, Why it works - Plain English Analysis

1099-INT:
Interest income is reported on a 1099-INT. The form contains your name, address, Social Security number, and the amount of interest paid to you. It includes the name and identification number of the institution that paid the interest. Foreign taxes, interest on U.S. Savings bonds, and any tax withheld are reported in separate boxes. You report your interest on your 1040 Schedule B. It’s a relatively simple process.

1099-R:
Form 1099-R for Pensions, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is also relatively easy. Be careful here, however. There are separate boxes for gross distributions and taxable amount. While you report the gross amount on the face of your 1040, you only include the taxable amount in your income. Be Careful

1099-DIV:
Things get a bit more complicated when you get to 1099-DIVs, in which your dividends and distributions paid are reported. Dividends are distributions of corporate income to shareholders. They also include distributions from mutual funds that you own. The mutual fund many times reports more income on the 1099-Div than you received. This is not uncommon and is not incorrect.

1099-B:
The gross proceeds from any sale of any securities are reported on form 1099-B.

All sales of securities are reported in this form. You must report the sale on your income tax return. The basis includes not only the original cost of the fund, or stock, but the reinvested distributions from the fund in the form of dividends not taken in cash as well. The reinvestments increase your basis, and thereby reduce any taxable gain. IF you fail to make a proper accounting of the reinvestments, the you will pay taxes twice on the income - once when it is earned and again when you sell the reinvested security.

The IRS allows sellers of securities to select from among four different methods to determine the gain, or loss, on the sale of mutual funds. IRS Publication 564, Mutual Fund Distributions, details those methods. Here is a brief summary of the four options:

First in, first out (FIFO) accounting assumes you sold your mutual fund shares in the order that you bought them. If your shares have been increasing in value, it will result in the greatest taxable gain.
Average cost method single category method computes your gain using the average cost of all the shares you own. Some mutual funds will compute this number for you.
Average cost double category method is rarely used. It allocates shares to long-term and short-term holding periods according to the overall ratio of such holdings.
Specific share allocation allows you to select particular shares from among your portfolio for sale. This is the best way because it allows you to select those shares that yield the best tax result. In most cases, this means choosing the shares that had the highest basis share, which includes the fund’s purchase price and dividend payments.

If you plan on using one of the "Average Cost" methods, you have no actions to take at the time you sell the shares.

IF the method of choice is one of the methods for which you choose which shares to sell. Then you must tax specific actions before you sell the shares. You must direct the selling agent which shares to sell. Three is a separate page on how to do this. Please read that page - or expect to lose an IRS challenge on this point.

Gains on long-term sales are taxed at a maximum rate of 20%, 10% if you are in the 15% bracket.

Your 1099-DIV will detail all of these gains. You start with your gross dividends, which are reported on Schedule B. From your gross dividends you subtract your non-taxable distributions and your capital gain distributions, both of which are included in your gross income figure. These subtractions are shown on your Schedule B. You then transfer all of your capital gain distributions to your Schedule D where you are then required to allocate them among the three holding period classifications discussed above. Your mid-term rate amount normally will be identified by the 1099-DIV as “28%” distributions, your short term as “ordinary” income. Be careful: Many funds report the amount of 28% distributions not on the 1099 itself, but on a supplemental schedule sent with it.

By making sure that you report each category of income correctly, you reduce the potential of an IRS correction letter, or, even worse, an audit. While a simple error of reporting gains in the wrong tax category typically won’t cause an audit, it will focus more attention on your return. From the IRS’ perspective, the more errors they catch you making, the more errors they suspect they aren’t catching in your return. Let’s not give them any more opportunities or reasons to contact you.

The IRS computers compare your tax return to the computers records of those sending you these 1099 forms. Use accuracy and good compliance measures, or expect letters from the IRS charging you additional tax and asking you to prove your position on the tax return.

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