This time of year, you begin to get tax documents that you will need when you complete your income taxes. Some of the most confusing documents involve your investment accounts, and I want to give you an overview of what you can expect to receive.
If you have a retirement account at work, or if you own an Individual Retirement Account (IRA), and you did not take any distributions from that account, you will receive NO TAX DOCUMENTS. A distribution would be money that was sent to you. A distribution is different from changing an investment. Buying and selling securities in retirement accounts does not create taxable transactions.
If you have a retirement account and you took a distribution from it, that distribution will be reported on a 1099-R. It will come as a document from your investment firm, and it will most likely be included as taxable income on your return.
If you have a taxable investment account, like an individual account or a trust account, you may have to pay tax related to that account. For example, f you sold an investment and it had earned a positive rate of return (in other words, you made money), you will have to pay capital gains tax on that money. Additionally, if your investment paid a dividend or interest, that is taxable in the tax year you receive it.
Typically, these taxable events are reported on a document called a “Consolidated 1099,” and you should receive that document relatively soon from your investment firm. Your Consolidated 1099 will show the gain from a security sale, and it will probably also show what you paid for the security. The price you paid is called the “basis.” You are taxed on the difference at the appropriate capital gains rate. If your 1099 doesn’t show a basis, you will have to find your original purchase confirmation or statement, or it’s possible your financial professional can help you find it. Additionally, the Consolidated 1099 will show data for interest and dividends you received in sections labeled 1099-INT and 1099-DIV.
If you receive these tax documents and you don’t understand them, your CERTIFIED FINANCIAL PLANNER(tm) practitioner can help you unravel them. Remember that tax planning is a major section of the CFP(r) exam. Most importantly, save them and use the data when you calculate your taxes! The IRS already has a copy.