27 03 2019

What to Know About Your Investment Tax Forms

Investors can expect to get 1099 and 5498 tax forms, and they may come with a couple surprises.

IT'S EVERYONE'S LEAST favorite time of year: Tax season, when you get hit with more attention from the Internal Revenue Service than you ever wanted. For investors, tax time comes with even more IRS love, often through a 1099 or 5498 tax form.

If you're wondering what you did to deserve so many investment tax forms, the good news is you probably received income from your investments last year. The bad news is the IRS wants its share of that income, too. The cut from your paycheck it already takes isn't enough to appease this hungry beast.

Here's what investors need to know about investment tax forms this year:

1099 tax forms are used to report investment income to the IRS. Form 5498 reports contributions and rollovers to individual retirement accounts (IRAs).
You may have to pay taxes even if you didn't sell an investment.
You may get a corrected 1099 form after the first mailing.
The new tax law added a line item for 199A dividends from real estate investment trusts, which are added to 199A income.
Some states now allow deductions for investment expenses even though the federal government no longer does.

What Do My Investment Tax Forms Mean?
If you sell an investment at a profit, the government wants its share. When you sell in the first year that you own the investment, you’ll be taxed at ordinary income rates as opposed to the more favorable capital gains rate. The capital gains rate you pay depends on your income,but is usually zero, 15 percent or 20 percent with occasional types of capital gains warranting a 25 percent or 28 percent rate.

When you make a profit on the sale of an investment, you expect to pay taxes on it. But here's the kicker: You may have to pay taxes on your investments even if you didn't sell. If a mutual fund you own makes a distribution, meaning the fund sells shares it owns and passes the gains onto investors like you, you’re responsible for the tax liability. Upside: You only have to pay at the capital gains tax rate for these.

You'll know if you owe taxes when you receive your 1099. These tax forms report income you received outside of your W-2 income. Investors will receive a 1099 if you:

Sell an investment for a gain or loss.
Receive dividends or interest from an investment, or get substitute payments in lieu of dividends or tax-exempt interest.
Take a distribution from a retirement account, health savings accounts or education account.
Sell your home or other real estate.
Own an original issue discount bond.
The 1099 is essentially a "conglomeration of everything that's in your brokerage account," says Amy Joyce, a certified public accountant, attorney, and partner at Margolin, Winer & Evens in Garden City, New York. It'll list things like dividends and interest you received, capital gains distributions from mutual funds, and gains or losses on sales of investments.

"If you have investments in foreign stocks, you might also see foreign income tax withholdings, which you may be able to get a credit for on your tax return," Joyce says.

IRS form 5498 is for individual retirement accounts (IRAs). You'll get a 5498 if you:

Contribute to an IRA.
Make a Roth conversion.
Complete a rollover from a 401(k) to an IRA.
Recharacterize an IRA or Roth contribution.

What If I Didn't Receive an Investment Tax Form?
"Filers often panic if their 1099 forms don't come," says Brian Wainscoat, a certified public accountant and tax specialist at San Francisco-based digital wealth manager Personal Capital. "But there's no need to worry. Unlike W-2s, 1099 forms aren't required to be filed with your return."

If you know the type of income you received and how much, you can report it on your tax return without an accompanying 1099. The exception to that is the 1099-R, which you will need to file with your return if you had federal tax withheld from a retirement distribution.

If you don't know how much income you need to report, "contact the issuing institution to get a duplicate for your records," Wainscoat says.

Why Did I Get a Corrected 1099 Form?
Speaking of duplicates, you may get what seems like the same exact 1099 tax form more than once. Although they may look identical, each new copy you receive is likely a corrected 1099. The top of the form will be marked "CORRECTED" if this is the case.

Corrections occur most often with 1099-DIVs. The IRS requires companies to report income estimates to brokerage companies by a certain date so the brokers can issue 1099s. But sometimes these estimates miss the mark.

"Some of the companies that estimate the income revise the information reported to your brokerage company when they finalize all of their calculations, which can take days, weeks or even months after they released their original reports," Wainscoat says.

"So if you get a second 1099, don't just throw it out because a lot of times they've been changed and you need to send it to your accountant," says Joe Bublė, a partner who leads the tax practice at Citrin Cooperman’s New York office.

How Have Tax Forms Changed?
Investment tax forms haven't changed much from last year, with one notable exception. Under the new tax law, there will be a new line item on 1099s referring to 199A dividends.

199A dividends are those from real estate investment trusts. Investors are now allowed to add 199A dividends to their 199A qualified business income. If you meet certain qualifications and don't go over certain thresholds, an individual taxpayer can receive a deduction of up to 20 percent of 199A qualified business income, Joyce says.

The other big tax law change for investors is that investment expenses are no longer deductible. That's a disappointment for a lot of investors and some states.

"A lot of the high income states like New York, New Jersey and Connecticut were not too pleased with the changes in the tax law," Joyce says. Some have even decoupled from the changes and give the investment expense deduction back to investors at the state level.

You can tell if your state has decoupled by looking at the top of your tax forms. "Every year when new tax forms come out, there's almost always a little section at the beginning of the instructions that says what's new this year," Joyce says. If your state has decided to add a deduction for investment expenses, it'll mention the change in this section of the form.