Editor's note: As a special feature for March,
offers an ongoing series on everything you need to know about taxes. Today is part seven.
Why do today what you can do tomorrow?
That may be the opposite of what you're told, but believe it or not, you might want to take on that mantra this tax season. That's because you may find a corrected 1099 in your mailbox one of these days. And the tax preparation process is so arduous the first time around, the thought of having to amend your return because of an error is enough to make you sick.
So consider stalling -- a bit.
Form 1099 is the form from your bank, broker or mutual fund that reports all the interest, dividends and capital gains distributions you received throughout the year. So you may have received a 1099-INT, reporting interest income, a Form 1099-DIV reporting dividend income or a Form 1099-B, reporting any broker transactions. Hopefully you received them by now.
The problem is they might not be accurate.
Due to the ever-convoluted tax laws, many investment firms couldn't get the numbers right and had a tough time getting the forms out by the Jan. 31 deadline. Companies such as Edward Jones, Merrill Lynch, Morgan Stanley and Wachovia Securities asked the IRS for a 30-day extension to ensure the numbers were accurate.
But other firms, like Fidelity and Charles Schwab, did get their 1099s out by the January 31 deadline -- but that's no guarantee that they reported the correct numbers.
Why the confusion? There are two big issues behind that:
The first affects your Form 1099-DIV -- your dividend distributions. Back in 2003, the Jobs and Growth Tax Relief Reconciliation Act introduced a new category of qualified dividend income that was taxable at federal rates. Those dividends are not subject to the ordinary income tax rates like other dividends, as long as they meet certain criteria. Instead, qualified dividends are taxed at a maximum rate of 15%. But companies must report regular dividends and qualified dividends separately on Form 1099-DIV, and they're still having a tough time separating them.
The second problem is new this year and screws up your Form 1099-INT. Thanks to a mid-2006 congressional decree, any portion of your tax-free interest that might be subject to the alternative minimum tax (AMT) must now be reported separately on your 1099-INT. So two new boxes are on the form. Box 8 now reports all your tax-exempt interest. Box 9 shows the portion of that interest that is from qualified private activity bonds and needs to be reported for AMT purposes.
Yuck. But it's pretty obvious why some banks and fund families are having a difficult time getting this info together. Thanks to these onerous rules, errors are on the rise. Don't be surprised if a corrected 1099 shows up in your mailbox over the next few weeks. The correction rate jumped to 14%, from 5% to 8% in the few years since the new qualified dividends were introduce.
So for all of you go-getters out there, it probably wouldn't hurt to stall the preparation of your tax return a bit, just in case one of your firms realizes they made a mistake and has to issue you a corrected 1099. I'd hate for you to prepare your return so diligently and file it only to find you have to amend it because your 1099 information was wrong.
It may be their mistake, but it's your responsibility.
Hopefully most of the kinks are worked out within the next few weeks, but it wouldn't hurt to call your broker or fund company and ask if they're sending out any corrected 1099s. So consider this a warning if a corrected 1099 happens to show up on St. Patrick's Day.
Go out and enjoy your green beer and just be thankful you procrastinated -- a bit.
Next in the tax series: Don't Fear the Auditor
tax series previously featured:
- Don't You Miss a Tax Credit or Deduction
- Booyah Breakdown: Taxes for Traders
- How to Choose the Right Tax Software
- AMT:Little Tax Of Horrors
- Last Chance to File for Refunds -- for 2003
- Booyah Breakdown: Taxes for Traders II
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;
to send her an email.