1099 Waiting Game
As financial firms postpone sending essential tax information -- for fear it includes errors -- investors may have to delay filing returns ... and getting their refunds. Is it a gamble these days to file sooner rather than later?
It's February. Do you know where your 1099 tax forms are?
By January 31, banks, brokers and mutual fund companies are supposed to provide investors the Form 1099 information reports they need to complete their tax returns. These forms show how much interest, dividends and capital gains distributions you should report on your tax return.
If you still haven't received the forms you need to do your return, you are not alone. Millions of taxpayers are in forced-procrastination mode because many financial firms got IRS permission to delay sending 1099s for up to 30 days. If you're among that happy majority of taxpayers who get refunds, delaying filing means postponing getting your money.
Banks and brokers aren't trying to cause you pain. In fact, they're trying to do clients a favor by not sending erroneous information that will have to be corrected later. Last year, more than 13% of 1099s issued had to be corrected. "We're talking millions and millions of forms," says a spokesperson for the Securities Industry and Financial Markets Association. Taxpayers who receive these forms and file returns based on faulty information may over- or under-pay their taxes and may have to file an amended tax return.
To hold down the errors in the first place, firms including Edward Jones, Merrill Lynch, Morgan Stanley and Wachovia Securities are delaying sending some 1099s. Other companies, including Fidelity and Charles Schwab, say they met the January 31 deadline. It's quite possible, then, that you have some of the 1099s you need and are still waiting for others.
What's going on?
The 1099 problem is most acute with mutual funds, which own a basket of securities. The fund must gather interest, dividend and capital gains information from each company and pass it on to shareholders, or, if the fund is held in a brokerage account, give the information to the broker who then passes it on to the client.
Two key issues are being blamed for potential errors this year.
One, which has been causing trouble since 2003, is the fact that the law now treats some corporate dividends differently than others. Complicated rules distinguish "qualified" dividends (taxed at a maximum rate of 15%) from nonqualified dividends (hit by a rate has high as 35%). If a company incorrectly reports the qualified/nonqualified breakdown to a mutual fund and then corrects it after the fund issues 1099s, corrected forms must go out to shareholders.
The other matter is new this year: A requirement that 1099 forms that show interest include information about tax-free interest and any portion of it that might be subject to the alternative minimum tax. Some funds are having difficulty gathering the necessary information from the issuers of all the bonds held in a portfolio.
Note: You don't have to worry about the 1099 snafu for investments inside an IRA or 401(k). Because income earned in those accounts is not taxed until you withdraw the money, 1099s are not issued for the annual earnings.
Should you wait?
If you're among the lucky taxpayers who have received all of your 1099s, should you file as soon as possible or wait to see if you get a corrected 1099 in the mail?
That's a good question.
You could play it both ways. Prepare your return using the information you have now, but wait a few weeks to file. If you use tax preparation software such as TurboTax (for which Kiplinger provides expert advice), you can plug in the numbers from the 1099 you have now and easily change the inputs if a corrected 1099 comes along later.
Or, you can file as soon as you're finished with your return, gambling that you won't get a corrected 1099, or, if you do, it won't matter.
One California accountant reports that her firm routinely ignores corrected 1099s because the differences in reported income are so small that it's simply not worth the trouble of filing an amended return. Remember, the tax-rate tables move in $50 increments, so it's possible a change in the amount of income reported would not affect your tax bill one wit.
If you file and then get a corrected 1099 that significantly changes your tax bill, you can file an amended return. If you use tax software, that's not an onerous task.