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Guarding Your Wealth for Senior Citizens
Changes in Tax Laws Have Created the ‘Corrected
1099’ Nightmare
Banks, brokers now report interest, dividends on
different 1099s
By Jeffrey D. Voudrie, CFP
 March 19, 2007 - There’s nothing more frustrating
than receiving a corrected 1099 a few weeks after you’ve filed your tax
return. Must you amend your return? Read on to find out.
The number of corrected 1099s issued has increased
dramatically the last few years and it looks like that trend will
continue. The increase is due to 2 major changes in the tax law and the
information banks, brokers and mutual funds must report.
The first change occurred in 2003. That’s when the
tax rate on dividends and capital gains was separated from the tax rate
on your other income. Previously, you paid the same amount of taxes
regardless of whether the income came from a Certificate of Deposit, a
preferred stock or capital gains on a mutual fund.
The good news is that most of you are paying less
in tax as a result of this change. The bad news is that banks, brokers
and mutual funds companies have to report interest income on one form
(1099-INT) and your dividends on another (1099-DIV). Surely that
shouldn’t be that difficult for those big computers they all use!
Well, nothing is ever simple with the IRS. Congress
decided that only certain dividends qualify for the lower tax rate. So
banks, brokers and mutual funds must wait to hear from the underlying
company whether a dividend is qualified or not. If you own a preferred
stock in a utility company, the utility company will have its lawyers
make the determination. Then that is communicated to the banks, brokers
and mutual funds.
So a mutual fund must wait for the utility to
inform them if the dividend is qualified. Then the mutual fund company
has to compile all that information so it can accurately report to the
brokers who then must compile it and report it to you. Multiply that by
tens of thousands of companies and you can see why it’s a nightmare.
The second change occurred last year. Now, a
1099-INT must include tax-free interest and the amount of that interest
that is subject to the Alternative Minimum Tax (AMT). If a mutual fund
holds hundreds of tax-free municipal bonds, it has to determine whether
each one is subject to AMT.
Over the last few years, 1099s have been sent out
by the January 31st deadline only to be followed by corrected 1099s soon
after. It isn’t uncommon for someone who files a tax return in early
February to get a corrected 1099 a few weeks later. They then dutifully
go back to their accountant and pay a couple hundred bucks to have an
amended return filed.
It doesn’t have to be that way. There are steps
that you can take that will minimize the pain and suffering caused by
corrected 1099s.
First, just because you receive a corrected 1099
doesn’t mean that you need to file an amended return. Most corrections
are very small. The amount of taxes you owe is based on tax rate tables.
Tax rate tables move in increments of $50.
If the difference between the original amounts you
reported and the corrected amounts aren’t going to change your bracket,
then there’s no need to file an amended return. If the corrections
result in you getting an additional refund, and that refund is minimal,
there’s no need to file the amended return.
Second, you can delay filing your initial return
until early April. The deadline for filing a return is April 15th.
There’s no rush to file it before then. You can have your return filled
out and ready to go, but hold on to it until early April. If you get a
corrected 1099, it’s much easier to make the change on your initial
return than it is to file an amended one.
Third, unless your taxes are very complicated (and
most retiree’s aren’t), you might consider doing your own taxes using
popular tax software you find at most office supply stores. The software
isn’t very expensive and completes your return based on your answers to
some straight-forward questions. When you get a corrected 1099, you can
easily go in and make the change yourself.
The chances are high that you will receive a
corrected 1099 this year. Take steps now, before your file your return,
and you can alleviate much of the frustration they normally cause.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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