Tax Return

How To Read Your Form 1099 Composite

Tax Return

As we approach tax day (April 18th, 2016), we want to take the time to go over the 1099 Forms that have been provided to our clients by Fidelity, Schwab, and TD Ameritrade. If you haven’t received this document, you can download them online from your custodian’s website, or, feel free to reach out to your IFA Client Service Specialist (CSS) if you need assistance gathering these documents. There should be a separate document for each account that you have. All documents provided by your custodian should be sent to your tax preparer.

There are a few key sections that are particularly important to clients.

Form 1099-DIV 

This section includes the dividends (both qualified and non-qualified) that were paid out by the mutual funds that you own. It also includes any capital gains (both short-term and long-term) paid out by the mutual funds that you own. The form separates qualified and non-qualified dividends since qualified dividends receive preferential tax treatment within the United States.

It is important to note that any dividends paid by the stocks within mutual funds are passed along to each individual investor. Capital gains distributions are due to the transactions taken by the mutual fund manager. As investors redeem their individual shares of the mutual fund, the mutual fund manager must sell positions within the mutual fund in order to raise the necessary funds. IFA utilizes the tax-managed versions of the strategies from Dimensional Fund Advisors in taxable accounts in order to minimize both dividends and capital gains distributions.

Another important line item on this particular section is foreign taxes paid. US investors who hold a substantial amount of foreign holdings pay taxes on the dividends and capital gains paid out by those funds that are imposed by other countries. In order to avoid double taxation, US investors are allowed to deduct any foreign taxes paid from their tax returns.

Form 1099-B

This section includes the short-term and long-term capital gains/(losses) realized by IFA. These gains and losses are generated whenever we need to raise money for a withdrawal, perform tax loss harvesting, or rebalance a portfolio back to its target allocation. Both short-term and long-term capital gains/(losses) have their own section in Form 1099-B. Each position that was sold during the calendar year is itemized in each section.

When IFA’s Portfolio Management and Research Department places transactions in our client’s accounts, we are always looking to minimize costs, which includes taxes. Based on market volatility or withdrawal needs, clients should expect some capital losses or capital gains generated in any given year.

Year-End Summary

This section provides more detailed information about the items reported in Form 1099-DIV and Form 1099-B. This is for informational purposes only and no information provided in this section is reported to the IRS. Nonetheless, we highly recommend that all tax documents provided by your custodian should be sent to your tax preparer.

Should you have any questions about the information provided in this article, feel free to contact your IFA Client Service Specialist (CSS) or your IFA Wealth Advisor.