More On Tax Planningfrom The Advisor's Professional Library
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- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
Charles Schwab Advisor Services released Wednesday the latest in its series of Market Knowledge Tool (MKT) reports, this one focusing on the extension of new cost-basis reporting requirements for mutual funds, ETFs and dividend reinvestment plans (DRIPs) acquired and sold on or after Jan. 1, 2012.
The report also provides suggestions to advisors on how best to communicate these changes to their clients, particularly on the changes to Form 1099-B that will include cost basis information that must be reported to the IRS on covered equities sold in 2011.
The expanded reporting requirements were mandated by theEmergency Economic Stabilization Act of 2008, aka the $700 billion bailout bill, under which the adjusted cost basis of various securities must be reported on Form 1099, and then inserted on Schedule D of clients’ Form 1040. Broker-dealers, transfer agents and custodians must also file their cost basis data with the IRS.
Under the Act, there are three phases to the reporting regs. The first took effect on Jan. 1, 2011, covering equities; phase two, starting Jan. 1, 2012, will cover mutual funds, DRIPs and most ETFs. The third phase, which takes effect Jan. 1, 2013, will coverfixed income and options, though the IRS has yet to issue final regulations on this phase.
“Cost Basis Reporting: Preparing for 2012” goes into detail on what advisors should expect from their "broker" partners when it comes to reporting and how RIAs’ back offices should prepare for the change. A large section of the study discusses best practices in communicating the changes to end clients to reduce their possible confusion and anxiety over the changes. Further information on cost basis reporting is available on Schwab Advisor Services’ website.
The white paper recommends the following steps advisors can take now to help clients with the process:
- Develop a communications strategy. Clients will need to be guided through the changes coming to mutual funds, DRIP shares and ETFs. Just as advisors may have reached out to clients last year about the changes to equities, firms should develop a strategy to explain the legislation that takes effect in 2012.
- Train back-office staff. Firms should prepare for workflow changes and a jump in client inquiries, especially when they receive the new Form 1099-Bs [in early 2012] containing cost basis information on equities sold in 2011.
- Develop a summary sheet. Even if advisors have already reached out to clients about changes to Form 1099-B, many clients will need a reminder as to why they are receiving cost basis information and what they are responsible for reporting on their tax return. A summary sheet can educate and remind clients on how to read information on the new forms.
- Contact clients’ CPAs and tax advisors directly. The changes coming in 2012 present a relationship building opportunity to reach out to clients’ CPAs and tax advisors and discuss the new cost basis requirements. By connecting with them, firms can potentially create a more holistic investment and tax-planning experience by using the Form 1099-B to include tax impact in assessing clients’ financial picture.