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.
As soon as we celebrate the start of 2014, the clock starts on the 2013 tax reporting season. For many advisors, the next three and a half months are one of the busiest times of the year, with a number of last-minute requests from other professionals who work with your clients, such as CPAs and estate planning attorneys. Let’s do a little advanced preparation and discuss some of the key areas where you can serve your clients’ tax reporting needs.
Have you heard enough about cost-basis reporting yet? This subject will likely require more of your attention now that the new cost-basis reporting rules of 2011 are in effect. For 2013 tax returns, reporting requirements continue to include stocks, mutual fund shares, ETFs and dividend reinvestment plans. In fact, you will see more of these securities in your clients’ accounts included under the “covered” category, since we are now three years into the reporting requirements for stocks and two years into the reporting requirements for mutual funds. This means that more of your clients’ cost-basis information will be reported to the IRS by their custodian.
The distinction between “covered” and “non-covered” is often confused. “Covered” means the security was bought after the new cost-basis reporting rules went into effect, and “non-covered” means it was bought before that.
Debt instruments and options were originally scheduled to be part of the cost-basis reporting rules beginning in 2013. However, this implementation date was delayed by the IRS and now will be covered under the cost-basis reporting rules that began on Jan. 1, 2014. Your responsibility is to make sure that you understand the accounting method that will be used for any of the securities bought or sold in a covered transaction. More complex debt instruments, such as convertible bonds, bonds with more than one rate and foreign debt are not currently scheduled to be covered until Jan. 1, 2016.
Another area to focus on is the delivery schedule for 1099 tax reports and how your securities holdings impact this schedule. The custodian of your client accounts should be able to tell you when clients can expect their 1099 reports. However, it is important to keep in mind that the types of investments in your clients’ accounts directly impact the timing of the report. For example, if an account only has simple investments like stocks, you would expect the 1099 to be prepared earlier in the reporting schedule. In situations where you are waiting well into February or early March, this delay is likely caused by a specific asset type that has not finished their tax preparation. Mutual funds and other registered investment companies that must produce a Schedule K-1, or receive a K-1 from a company they own, often cannot produce their 1099s until March.
Don’t forget about the dreaded revised 1099. It is beyond your control when a 1099 is revised, but you should be able to be notified prior to your client receiving the updated report. This will allow you to review what was revised and be proactive with your client.
How you communicate with your clients is another key consideration. I have seen a number of letters sent to clients over the years. The best ones usually explain the finer details of the tax reporting season, including the 1099 delivery schedule, revision possibilities and cost-basis reporting rules. Considering the popularity of tax reporting software like TurboTax, you might want to use such a letter to remind your clients of any differences between the data they download from their custodian versus the tax reports created by your firm.
The tax reporting season can be very taxing for advisors—yes, the pun was intended. The number of “fire-drills” seems to increase each year; meanwhile, you still have regular business that requires your attention. Make it a priority to focus on these areas to help your firm during this time of year.