From the February 2017 issue of Investment Advisor • Subscribe!

2016 Tax Tips to Keep on Your Radar

As tax reporting season ramps up, here are some new items that should be on your tax to-do list

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Tax reporting is an unpleasant chore and always a bit daunting. There are the same questions each year, some new questions, too, and of course the last-minute “fire-drill” requests. Here are some new items that should be on your task list for the 2016 tax reporting season.

Review Accounting Elections With Clients

It is always a good idea to review the default accounting selections on your clients’ accounts (or group of accounts), and to make sure that no changes are necessary. Especially considering the number of accounting selections available today for various asset types, you might be surprised by the number of options if you haven’t reviewed this information in a couple of years.

Furthermore, make sure that your clients are aware of the default accounting selections for their accounts, particularly if they work with a CPA who is not connected with your firm. We all hear stories of past accounting selections being questioned by the individual who is doing the client’s taxes. This doesn’t have to be a tense situation if there was previously full transparency in sharing this information.

1099 Delivery Schedule

For a number of years, a significant frustration with tax reporting was the limited information regarding the delivery of tax reports. Today, your firm should be fully aware of the 1099 delivery schedule, including details about specific securities that can delay a final report. You also may have access to detailed information regarding revisions prior to your client receiving the revised statement.

Advisors also have access to multiple reports and data exports of clients’ tax information to better assist with managing the workload of tax season. If these reports and services are not familiar to you, you are definitely missing out on some efficiency opportunities as well as tools for providing your clients with better service and support. Take a moment to check with your custodian, your reporting software solution and other partners to ensure your firm is utilizing all the tools available for handling tax season.

When a 1099 is revised, especially when it is late in the tax season, a good first step is to understand how material the revision is and the number of clients that will be impacted. Unfortunately, revisions will happen, and the faster your firm can respond, the better you can deal with the situation.

Finally, depending on the level of detail of your dividends, capital gains and tax reporting, it is unlikely that any 1099 revisions will also lead to the original transaction (in the previous year) being revised and updated for your reporting systems. Therefore, keep in mind that you might need to manually update these systems if the revision is material to your own reporting systems.

Cost Basis Reporting

Your firm is probably well versed by this time about cost basis reporting requirements and regulations. Equities, options, mutual funds and some bonds have been included in the covered category for a number of years. Starting in 2016, more complex bonds are also part of the reporting requirements. This means that cost basis for trades in physical certificates, foreign currency debt, foreign debt, convertible bonds, stripped bonds, payment-in-kind bonds, bonds with more than one rate and some private issues will now be reported to the IRS.

Now that more investments are under the covered category, it should be less confusing for clients to understand the covered versus non-covered cost basis reporting requirements. Regardless, it is important to reiterate to your clients where they should retrieve their cost basis information; that is, from their custodian, your firm's reports, both, etc.

Charitable Giving

Advisors often recommend that clients donate securities that have appreciated in value to fulfill their charitable giving desires. Processing these requests is fairly straightforward, and many advisors identify the specific security tax lots that should be gifted. It is important to review the transaction statement and confirm that the right tax lots were ultimately donated.

Come April 15, many of us are ready to leave tax season behind and move on to addressing other needs and projects. I appreciate this desire, but don't miss the opportunity to identify new best practices and ideas that will improve next year's tax season. Maybe give your staff a week or two to take a break from tax chores, and schedule a tax season debriefing in early May — and if it was a truly painful tax season, you better bring cookies!

--- Read House GOP Pledges to ‘Bust Up’ IRS in Tax Plan on ThinkAdvisor. 

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