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December 23, 2013 at 07:00 PM
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.