Making sense of tax-related forms

Tax time can be confusing, especially when you may not be clear why you have received a specific tax form based on your investments and retirement accounts. The following are brief explanations of the tax-related forms commonly received by investors.

Form 1099-B is a form issued by any broker/dealer to any client who sells shares of a security. This Form summarizes the proceeds of all capital transactions, which will be accompanied by a gain or loss, and must be reported to the IRS when you file taxes. Form 1099-B is issued by a fund underwriter in connection with the sale of mutual fund shares. Full-service broker/dealers also issue Forms 1099-B for any capital transaction in common stock, preferred stock, bonds, options, futures, etc. This notifies the IRS of all transactions that should appear on a taxpayer’s IRS Form 1040, Schedule D, either as a capital gain or capital loss.

Form 1099-DIV is a form issued by corporations to report all taxable dividends paid in the relevant year. This Form is also used by mutual fund companies to report all taxable capital gains and dividends paid to an investor – even if the shareholder reinvests these amounts in additional shares. The Form includes ordinary dividends, total capital gains, qualified dividends, non-taxable distributions, federal income tax withheld, foreign tax paid and foreign source income from each investment account held by a fund company. Dividends are reported on Schedule B and capital gains distributions are reported on Schedule D of Form 1040.

Form 1099-INT is issued by a payor of taxable interest such as a bank and tax-exempt interest such as a municipality or municipal bond mutual fund. Exempt-interest dividends should be shown in box 8 of Form 1099-INT. A taxpayer must report them on his/her tax return if required to file. This income is generally a “tax preference item” and may be subject to the alternative minimum tax. Box 9 of Form 1099-INT should show the tax-exempt interest subject to the alternative minimum tax.

Form 1099-R is the Form used by custodians and trustees to report distributions from all types of retirement plans, including §457 plans. Form 1099-R is also issued by insurance companies for distributions from non-qualified annuities. Form 1099-R must be mailed to each participant who has taken any distribution in a tax year by the end of January in the following year. It is transmitted electronically to the IRS by the end of February in the year following the distribution.

Form 2439 is a form issued by a mutual fund showing the shareholder’s share of undistributed long-term capital gains that the fund retained and paid taxes on. The taxpayer must report his/her share of these amounts as long-term capital gains on Schedule D, even though s/he did not actually receive a distribution. The taxpayer can take a credit for his/her share of any tax paid because s/he is considered to have paid it. This increases the shareholder’s basis in the account and s/he should keep Copy C of Form 2439 as documentation of this increase in basis.

Form 5498 is a Form that each IRA custodian must provide to the IRS and the account owner that

1) reports the fair market value at the end of a tax year and

2) reports all contributions and rollovers, including recharacterizations and conversions, made during the tax year and those regular contributions to traditional and Roth IRAs made in the following tax year prior to April 15th that were designated as contributions for the preceding year.

These are electronically transmitted to the IRS by the custodian. This form is informational only – it is not filed with the taxpayer’s Form 1040.

Form 8606: The title to this form is “Nondeductible IRAs.” This is the Form taxpayers must attach to their Form 1040 tax returns to inform the IRS of:

1) non-deductible contributions made to a traditional IRA in the relevant tax year,

2) after-tax employee contributions to an employer plan rolled over to an IRA in the relevant tax year;

3) the cost basis of any IRA distributions taken during the tax year if any non-deductible contributions had ever been made in previous years to any of the owner’s IRAs,

4) conversions from traditional IRAs to Roth IRAs,

5) distributions from Roth IRAs.

All of an IRA owner’s traditional IRAs are considered one IRA for this form – once someone has made a non-deductible contribution to any traditional IRA, this form will have to be completed and attached to his return every year a distribution is made from any of his traditional IRAs, including distributions made to his beneficiary or beneficiaries. In the same vein, all of a Roth IRA owner’s Roth IRAs are treated as one Roth for distribution purposes.

For recharacterizations, a taxpayer must attach a written explanation with all the pertinent details of any recharacterizations transacted for a relevant tax year to his/her Form 1040. Instructions regarding this are found in the Instructions to Form 8606. Also, an explanation for a recharacterization completed in a subsequent tax year must be attached to the Form 1040 for the original tax year, i.e., the tax year of the original transaction, which may mean the individual must file an amended Form 1040. The amended return does not have to be filed by October 15th (i.e., the normal deadline plus extension), but must be filed by the normal deadline for amended returns which is generally three years. The amended return must provide the statement “Filed pursuant to §301.9100-2.”

Form 5329: This is entitled “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts” Basically, this form must be filed with Form 1040 when a taxpayer:

1) takes a premature distribution from any retirement plan (except §457 plans), even though there is a §72(t) exception to the 10% penalty

2) takes a premature distribution from a non-qualified annuity (e.g., for SAM fees),

3) has made an excess contribution to either a traditional IRA or a Roth IRA and owes the 6% excise penalty,

4) has taken a distribution from an Education IRA not used for qualified educational expenses,

5) has made an excess contribution to either an Education IRA or a Medical Savings Account (MSA) or

6) has not taken a required minimum distribution and is subject to the 50% penalty.

Please note that the penalty must be paid when this form is filed, with or without the Form 1040. If the taxpayer has taken a premature distribution from a retirement account and the situation fits one of the §72(t) exceptions to the 10% penalty, s/he must declare which exception applies to the distribution on Form 5329. This does not apply for death or disability distributions.

Form 709: The Gift Tax Return is due by April 15th of the year following the bestowal of the gift. The Form is used to report any gift(s) to any donee excluding a spouse that exceeds the $13,000 annual exemption amount. However, if your client makes a gift to his/her spouse with strings attached (i.e., such as through a QTIP trust) or if the spouse is not a U.S. citizen and the client’s gifts total $133,000 or more, s/he will have to file this Form.

Corey M. Malstrom, CFP®
Registered Representative
CERTIFIED FINANCIAL PLANNER™ practitioner
Legend Equities Corporation
The Legend Group
450 Corporate Parkway, Suite 102
Amherst, NY 14226
office: (716) 837-3335 x261
mobile: (716) 553-2538
fax: (716) 837-3099

Converting to a Roth IRA may provide future benefits:

Hedge Against Future Tax Increases — Considering current personal income tax rates and with the nation facing unprecedented financial challenges in the years ahead, a Roth IRA may provide valuable tax-hedging advantages. Given the some of the current economic issues the nation is facing and potential fiscal challenges related to Medicare and Social Security, it’s not difficult to envision the possibility of being in a higher tax bracket during retirement, even for individuals who are currently in the upper income tax bracket (35% for 2010).

Tax Diversification in Retirement1 — Another advantage of Roth accounts relates to the potential benefits of creating a diversified pool of both tax-deferred and tax-free sources of savings from which to generate retirement income. When most or all of your retirement assets are held in traditional tax-deferred accounts, you do not have the flexibility to control your taxable income without foregoing retirement income and spending flexibility.

1 Distributions from a Roth account are tax-free provided the account has been open for at leastfive years and the individual is over age 59 1/2. Otherwise, withdrawals ofearnings may incur a 10% penalty in addition to ordinary income taxes.

Carefully consider the taxes, fees and expenses associated with a Roth conversion. The full amount of the conversion will be taxed as ordinary income.

Legend EquitiesCorporation and its affiliates do not provide tax or legal information or advice.

Carefully consider taxes, fees and other expenses before initiating an IRA conversion.

Corey M.Malstrom, CFP®

Registered Representative | CERTIFIED FINANCIAL PLANNER™ practitioner

Legend Equities Corporation

2011 Payroll Tax Cut designed to provide a Bigger Paycheck!

What will you do with your extra income?
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation
Act of 2011 includes a temporary provision to cut the FICA (Social
Security) payroll tax for individual employees from 6.2% to 4.2% this year. This means most workers will see a 2% increase in their take home pay over last year!1

Put your extra cash to work for your future!
The table below illustrates how much more you may receive in 2011 based on your current annual salary, how much you could invest in a tax-deferred retirement savings account without seeing a decrease in your take home pay,2 and how much that investment may grow over the years.

Talk to your Financial Advisor today…
about increasing the amount you contribute to your employer’s retirement savings plan, or your IRA/Roth IRA.

Legend Equities Corporation and its affiliates do not provide tax information or advice.
1 All other factors being equal.
2 Compared to your 2010 take home pay.
3 The hypothetical illustration assumes a 25% federal tax rate, a 7% annual rate of return and 26 pay periods per year. Lower capital gains rates may reduce the difference in accumulated values between the taxable and tax-deferred examples. This is a hypothetical illustration only and is not indicative of the performance of any particular investment. The principal value of an investment may fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. The illustration shows constant rates of return, whereas actual rates may fluctuate. This is not a guarantee of future results.
Taxes, fees and expenses have not been taken into consideration for the purpose of this illustration.4 2011 FICA maximum.

Did you know Sunday, May 29th was National §529 College Savings Plan Day? National §529 College Savings Plan Day is a great reminder to think about your children’s future education.
Named after the section of federal tax code that governs them, §529 College Savings Plans are tax-advantaged plans that can help meet the expenses associated with higher education. Funds accumulated within a §529 plan can be used for tuition, fees, room and board, books, supplies and equipment necessary for enrollment and other qualified expenses at nearly every accredited U.S. institution of higher learning.
§529 plans offer significant benefits for investors seeking to fund a college education:
■ Convenience and Flexibility
A §529 College Savings account can be opened and funded at any time. The account can be started with an initial lump-sum contribution, (modest or significant) and contributors can make regular or occasional contributions as they please. Anyone (parents, grandparents, friends, even the intended beneficiary) can establish a §529 account and anyone can contribute to the account once it is opened.

■Tax-deferred treatment of earnings and Tax-free Distributions1
§529 plans allow for earnings to be treated as tax-deferred until withdrawal. This way, taxes will not erode your account, allowing more of your funds to work for you over time. What’s more, withdrawals made for qualified higher education expenses are federal income tax-free!

■ Investment choices
Choose from a selection of professionally managed portfolios offered by a variety of prominent mutual fund companies.

■ Control of Assets
The account owner retains control of the assets and determines how the investment is used. If the beneficiary chooses to forego college, the account owner may change beneficiaries2 or withdraw the assets.1

■ No income limits or restrictions
Anyone at any income level can establish or contribute to a §529 account.

■ Generally low minimum investments/ Varying contribution limits
Although the rules vary from state to state, contribution minimums are generally low, while the maximum amount allowed over the life of the account can be quite sizeable—more than $150,000 per student under most plans.

■Special gift and estate tax treatment3
Account owners can deposit up to five years of contributions4 in a single year for each beneficiary without gift tax consequences. Also, contributions are generally excluded from your taxable estate for federal estate tax purposes, provided you are not the beneficiary on the account.

Start Now!
It’s never too early to start a college savings program. Contact your Financial Advisor today to begin taking advantage of this outstanding savings vehicle.

1Federal income tax on the earnings and a 10% penalty may apply if monies within §529 plan are not used for qualified educational expenses.
2The new beneficiary must be a member of the original beneficiary’s family. There may be federal gift or generation skipping transfer tax consequences if the new beneficiary is a member of a younger generation than the original beneficiary.
3Account owners may opt to contribute five times the current gift tax exemption amount in one year; the gift is treated as a series of five equal annual gifts on the federal gift tax return after the gift is made. If additional gifts are made, they may be subject to federal gift taxes.
4Subject to an “add-back” rule in the event of the contributor’s death.

Section 529 plans offered: Are Not FDIC Insured; May Lose Value; Are Not Bank Guaranteed.

Favorable state tax treatment may be limited to investments made in a §529 college savings plan offered by the customer’s home state. Customers should consult their tax advisor before investing. Legend Equities Corp and its affiliates do not provide tax, estate planning or legal information or advice.

Before investing in a §529 plan, consider its investment objectives, risks, charges and expenses carefully. The official statement, which contains this and other information about the §529 plan, can be obtained by contacting Legend Equities Corporation. Please read the official statement carefully before you invest or send money.

Corey Malstrom, Registered Representative of and securities offered through Legend Equities Corporation, member FINRA/SIPC.