A Simple Checklist for Investors to Accurately File Their Taxes

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Investors don't just gain advantages when they receive dividends or see significant capital appreciation; they might also receive tax advantages, depending on the type of investment income that they receive. As you prepare to file your taxes (the deadline is quickly approaching) keep in mind that there are likely extra tax forms required because of the various income sources from your portfolio.

Lindsay Abbett, Tax Director at FAA Tax, LLC, points out that there are a number of things you can do to get ready for tax time as an investor.

Use this checklist to prepare your taxes for accurate filing.

1. Create a New Folder

“The best recommendation I have is to, throughout the year, keep your tax documents as they come in,” Abbett says. She suggests setting up a folder in an easy-to-access area. When you receive tax documents, whether they are related to investing or not, put them in the folder. That way, you know where they are and you can easily find everything you need at tax time.

I've been following this strategy for years and it works well. Everything from investment information to business receipts to various forms go into the folder. With everything in a single folder, you are less stressed when it's time to bring your documentation to your accountant.

Additionally, don't forget to pay attention to changes in the tax law. It's true that you aren't going to be as up-to-date as a tax professional, but Abbett believes that you should at least have a general idea of what to expect.

“Take time to read up on tax rules and laws each season, since they do change,” she says. “Refresh with capital gains and dividend rates.”

Preparing ahead of time by understanding what you might have to pay can help you understand the implications of your investment decisions. Take the lessons you learn from the last tax year, and begin planning ahead for the coming year.

2. Save Important Documents as You Get Them

Abbett says that once you have your folder set up, you need to watch for documents related to your investments. Some of the documents applicable to investors include:

  • 1099-OID
  • 1099-DIV
  • 1099-INT
  • 1099-B
  • 1099-S
  • Schedule K-1

Abbett also suggests keeping track of supporting documentation as an investor. “If you sold real estate, keep your settlement statements from the sale,” she says. “You want to have documentation from the date of acquisition as well, so you have the full documentation of cost basis.”

She points out that brokerages are required to include cost basis information on the documents they provide you at the end of the year. So if you sold stocks, the form your brokerage sends should include the original cost basis so your gain or loss can be figured.

3. Beware of Net Investment Tax and ACA Tax

It's important to understand that you might also need to be concerned about additional taxes that affect investors. Two taxes to watch out for are the net investment tax and the ACA surtax.

Net investment tax: “If your investment income amounts to more than $200,000 if you're single or $250,000 if you are married filing jointly, you might have to pay an additional tax amount,” says Abbett.

She recommends keeping track of your fees and expenses related to your investment income so you can offset some of it. You can, of course, offset some of your investment income with capital losses, but she also says that investment advisory fees, tax preparation fees, and state and local income taxes can reduce your income. If you have enough expenses to get under the threshold, you won't have to pay the net investment tax.

ACA surtax: The passage of the Affordable Care Act (also called Obamacare) led to a 3.8% Medicare surtax. You need to check to see if your income meets the current threshold to pay this tax, and then pay it on your investment income. There are some exceptions and special cases, so make sure you understand these before you figure your taxes. A tax professional can help you understand the ins and outs of the ACA surtax.

4. Contribute to Tax-Advantaged Accounts

“Take a look at your IRA contributions,” says Abbett. “Sometimes you contribute to an account and find out that you've overcontributed.” If you have a Health Savings Account, you need to pay attention to contribution limits to this type of account as well.

She also cautions about Roth IRA accounts. Sometimes, after contributing to a Roth, you might find out that you don't actually qualify for a Roth. “There are ways to fix this problem and avoid penalties,” Abbett says. “You can come up with options. Talk to your tax professional to create a plan. You don't want to pay penalties if you don't need to.”

Along with paying attention to the contributions you make to tax-advantaged accounts, you should also be aware of the impact of Required Minimum Distributions. “RMDs can change your tax picture,” Abbett says. She also suggests paying attention to RMDs that result from inheriting an IRA. “There are rules that govern when you have to start taking withdrawals from an inherited IRA, and you should plan for those.”

5. Create a Simple Game Plan

In the end, it's mostly about creating a strategy, says Abbett. “If you know something happened this year, and you know you will owe tax, have your ducks in a row,” she suggests. She also suggests looking ahead to the coming year and discussing strategies with your tax professional.

If you were surprised by any of your tax moves this year, a good talk with your accountant can help you formulate a plan to avoid the same unpleasantness next year. “Make the best use of your time,” she says.

How do you prepare for a smooth tax season as an investor?

Miranda Marquit

Miranda is a journalistically trained freelance writer and professional blogger specializing in personal finance. Her work has appeared and been mentioned, in various media, online and off. You can follow Miranda on: Twitter

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