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There’s nothing more frustrating than receiving a corrected 1099 a
few weeks after you’ve filed your tax return. Must you amend your
return? Read on to find out.
The number of corrected 1099s issued has increased dramatically the
last few years and it looks like that trend will continue. The
increase is due to 2 major changes in the tax law and the
information banks, brokers and mutual funds must report.
The first change occurred in 2003. That’s when the tax rate on
dividends and capital gains was separated from the tax rate on your
other income. Previously, you paid the same amount of taxes
regardless of whether the income came from a Certificate of Deposit,
a preferred stock or capital gains on a mutual fund.
The good news is that most of you are paying less in tax as a result
of this change. The bad news is that banks, brokers and mutual funds
companies have to report interest income on one form (1099-INT) and
your dividends on another (1099-DIV). Surely that shouldn’t be that
difficult for those big computers they all use!
Well, nothing is ever simple with the IRS. Congress decided that
only certain dividends qualify for the lower tax rate. So banks,
brokers and mutual funds must wait to hear from the underlying
company whether a dividend is qualified or not. If you own a
preferred stock in a utility company, the utility company will have
its lawyers make the determination. Then that is communicated to the
banks, brokers and mutual funds.
So a mutual fund must wait for the utility to inform them if the
dividend is qualified. Then the mutual fund company has to compile
all that information so it can accurately report to the brokers who
then must compile it and report it to you. Multiply that by tens of
thousands of companies and you can see why it’s a nightmare.
The second change occurred last year. Now, a 1099-INT must include
tax-free interest and the amount of that interest that is subject to
the Alternative Minimum Tax (AMT). If a mutual fund holds hundreds
of tax-free municipal bonds, it has to determine whether each one is
subject to AMT.
Over the last few years, 1099s have been sent out by the January
31st deadline only to be followed by corrected 1099s soon after. It
isn’t uncommon for someone who files a tax return in early February
to get a corrected 1099 a few weeks later. They then dutifully go
back to their accountant and pay a couple hundred bucks to have an
amended return filed.
It doesn’t have to be that way. There are steps that you can take
that will minimize the pain and suffering caused by corrected 1099s.
First, just because you receive a corrected 1099 doesn’t mean that
you need to file an amended return. Most corrections are very small.
The amount of taxes you owe is based on tax rate tables. Tax rate
tables move in increments of $50.
If the difference between the original amounts you reported and the
corrected amounts aren’t going to change your bracket, then there’s
no need to file an amended return. If the corrections result in you
getting an additional refund, and that refund is minimal, there’s no
need to file the amended return.
Second, you can delay filing your initial return until early April.
The deadline for filing a return is April 15th. There’s no rush to
file it before then. You can have your return filled out and ready
to go, but hold on to it until early April. If you get a corrected
1099, it’s much easier to make the change on your initial return
than it is to file an amended one.
Third, unless your taxes are very complicated (and most retiree’s
aren’t), you might consider doing your own taxes using popular tax
software you find at most office supply stores. The software isn’t
very expensive and completes your return based on your answers to
some straight-forward questions. When you get a corrected 1099, you
can easily go in and make the change yourself.
The chances are high that you will receive a corrected 1099 this
year. Take steps now, before your file your return, and you can
alleviate much of the frustration they normally cause.
Nationally-syndicated financial columnist and Certified Financial
Planner® Jeffrey Voudrie provides personal, in-depth money
management services and advice to select private clients throughout
the USA. He’ll answer your financial question – FREE at
www.guardingyourwealth.com.
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