Woman confused when reading financial and tax documents

EDDY & SCHEIN FINANCIAL LITERACY SERIES

Understanding Investment and Tax Documents

Understanding the financial concepts orbiting your life will help you make better decisions about money now… and in the future. Financial literacy is key.

Tax Documents

Your mailbox or inbox may be filled these days with “Important Tax Documents.” If you have a brokerage account, you are likely receiving those Annual Statements as well. As you begin to get organized for your tax return preparation, do you wonder what these documents actually tell you?

Some people feel taxes are too complicated and may think “Why bother?” about educating themselves. They just pass everything on to the accountant. However, others may decide to take a closer look to see if they can figure out whether they’ll have a tax bill or get a refund.

You can definitely learn things from these documents and gain understanding that can influence your financial behavior in subsequent tax years.

Form 1099-B: Proceeds from Broker and Barter Exchange

This form reports your gains and losses during a tax year with different categories such as:

  • Short term & long-term capital gains/losses on assets sold
  • Interest income
  • Dividend income (ordinary & qualified)
  • Foreign tax paid
  • Return of principal

Each type of financial transaction has its own particular tax treatment, so with a little education from conversations with your accountant, you may become a smarter consumer of the investment advice from your financial advisor. After this tax season, arrange a time to chat with your accountant about the tax implications of your investments. You can learn more about tax documents on the IRS website.

Brokerage Account Annual Statements

Your accountant may request these as they show:

  • Number of shares of stock or mutual funds are held in your account
  • All transactions during the statement period
  • Cost basis
  • Investment management fees
Form 1099-R: Retirement Fund Distributions

These reflect distributions from:

  • Profit-sharing or retirement plans
  • Any individual retirement arrangements (IRAs)
  • Annuities, pensions, insurance contracts,
  • Survivor income benefit plans and inherited retirement funds
  • Permanent and total disability payments under life insurance contracts
  • Charitable gift annuities, etc.
Form 1099-INT: Interest Income

This form reports interest earned from bank and investment accounts.

Schedule K-1: Beneficiary’s Share of Income, Deductions, Credits
  • As these come from trusts, partnerships, etc., they will require additional work from your accountant and may increase your tax preparation fees
  • You’ll probably receive your K-1 forms later than your 1099s which may require you to file for a tax return filing extension.

Investment Statements

What to look for on a monthly investment statement or daily online report
  • The current value of your holdings vs. value at other time periods
  • Amount earned in dividends and interest
  • Changes in the value of the portfolio due to changes in prices of invested assets vs. dividends/interest income vs. withdrawals
  • Purchases/sales of securities
  • Inflows and outflows from the portfolio
  • Realized gains/losses (after the sale of a security)
  • Unrealized gains/losses (on “paper” until a sale is made)
Make sure that nothing sketchy is going on with your investments.

Did you request that $10K withdrawal? Did it go to the intended bank? Was a fee incurred to transfer the money and, if so, was it avoidable using a different transfer method? Did the dividends and interest payments get directed as intended (i.e., reinvested, swept into a brokerage cash account, or paid out to you)?

Ask questions to better understand your investments.
  • In a managed account, do you see unnecessary activity that could be increasing your tax bill?
  • Is your financial manager investing your money to best achieve market diversification?
  • Would a broad market index fund have achieved the same return at a potentially lower cost, with less volatile results?
  • Has your asset allocation kept up with your advancing age?
Building Financial Literacy is a process of continuous improvement.

Becoming a tax or investing expert may not be your goal. But your ability to ask good questions, and to understand some of the information and implications of your own tax and investment documents, is a great way to build knowledge, confidence, and financial insight.

Armed with those skills, your relationships over time with your financial professionals, and with your own money, will undoubtedly benefit you in making informed decisions. And you’ll benefit throughout the year by better understanding your personal finances.

If you are planning to take a more active interest in personal finance management, talking to Eddy & Schein Group could be a good first step.

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