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Understand Investments before IRS Tax Problems Occur
By Michael Rozbruch | August 23, 2011
As a tax attorney some of the best advice I can offer for staying out of IRS tax trouble is to stay educated on the current rules and regulations surrounding tax law. Below is a post I recently wrote for my Tax Resolution University blog on staying up on the rules for investment taxation before IRS problems occur.
An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day (Wikipedia). ETF’s are becoming a more popular form of investing, but the structures of the funds can be taxed very differently from your normal run-of-the-mill mutual funds. Laura Saunders and Jason Zweig of the Wall Street Journal outline some very important answers to questions regarding your income investments in What to Ask Before Buying. Knowing the rules and staying savvy to investments can save you some serious tax relief when it comes time to file your tax returns. Here are few great tax tips and examples from the article to help you stay on your toes and away from IRS Tax Problems:
- Does this investment have tax quirks? There are many in the world of exchange-traded products. For example, investors in precious-metals ETFs organized as trusts (SPDR Gold Trust, iShares Silver Trust) often are surprised that long-term gains are taxed at 28% rather than 15%—because the metals are deemed “collectibles.”
- How will I know the ‘cost basis’ of my investment? When you sell an investment in a taxable account (as opposed to a tax-sheltered one like an individual retirement account), the taxable gain or loss is measured from the purchase price, known as the “cost basis.”Tracking basis is notoriously difficult for taxpayers, especially when there are adjustments common with ETFs such as reinvested dividends, which raise basis, or return of capital, which lowers it. If you make mistakes, you can end up wildly overpaying or underpaying tax.
- Might I have to make multistate tax filings? If you own a publicly traded partnership, you may have to file a tax return in one or more states where you don’t live if income generated in those states—say, from an oil well—is above a certain level. Even if the payout on one investment is below a state’s threshold, the total from two or three may put you over the limit.
- When will I find out about taxable income each year? Mutual funds must usually send out 1099 forms by Feb. 15, but ETF partnerships often get extensions until the following Sept. 15. Some report results to investors by March 15 and others send a letter or post a website notice before the April due date with estimates of income, but often there is no requirement to do so, according to an IRS spokesman.
To read more tax tips when it comes to the complicated world of investing you can read the whole article here.
Topics: Banking & Finance, IRS back taxes, IRS tax relief, Tax Tips, back taxes, hiring a tax attorney or Certified Tax Resolution Specialist, tax help | No Comments »