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The market has been lousy for the better part of a year.
And unfortunately, the current tax season promises
to compound the pain for many investors. Prior to last
year, stocks had been on a tear. Valuation-conscious
investors may have been unloading highly appreciated
securities; strategic buy-and-holders may have been
scaling back on winners and rebalancing into bonds
and/or foreign stocks. These actions can improve a
portfolio’s future risk/reward profile, but they also can
boost your tax bill if you carry them out in your
taxable account.
Even investors who did nothing may own mutual
funds that made capital gains distributions. Owing
to a confluence of events—a strong market since
2009
, and an exodus of investors from actively
managed funds and into index products—investors
have been hit with high capital gains distributions
from many funds for several years running, and
2015
was no exception.
As painful as it is to write that check if you owe addi-
tional money on your
2015
taxes—above and beyond
what you paid throughout the year—there’s a tiny
silver lining: Your return and its supporting documents
can supply valuable intelligence about your invest-
ments. You can see what your financial assets and
your investment habits are actually costing you (or
maybe saving you) from a tax standpoint.
As you review your tax return, take note of the
following line items.
Line 8 of Your 1040:
Interest Income
You can see the raw dollar amount of your interest
income on line
8
of your
1040
form. Line
8
a shows
taxable interest income, or “interest,” and line
8
b
shows tax-exempt interest income, generally from
municipal bonds. If you have a high level of taxable
interest income, make sure that you’re paying atten-
tion to asset location and have assessed whether
taxable bonds and money markets, rather than munis,
are truly the better bet for your taxable savings,
once the tax effects are factored in.
Part I of Schedule B provides specific details on how
much interest income various securities have
delivered. If you have paltry levels of income from a
smattering of cash accounts, see if you can con-
solidate them into a single, higher-yielding option. If
you didn’t receive a
1099
from financial institutions
where you know you hold cash, don’t be alarmed—
it’s (highly) possible that your interest was less
than
$10
, so the institution doesn’t need to send you
a
1099
. However, you’re technically still required
to report that interest. You should be able to find the
amount by going online.
Line 9 of Your 1040:
Dividend Income
Line
9
a shows the total amount of ordinary dividends
you received last year. Those that count as qualified—
meaning that they’re subject to more-favorable tax
treatment—are on line
9
b. As with taxable interest
above, take a hard look at any investments, such
as
REIT
s, that are paying nonqualified dividends that
you’re being taxed on. Those investments are better
housed in a tax-sheltered account such as an
IRA
, if
possible. Even if you don’t own a dedicated real
estate fund, you may end up with substantial
REIT
investments if you have a large position in a value-
oriented equity fund or equity-income fund. In a similar
vein, some of your dividend-focused mutual funds
may hold investment types like convertibles and pre-
ferred stocks to boost their income; income from
those securities doesn’t typically qualify for the favor-
able qualified-dividend treatment. Part
II
of Schedule
B depicts dividends received from all sources last year.
Line 13 of Your 1040:
Capital Gain (or Loss)
As noted at the outset of this article, many investors
may have realized sizable capital gains in
2015
,
whether they triggered the gain with their own selling
or one or more of their funds realized gains and
made a distribution. If one of your fund holdings made
Lessons From Your Tax Return
Portfolio Matters
|
Christine Benz