(PUB) Investing 2016

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Lessons From Your Tax Return Portfolio Matters | Christine Benz

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 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 9 of Your 1040: Dividend Income

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

Line 13 of Your 1040: Capital Gain (or Loss)

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

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