When you receive a corrected 1099 form from your brokerage, it doesn't necessarily mean your broker made a mistake. Sometimes, income from an investment is simply recharacterized from a tax perspective after it was distributed to you, which your brokerage must account for via an updated form.
Here's why that might happen: When companies pay out distributions, they must characterize them in a particular way. For example, payments could be considered qualified or non-qualified dividends, a return of capital, or long- or short-term capital gain distributions. Each has its own tax treatment.
However, the company's tax advisors may determine later on that a payment should have received a different tax treatment. As a result, an investor's dividend income could be recharacterized as a capital gain distribution or a return of capital. Corrections are particularly common for regulated investment companies (RICs) and real estate investment trusts (REITs).
Most income changes happen before the tax-filing deadline. But be aware, changes could apply to distributions going back up to three years, though going back this far is generally rare.
If changes occur, the broker is required to provide you with updated tax forms. If you've already filed your taxes or the correction applies to a previous year's filing, you may have to file a corrected tax return.
Filing for an extension
If you do get a corrected form, you might want to request an extension before the April tax filing due date. In fact, if you're invested in an RIC or REIT, you may want to consider filing for an extension as a matter of course, just because such investments commonly issue corrected forms.
With an extension, you generally have until October 15th to file without penalties. That said, the extension is only for filing your tax return. It doesn't mean you can push back the date on which you pay any taxes owed. You will still have to pay those by the regular April filing date.
Bottom line
Unfortunately, there's not much you or your broker can do to avoid corrected 1099s. Dealing with these corrects can sometimes be a bit of a pain. To help avoid the headaches that can come with corrected 1099s, consider working with a local tax professional. There is a cost associated with doing so, but they can handle the details and help you avoid potential errors that could lead to interest or penalties.
Get ready for tax time.
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