True or false? A corrected 1099 form means your broker made a mistake.
False. While it's true that everyone, even a broker, is capable of a slip-up, if you received a corrected 1099, it's likely because of an income reallocation rather than a mistake, which happens more frequently than you might think.
Let's explain. When you receive a distribution from a security, it's categorized as a qualified or non-qualified dividend, return of capital, or a long- or short-term capital gain distribution, just to name a few classifications. However, when that amount was distributed, its true "taxability" may not have been known. Brokers are required to provide updated tax forms to tax filers within 30 days of learning about a material change to tax reporting.
This is particularly common for regulated investment companies (RICs) and real estate investment trusts (REITs). Although a company pays the distribution one way, its tax advisors may determine that the income should be taxable in a different manner. This could change an investor's dividend income into capital gain distributions or return of capital. Essentially, the income allocation and tax classification may change after money is distributed to investors. Brokers are then required to make these updates on investors' tax forms.
It all takes time
Securities income reallocation requires a change in reporting based on material findings uncovered for up to three years. That means you may receive a corrected 1099 after filing your taxes. We feel your pain. Preparing your tax return the first time isn't usually a picnic. Filing a corrected tax return, potentially three years later, won't be high on your list of favorite things either.
The upside? Most income reallocations happen before the tax-filing deadline. However, if you're invested in RICs or REITs, you may want to consider filing for an extension no matter what, just to buy some time in the event of an adjustment.
Prepare for the possibility
Filing taxes can be difficult, but getting an extension is relatively simple, and you have choices. Take a look at the Extension of Time to File Your Tax Return page from the IRS. You can file an extension on your own, even if you use a professional tax preparer, which could save you some fees. And if you're not sure how to file an amended tax return, your tax advisor can certainly help you. Keep this in mind: The extension is for time to file your tax return, not extend the time to pay taxes, so read the form carefully.
Although there's nothing you can do to avoid getting corrected 1099s after filing, prepare for the possibility by reviewing your original 1099s thoroughly. Do you understand everything that's listed? If not, there's nothing wrong with asking your broker some questions. Just keep in mind a firm is never able to guarantee that you won't receive corrected tax forms.
For investors who receive multiple corrections before the tax-filing deadline, be aware that the IRS probably hasn't received all these notices by the tax deadline. For tax year 2022, the filing deadline for brokers to submit 1099 files to the IRS is March 31, but some brokers will file for an extension. IRS Publication 1220 details what, when, and how brokers report tax forms.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner, or investment manager.
Schwab does not provide tax advice. Clients should consult a professional tax advisor for their tax advice needs.0223-3CLJ