Many taxpayers rush to file their tax returns as quickly as possible. Ordinarily, that's fine. But if you own mutual funds, don't file your tax return before March 1!
Here's why: Everyone involved in the financial industry -- including employers, banks, insurance companies, mutual funds and brokerage firms -- is required to mail W-2s and 1099s by Jan. 31. But in 2006 and 2007, either because of last-minute changes in tax law or accounting reconciliations, many mutual fund companies and brokerage firms discovered that their 1099s contained incorrect information -- which forced them to issue "amended" 1099s.
This was not only very expensive for the firms -- they doubled their printing, postage and mailing costs -- it was also a huge headache for their clients who had already filed tax returns based on the original documentation. These hapless consumers found themselves forced to redo their returns and file amended tax returns, adjusting the amount they owed or were due in refunds -- and paying their tax preparer additional fees to do the extra work.
It looks like 2008 will be the same. In fact, at least one custodian has already announced that it has received IRS permission to mail its 1099 forms in mid-February 2009, and other firms are expected to make similar announcements. Others that plan to mail their forms in January could find themselves issuing amended forms weeks later.
Therefore, if you own mutual funds, we recommend that you do not file your tax return before March 1. Waiting a few extra weeks might help you avoid the hassle and costs of having to file an amended return.
Waiting shouldn't bother you. But you might be annoyed if you're expecting a large refund. If that's the case, you might be handling your taxes incorrectly. That's because you're not supposed to be due a large refund -- if you are, then you're giving the IRS a tax-free loan for months. See if you can correct this by reducing the amount of money that your employer withholds from your paycheck. Remember: Refunds are not gifts from the IRS, but simply a return of the money that's yours in the first place.
By the way, if you're interested in learning more about the contents of all those envelopes loaded with tax documents you receive from your mutual funds (i.e., you're a glutton for punishment), keep on reading. Otherwise, just give those documents to your tax preparer.
One of the most common tax forms is Form 1099. You should receive a 1099 for each taxable account you have. If yours is a brokerage account, you'll get one 1099 for each account; if you hold your accounts directly with a mutual fund company, you will receive a separate 1099 for each fund. If you moved your accounts from one firm to another during the year, you will likely get separate 1099s from each firm (for the period your accounts were at each one).
Each 1099 reports dividends, capital gain distributions, interest, sales and withdrawals. This information must be reported on your tax return.
Some of the information gets reported on Schedule B; information about gains and losses from the sales of securities made during the year is to be reported on Schedule D. This form is quite complex, and many do-it-yourself taxpayers overpay their taxes by completing it incorrectly.
To help my clients avoid this problem, I provide them with a Substitute Schedule D-1. But if I sold assets for a client that he purchased from a different firm, I don't have the historical information necessary to create an accurate Substitute Schedule D-1. If that applies to your situation, give your tax advisor your old statements so he or she can prepare your return accurately. If you don't have those documents, try contacting the firm that handled your account, as it might be able to provide you with the information you need.
Financial Adviser Ric Edelman is the author of several best-selling books about personal finance, including "Ordinary People, Extraordinary Wealth" and "Discover the Wealth Within You." You can e-mail him at firstname.lastname@example.org.