Let me start by saying that this investment tip is about taxable brokerage accounts. If all your funds are in IRAs or 401Ks, breath easy. 1099s don’t apply.
I start getting phone calls from clients about the middle of January, “Where is my 1099, I want to file my taxes”. My response to them is always “Be patient”. There is no question that it’s a downside of investing in stocks or master limited partnerships (MLPs). You are probably not going to be able to file your taxes in January, and probably not in February either, and in the case of MLPs, there is a good chance you’ll have to file for an extension, because that K-1 may not come along until April.
What is the problem? Why does it take so long? Why is the broker dragging his feet? Are they incompetent? I think it is a big mistake that they don’t do a good job of explaining to clients that they are pretty powerless to provide the information as quickly as the clients would like. Let’s look at a situation that may help explain what’s happening.
Someone may have some stocks, a real estate investment trust (REIT) a master limited partnership, and a few mutual funds in their investment account. Each one has different tax problems. The stocks probably pay a dividend, which is taxable at a reduced rate right? Not necessarily. A dividend from a company may actually have several components. That payout may contain a taxable dividend, a capital gain, or a return of capital. Those are all taxed at different rates. And very often a corporation may not characterize which is which within that dividend until well into the new year. A REIT has a similar problem. Their dividends are taxed at a higher rate than ordinary stocks, but they still will probably have return of capital and capital gains components. The broker has to compile all that information and include it in the 1099. MLPs are the worst. They have to file a separate complex tax document called a K-1. That is often not completed until the end of March, and I know of one case where it was not actually issued to clients until June. In those cases the person will have to take their best guess and file an extension.
Wait, my broker issued a 1099 on February 10th! I’m ready to go right? No!!! Because that’s just a first estimate. There may be one or more revisions to that initial 1099. I would be hesitant to file until the 2nd or better, the 3rd one is issued. That might not be until March. But you can check with the broker (or like in my case) with your advisor who custodies with a broker. It may be that your situation is simple enough that you can use that first 1099. But more than likely, you will have to be patient and wait for that 2nd or 3rd 1099, or worst case, a K-1 as well.