Don't wait for tax time to prepare yourself for a paper-work blizzard
Boston — The mailboxes are filling up with Christmas cards, letters from charities, and presents from Uncle Fred. But after New Year's Day, the tired letter carriers will have to start lugging around tax documents. They'll start with the standard Form 1040 and the instruction booklet, but by the end of January they'll be delivering a blizzard of forms, schedules, and other documents from mutual funds, brokers, and investment advisers.
So now might be a good time to review what some of those forms report and whom they come from. Right now is also a very good time to remember that copies of almost all these forms are forwarded to the Internal Revenue Service, just in case you miss something.
While most taxpayers are familiar with the W-2 they receive from their employer, and anyone with a bank account gets a 1099-INT statement of interest earned during the year, there are some forms that others are seeing for only the first or second time this year.
``The '86 tax act did create a few new tax forms,'' says Steven Woolf, a tax manager in the Washington office of Coopers & Lybrand, the accounting firm. ``There's now a form for non-deductible contributions to an IRA [individual retirement account]. That's Form 8606.''
After the W-2, the most popular forms are probably the 1099-DIV and 1099-B. The 1099-DIV covers dividends and capital-gains distributions from your brokerage account or mutual fund, as well as federal taxes withheld and foreign taxes that were paid by funds mostly invested in foreign securities markets.
The 1099-B gives information on redemptions and sales for mutual fund investors and those with brokerage accounts. Anytime you take money out of your mutual fund, either directly or by writing a check, or transfer money from one fund to another, any gains from the fund must be reported.
This form does all that, showing the date and amount of a sale or redemption, the identification number given to each security, and the amount of federal income tax withheld. Most mutual funds and many brokers send out the 1099-DIV and the 1099-B on one consolidated form, to make it easier to figure out where you stand.
While nearly all these 1099-DIV and 1099-B forms are accurate, there is certainly opportunity for the kind of mistakes that good recordkeeping on your part can help overcome. ``You should be keeping your own records of transactions throughout the year,'' Mr. Woolf says. ``You always want to keep accurate records yourself to get the proper income and deductions.
``That goes for virtually everything in the tax laws. Accurate records can save you money, or get you larger deductions.''
Your up-to-date personal record should include instructions given by you over the phone, in person, or by letter to your mutual fund representative or broker. You should also save all those account statements and confirmations of transactions the broker or fund sends out during the year.
These records should include the price of any corporate shares, bonds, or mutual fund shares on the day they were bought or sold.
Some forms are just information; they don't mean you have to pay any taxes - for now. One of these is Form 5498. This is an annual summary of activity in your IRA, simplified employee pension IRA (SEP-IRA), Keogh, or defined-benefit plan. It shows total contributions made during 1988 and the value of these accounts as of Dec. 31. While any money you made in these accounts isn't taxable until you retire or make early withdrawals, the forms will help you track the performance of your retirement investments.
If you have a Keogh, you'll get a summary and statement guide for completing Form 5500. With this, you keep track of the balance at the beginning and end of 1988, the earnings received, contributions and distributions made, and any fees paid during the year.
If you did make any withdrawals from your retirement account during the year, you'll get Form W2-P for partial distributions, and Form 1099-R for total distributions. These also go out in January.
If you invest in a limited partnership, the partnership will send you a Form K-1 in March to show any gains you made during the year.
While most of these forms, especially the 1099 ``family,'' have been around for many years, Woolf says, some of the newer ones are creatures of the 1986 tax law. In addition to Form 8606 for non-deductible IRAs, Form 8598 will help you figure out out how much of your home mortgage interest is deductible.
When you get all these forms, the next thing to look for is time. The IRS estimates the average taxpayer spends 10 hours and 8 minutes on the 1040, and 4 hours and 30 minutes on Schedule A, the form for itemized deductions.