Investor Income Tax Prep

A diversified investment portfolio means there is more to do when gathering information for tax preparation. While entities outside of the United States are not required to provide tax documentation revolving around the US and its tax implications, it is a crime to not report all worldwide income on your US income tax return. Whether your investment accounts are in an IRA or real estate investments or in off shore investments, they all need to be accounted for when filing your US income tax return.

Tax Documentation

All investment entities within the US will provide annual tax documents. They are required to provide them by January 31^st of the year that precedes the previous tax year. Keeping track of your investments is important to ensure that you do not mistakenly leave income off of your tax return.

401(k) accounts are only taxable if you make a withdrawal and you must then pay the taxes on the distributions from that income. Contributions to 401(k) accounts are usually pretax, so no income taxes were paid on the money when it went into the investment account. However if you make after-tax investments into your 401(k) that income would not be taxed. This variation between withdrawing pre-taxed or after tax investment income is based in the taxpayer’s best interest. The income withdrawn first from a 401(k) account would be the after-tax income after that balance has been withdrawn the remaining available funds would be the pre-tax funds. Income withdrawn from a 401(k) will be reported on a 1099-R.

Stock Market

If you have investments in the stock market you only need to claim the stocks that have been sold, i.e. earning a profit or a loss or stock dividends. Just owning stock does not require a US income tax obligation, but earning a profit does. If you earn a dividend from stock investments the entity will issue a 1099-DIV to use to file your income tax return. If you sold stock at a profit you will have earned capital gains and your income will be reported on a 1099-B. Both of these forms provide everything you need to know to input your market income into your tax return. Likewise if you sold stock at a loss, you will use that loss to lower your taxable income from any stock sold for a profit.

The US government wants you to invest! Capital gains tax can vary depending on how long you owned your stocks. If you owned your stocks for less than one year and sold them you could pay upwards 35% in capital gains tax. If you owned your stock for over one year the maximum capital gains tax you would pay is 15%. The government wants you to invest long term.

Mutual Funds

Mutual funds are merely bundled stock where a group of people own shares of different stocks. You only need to account for the income from a mutual fund if you sell it and earn capital gains income. Your brokerage firm would provide a 1099-R for the income earned. As long as the brokerage firm provides the 1099-R having this type of investment can still easily be added to your income tax return.

Real Estate Investments

Much like all of the above investments, real estate is only taxed when sold. If you buy a property for $100,000 then sell it for $125,000 you have capital gains of $25,000. If you had a loan for the $100,000 and paid interest it would lower the taxable income from the capital gains. You could avoid paying any capital gains taxes on the $25,000 if you turned and invested that back into the purchase of another property within the same tax year. This is good for people who flip houses for income they are able to keep building their wealth in homes as they flip and sell.

Investments Overseas

Regardless if you have stock, real estate, savings accounts etc. any income earned worldwide should be included on your US income tax return. The entities where the investments are held may not issue US tax forms like a 1099-DIV, 1099-R or 1099-B but you will be able to use the monthly, quarterly or annual investment statements to calculate what you earned and need to report on your income tax return.

Organize It

If you are fairly organized you should have no problem keeping track of all of your investments and the documents needed to accurately file your income tax return. However if you aren’t good at staying organized or aren’t good with math. You should consider having a tax firm prepare your return. They understand the tax laws and know what you can deduct and what you need to claim. If you are filing on your own you might miss a deduction that could have lowered your taxable income.

If you have a pretty diverse portfolio and regularly sell investments it is a good idea to have a professional handle your taxes. The government checks to ensure that you account for all of your income, they do not check to make sure you have taken advantage of all the credits and deductions you can take to lower your taxable income.

Paying for Tax Prep

Paying a professional to handle your taxes can easily pay for itself through their knowledge of the tax laws, credits, exemptions and deductions. Letting your accountant know you is the biggest key to letting them figure out how to help you save money on your taxes. Just because you completed your tax return and got a return and were not audited does not mean that you filed them accurately.

Experience Counts

Having filed my own simple tax return for years, getting a small refund made me think I knew what I was doing. I hadn’t been audited and I got some money back each year. It wasn’t until a friend of mine who worked at a tax accounting firm offered to do my taxes and got me ten times back that year than previous years that I realized I could have done my taxes better. She not only found me ten times more in a cash refund, but also back filed my taxes for three years and found an extra $7,500 to a recent college graduate this was like winning the lottery. It has been over 15 years since that tax filing and my portfolio has grown to include business, stock, 401(k), real estate and I refuse to file my own taxes. I am aware how taxes work and tax implications of transactions, but I know that having a professional handle my taxes each year they will ensure that I am taking advantage of all tax deductions and credits to make the most out of my tax return each year.

Tax software has greatly improved over the last decade but after a conversation with my mother who files her taxes with TurboTax I informed her of a tax credit that she had not taken advantage of, which would lower her taxable income. Using tax software online can easily lead to missing deductions or credits because the software asks a question but doesn’t explain it. i.e. Question my mother ignored: Have you given a gift of $14,000 or less to a qualifying family member? My mother answered no. This is incorrect. She actually has given a “gift” of over $14,000 to a qualifying family member. My little sister, a single mother of 4 has needed assistance this past year and my parents have helped her out. This is tax deductible.

While the government will not penalize you for not taking advantage of their credits, deductions or exemptions, they will if you do not claim all of your income no matter what the source. Staying organized and working with a tax professional is your best bet to ensure that you are getting the most out of your tax return and protecting the investment income you earn.