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Tax Statement FAQs
Please consult your tax advisor about using this information.
Tax Statement
The IRS began to require cost basis reporting for certain securities (covered securities) on Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, beginning with tax year 2011. As a result of these new regulations, brokerage firms (including National Financial) are required to report most cost basis information for sales, redemptions, exchanges, etc., on Form 1099-B for securities that the IRS deems as covered by these regulations. Generally, covered securities are:
- Stock in a corporation purchased on or after January 1, 2011
- Registered investment companies, including open-end mutual funds, and stocks acquired in dividend reinvestment plans purchased on or after January 1, 2012
- Additional types of securities, as determined by the Treasury Department, purchased on or after January 1, 2014
The 2012 Form 1099-B in your tax statement identifies, in up to five separate subsections, the transactions for which we report cost basis to the IRS and those for which we only report cost basis to the account holder.
These reporting changes do not mitigate the customer's responsibility to accurately complete all required tax forms, including Form 1040, Schedule D. In fact, prior to completing Schedule D (which now serves a summary function), the IRS requires many types of account holders to complete Form 8949, Sales and Dispositions of Other Assets, as part of the process of completing Schedule D.
Other changes include new rules governing reporting short sales (see the related FAQ, How are my short sales reported?).
Beginning with tax year 2013, the American Taxpayer Relief Act of 2012 permanently extends the 0% and 15% tax rates for qualified dividends for single filers with taxable incomes below $400,000 and joint filers with taxable incomes below $450,000. The top rate will permanently increase to 20% for filers with taxable incomes above these thresholds. Qualified dividends are generally dividends from domestic corporations and certain qualified foreign corporations for which the requisite holding period(s), described below, are satisfied.
In order for the qualified dividends reported to you in Line 1b of Form 1099–DIV to be taxed at one of the lower federal long–term capital gain tax rates, you are required to have held the dividend–paying security unhedged for at least 61 days out of the 121–day period that begins 60 days before the ex–dividend date. If you did not hold the security unhedged for the requisite period, the dividends should be taxable at ordinary income tax rates.
Mutual fund dividends attributable to (i) interest, (ii) dividends on stock issued by certain foreign companies, and (iii) dividends on stock not held by the mutual fund for the requisite holding period will not qualify for long–term capital gain tax rates at which qualified dividends are potentially taxed. These dividends will likely comprise a portion of the total ordinary dividends reported in Line 1a of Form 1099–DIV. Mutual fund dividends that are reported as qualified dividends on Line 1b of Form 1099–DIV, but for which a shareholder does not satisfy the requisite holding period for the dividend–paying mutual fund (see previous question), also will not qualify for the lower long–term capital gains tax rates.
Substitute payments in lieu of dividends may be generated where, for example, a security has been lent to a third party (such as a broker) over a dividend record date. If an investor has a margin account debit balance, securities in the account are often eligible to be lent to a broker. If the shares are lent over a record date, the investor should receive a substitute payment equivalent in amount to the dividend but taxable at ordinary income tax rates. Prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), substitute payments and actual dividends were both taxed at the federal level as ordinary income. JGTRRA introduced lower federal rates for qualified dividend income; however, substitute payments are not taxed as qualified dividend income and are instead still taxed at ordinary income rates. Substitute payments in lieu of dividends are reported on Line 8 of Form 1099-MISC.
National Financial must adhere to IRS requirements when reporting on Forms 1099-DIV, 1099-INT, and 1099-B, which may result in differences between what is on your monthly and quarterly statements and what is reported to the IRS. For example, transactions on Form 1099-B must be reported based on the trade date even though your statements reflect sales based on the settlement date. Additionally, unlike dividends from individual securities, which are typically taxed in the year the dividends are paid, mutual fund distributions declared as payable to shareholders of record in October, November, or December and paid prior to February 1 of the following year are taxable to shareholders based on the record date, not when paid. For example, mutual fund distributions with a record date in December 2012, and paid in January 2013, are reported and taxed as 2012 dividend distributions.
Dividends and interest earned on foreign securities may be subject to withholding tax by the country from which they were paid. If you held securities that paid dividends or interest that was subject to foreign tax, Form 1099-DIV and Form 1099-INT report the gross amount of the dividends or interest (as applicable) and the amount of tax withheld at the source. You must report the gross amount of the dividend or interest on your tax return; however, you may also be able to claim a credit or deduction for the amount of tax paid to foreign countries.
If that mutual fund holds more than 50% of its assets in foreign securities at year-end, it may elect to permit shareholders to claim a credit or deduction on their federal income tax returns for their pro rata portion of the foreign taxes paid. If the election is made, the amount of foreign tax that you may be able to claim as a credit or deduction will be reported on Line 6 of your Form 1099-DIV and that amount will also be included in the dividend amount reported in Line 1a (and if applicable, 1b) of your Form 1099-DIV (i.e., the dividend amount will be gross of the foreign taxes). Under these circumstances, you must report the gross dividend amount on your tax return; however, you may be able to deduct or receive credit for the foreign taxes. If the mutual fund is not able to, or chooses not to, elect to permit shareholders to claim a credit or deduction for their portion of the foreign taxes paid, those foreign taxes will not be reported on Line 6 of your Form 1099-DIV and will not be included in the dividend amount reported in Line 1a (or Line 1b) of your Form 1099-DIV (i.e., the dividend amount will be net of the foreign taxes). Under those circumstances, you may report that net dividend amount on your tax return but cannot otherwise deduct or receive credit for the foreign tax.
This section reports in U.S. dollars (USD) the estimated gain/loss on the foreign currency position that you disposed of in the security purchase. When you acquired that foreign currency position, a USD cost basis was established in that position (as described in the Currency Realized Gain/Loss section and in the footnotes on that section of your statement). Based on changes in exchange rates between that time and the time of the security purchase you experienced a gain or loss in the USD value of that foreign currency position which you realized when you used the foreign currency position to purchase the security.
National Financial is required by the IRS to report gross dividends and gross interest from unit investment trusts (before expenses have been deducted). These expenses are included in the dividend and interest amounts reported on Forms 1099-DIV and 1099-INT and in their associated supplemental detail information sections. The total corresponding expenses are reported on Line 5 of Form 1099-DIV or 1099-INT. Those expenses are itemized, by security in the detail sections. Expenses, included in tax-exempt interest dividends on Form 1099-DIV or in tax-exempt interest on Form 1099-INT, if applicable, are listed separately in the supplementary Tax-Exempt Interest Investment Expense section, near the end of your tax statement. In addition, your reported gross dividends and gross interest could also include any foreign tax paid by the issuer of your security.
Due to IRS reporting requirements governing widely held fixed investment trust (WHFITs), if you owned a unit investment trust (UIT), a security derived from a mortgage pool, or a real estate mortgage investment conduit (REMIC), we report your prorated share of proceeds from the sale of a security held by the trust or conduit as return of principal. We report your share of the gross proceeds, prior to making any deductions for expenses, whether or not you actually received a payment. For example, your UIT may have sold a security in order to cover redemption requests or other expenses. Since all gross income and expenses must be prorated among all unit holders, your share of such proceeds is reported, even if you did not receive any distribution. We are required to report gross return of principal, including expenses, as of the transaction date for the trust—this may often be considerably before the trust made any resulting distributions to individual trust holders. Please note that you must generally report on Form 1040, Schedule D, all transactions reported on Form 1099-B, including return of principal. Return of principal transactions may also result in realized gain or loss. Return of principal generally reduces your basis in the affected security.
The IRS requires you to use the trade date to determine your holding period. The "Date of Sale" on Form 1099-B is the trade date for each sale. Your monthly statement reports settlement date, which is the date by which payment is due.
National Financial is required to report these distributions to you and to the IRS. Nondividend distributions generally reduce your basis in your shares (but not below zero). This becomes important when you sell your shares and need to calculate your gain or loss. However, a nondividend distribution is taxable as (and must be reported as) a capital gain to the extent that it exceeds your adjusted basis in the shares.
If you held a limited partnership in 2012, the partnership (not National Financial) will provide a Schedule K-1 to you. If you held a CMO in 2012, you will receive its income information in a separate Form 1099-OID from National Financial in mid-March.
Starting in 2011, the IRS requires us to report short sales in a new way. Any short sale entered into in 2011 or later will not be reported on your 1099-B until you have closed the short sale. In most cases, your 1099-B will show the date that you closed the short sale, the acquisition date of the security used to close the short sale, and the adjusted basis of the security used to close the short sale. If you closed a short sale in 2012 that was opened prior to 2011, this transaction will not appear on your 2012 1099-B, but it will appear in the supplemental Long-Term Realized Gain/Loss section. All gains and losses resulting from closing short sale positions should be reported on Form 1040, Schedule D for the year in which the short position is closed. For more information on short sales, see IRS Publication 550, Investment Income and Expenses (PDF) or consult your tax advisor.
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What are the new IRS cost basis reporting regulations?