An Investor’s Income Tax Checklist

William Sweet, CFP®, is an Investment Advisor at Ritholtz Wealth Management. Bill has spent much of his career minimizing the impact of income taxes on investment returns. He served on active duty in the US Army as an Armor Officer for six years and was awarded the Bronze Star for valorous action in combat in 2003 during Operation Iraqi Freedom. Bill holds a degree in Computer & Systems Engineering from Rensselaer Polytechnic Institute (RPI).


Investor form checklist:

• Form W-2
• Form 1099-B
• Form 1099-DIV / 1099-INT
• Form 1098
Form 1098-E  
Form 1098-T
• Form K-1 / K-1S


Few things are as convoluted as the US tax code, a mammoth text composed of 73,954 pages of mind-melting complexity. Luckily, most of us only have to do battle with taxes once per year, and hopefully with the help of a trained professional.

Yet even with a professional it is the taxpayer’s responsibility to accumulate and sort through the mountains of paperwork necessary to complete a tax filing that arrives in February. By this time of the year, you should have what you need to get started.

To help you navigate tax season – there’s less than a month before April 15th – we offer a humble checklist for investors with taxable investment accounts. These are the documents you should seek out in your mailbox and deliver to your accountant as soon as possible.

Form W-2

If you had a job last year, you should have a W-2 in hand already. This vital document lists your taxable compensation for the year, along with some important details your accountant needs.

The most important data are in Box 1, which shows your total taxable compensation for the year, and in Box 2, your federal tax withholding.

Notice the difference between Box 1 and Box 5 (Medicare wages). If you contributed to a tax-deferred retirement plan such as a 401k or 403b, you’ll notice a difference in the amount paid, as amounts contributed to most retirement plans aren’t taxed until distribution.

 Form 1099-MISC

This form reports non-employee compensation of all flavors under the sun. Rents, Royalties, Fishing Boat Proceeds, Crop Insurance Proceeds, Excess Golden Parachute – you know, just the basics.

The most common flavor is reported in Box 7 for non-employee compensation – usually contract work. This income is usually subject to not only income tax but also self-employment (Social Security, Medicare) tax, so I always handle these really carefully. If you receive Form 1099-MISC you should definitely talk to a qualified tax professional to see if you can deduct any expenses against that income.

Form 1099-B

This critical form is issued to any investor who had a taxable brokerage account in 2015 and engaged in any taxable transaction.

These are usually sales of stocks, bonds, ETFs, or mutual funds, and the form contains critical information on the proceeds of sale, cost/basis, and whether the gain was short- or long-term.

Your cost/basis is probably the single most important piece of information relative to any transaction. If you bought a stock for $900 and sold it for $1,000 three months later, you are obligated to pay income tax on the gain – $100. Absent the cost/basis information included in the 1099-B, the IRS assumes that you owe tax on the full sale proceeds of $1,000. Ouch.

Accurately tracking your cost/basis in stocks or funds is probably the most over-looked part about being an investor. Make it a point to track what you pay for stocks, funds, real estate, and other securities to ensure that you aren’t paying more than your fair share. Documentation is critical; guesswork doesn’t cut it with the IRS.

Form 1099-DIV / 1099-INT

The little brother of Form 1099-B, but just for dividend or interest income. In fact, the two are often combined on a statement.

Qualified dividends – generally ones paid by a US stock – receive favorable tax treatment even better than that of long-term capital gains (15% for most taxpayers). However, interest is generally taxable as ordinary income in the year received.

Form 1098

Mortgage interest statement. The US tax code allows for interest paid on mortgage debt to secure a primary or secondary home to be tax deductible. I’ve always assumed that this was implemented to incentivize folks to buy and own homes, and it makes up probably the largest middle-class tax break in the history of the world. The deduction can be hefty – even at today’s lower-than-average interest rates, I commonly see $20,000 – $30,000 of deductible interest payments. At the 25% tax bracket on the Federal level and 6.2% bracket for New York that translates to $7,500 – $8,500 of tax reduction per year. Also, this form commonly also reports other tax-deductible payments such as real estate taxes and private mortgage insurance (PMI).

Note the mortgage interest deductions is only available on the first $1,000,000 of mortgage debt, plus the first $100,000 of home equity debt.

Form 1098-E

Student loan interest document. Interest paid on student loans qualifies for an above-the-line deduction, but only below certain income limits: $80,000 for single/head-of-household filers, and $160,000 for married filers.

Form 1098-T

This is a record of tuition paid to a qualified institution of post-secondary education. Box 1 includes all payments made to the institution during the tax year.

Education credits are valuable: the credits “cap out” at $4,000 of tuition paid for a maximum below-the-line credit of $2,500 (for the American Opportunity Credit, $1,500 non-refundable, $1,000 refundable). There are actually three different options for education benefits, which differ generally by how much income you received during the year as a taxpayer, and whether or not the tuition was for graduate or undergraduate work.

Form K-1 / K-1S

The always-late K-1 form is a partner’s share of distributive income (K-1S is for an S-corporation shareholder, similar concept though).

Pass-through entities such as partnerships and S-corporations don’t pay their own tax. Instead, their tax form calculates their net income (gross income less expenses) and the income (or losses) left over pass through to the partners or shareholders according to a set of rules usually spelled out in the partnership agreement.

Those are the big ones. Like every investor, every tax situation is different, and more complicated tax situations require an investor to keep track of all of these forms to decrease your audit risk. This is especially true for individuals whose income exceeds $200,000 because of the increased audit risk that high-income earners face.

It pays to have your ducks in a row before you reach out to your accountant. Armed with a checklist, you’ll have what you need to get the job done, avoid unnecessary delays, and duck any late-filing penalties and interest.



Forms & Publications

General Instructions for Forms W-2 and W-3

Instructions for Form 1099-MISC

Instructions for Form 1099-B

Instructions for Form 1099-DIV

Instructions for Form 1098

Instructions for Forms 1098-E and 1098-T

Partner’s Instructions for Schedule K-1 (Form 1065)


What's been said:

Discussions found on the web:

Posted Under