Jason Stipp: I'm Jason Stipp for Morningstar.
It's Tax Relief Week on Morningstar.com, and today we are checking in on all the things that should be on investors' radars for 2012 and 2013. There are a lot of things that investors need to keep track of. Here to help us is John Pitlosh. He is a financial advisor and a tax expert at Investor Solutions.
John, thanks for calling in.
John Pitlosh: Thank you.
Stipp: First question for you: Folks are still filling out their tax returns for 2012. You have a few things on your list that they may want to keep in mind as they're doing that activity. What should be on investors' radars for the 2012 tax year?
Pitlosh: Well, there are a couple of things to look at. Periodically, whenever I view tax returns of clients for the previous years, there are a lot of things that they miss and especially with new reporting requirements that all the custodians are doing, and the fact that the IRS is now actually checking, and the custodians are reporting your information for some of your transactions. It's important to make sure that the cost basis that you listed for the buys and sells that you have in any given year are actually correctly inputted on your 1099. So, I've noticed a lot of clients that can lose cost basis information actually end up paying more in taxes because they didn't keep good track of their investments--what they bought and sold.
There are a couple of new issues with the 1099s this year that cover mutual funds. There are things called "covered securities" or "covered transactions" and "non-covered transactions." Really what clients need to know is that the covered transactions are what are directly reported to the IRS. So, you definitely need to make sure that that information is correct. And with the "non-covered transaction," those are things that the IRS is still allowing individual investors to track themselves, and they can still maintain their own basis for those items. So, it's important that they have the covered and non-covered--it can get complex--but just making sure that they do a good job of keeping track, so they are not leaving anything on the table.
Stipp: John, a lot of investors are investing globally these days, more and more so. You say there are a few tax issues with foreign income that need to be on their radars as well?Read Full Transcript
Pitlosh: This is just another one of those items that, it's not something you look at every day or even think about, but a lot of investors do end up paying foreign taxes on dividends that are claimed in other countries, but they are just in regular mutual funds or ETFs they might own, and if it's not something you pick up on, a lot of times you're missing out on that foreign tax credit.
So, it's just important to make sure that when you look at your 1099s, that you look at the foreign source income, and make you're claiming it correctly on the foreign tax credit side. Usually the foreign tax credits are gained, or you get that money back, through Form 1116 with the IRS.
Stipp: Advisory fees, John, are something else that you say investors sometimes miss. So if I come to see you, I may be able to deduct a portion of the advisory fee on my return?
Pitlosh: Advisory fees can be deducted on Schedule A as a miscellaneous itemized deduction. As long as they are paid from a taxable account, at least some portion of those can be deducted, and that's something enough people miss that it's something you want to double-check and make sure you don't forget, because if you're paying an advisor and you're getting that help, you should get the biggest bang for your buck in terms of the deductions.
Stipp: Another important thing, in 2012, we now that a lot of folks did Roth conversions ahead of the fiscal cliff and all the uncertainty on tax rates that was happening at the time. You say that if you were doing a lot of this activity, there are a few things you really need to keep in mind.
Pitlosh: Not only did people do Roth conversions in 2012, there's actually leftovers from--I don't know if you recall--but back in 2010, the Roth conversion default … allowed [people] to move the income from the Roth conversion, to split it 50-50, in moving half the income in 2011 and half the income in 2012. And a lot of people have done Roth conversions not even knowing that they had additional income from conversions they'd done in 2010.
So, on top of all the other [questions of] is a Roth conversion good or bad for you in a particular year, there's also the impact of forgetting that you've previously done a Roth conversion that actually counts in this taxable year.
And just missing some of these things or even overcompensating for the amount of conversion that you actually needed or is effective for you, these types of things can actually affect the amount of AMT. As well as in some cases, I have seen clients' Medicare premiums are likely to go up, because they converted a lot more than they needed to.
So, it can have an impact. You just need to make sure that you can take care of these issues. The good thing about the Roth conversion, though, is if you went too far, you actually have the ability going all the way out to Oct. 15 of this year, to actually undo a conversion if your CPA or other tax advisor thinks you went a little too far in terms of the overall benefit.