Friday, February 25, 2011

OMG! Another tax form arrived. Now what do I do?

Q.  As a family, we travel full time with our teenage kids whom we self-school.  As part of her "learning experience," my daughter who had  W-2 wages from a summer job, self-filed her tax return. Our mail just caught up with us, and she received a 1099-B form from the Kaufmann Fund. Apparently her grandparents redeemed shares from one fund and reinvested the proceeds into another. Can't we just ignore this since the funds were reinvested? It appears the fund was sold at a loss. If this needs to be reported, can we include this on our return?

A.  Investing in securities are not the same as investing in a CD or just putting money away into a savings account. By law, when securities are sold or exchanged, it is a taxable event. There is no such thing as a tax free exchange.

You daughter will need to file an amended return and include the Gross Proceeds on Schedule D. Most likely, even if your daughter did not have wage income and withholding, she would be required to file her own tax return, depending on the gross proceeds reported to the IRS.  Form 8814 can be used to report interest and dividend income of a minor, on the parents return, but not the sale of securities.

Tax Tip:  Every year I receive calls for "help" from either children, parents, or grandparents who have prematurely filed their tax return. I mean prematurely in the sense that in the rush to get that refund (all kids are certain they are owed a refund!) they overlook the possibility of other forgotten income reportable on forms which haven't come in yet. Brokerage houses legally don't have to mail these form to you until March 15th! It's a good idea to involve the entire family and do as we professionals do: get an income tax organizer or at the very least, a checklist of reportable items.

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