5 Investment Tax Mistakes to Avoid

5 Investment Tax Mistakes to Avoid
March 3, 2020 Kyle Eaton

It has been fifteen years since I started my career as a financial planner. During that time, I have seen a lot of investment tax mistakes from clients trying to prepare their own tax returns. Mistakes are understandable. The tax code is complex, and the information provided by custodians doesn’t always provide all the information that you will need. But errors can be costly. Many items, such as Medicare premiums, are determined by adjusted gross income. Reporting income incorrectly could result in you paying not only more in taxes but also more in Medicare premiums.  

In Four Tax Moves You Should Make Before Year-End, we discussed some general tax planning moves. This article will focus specifically on potential tax preparation mistakes related specifically to investments and investment accounts. Hopefully, this article will save you a little time and the headache of having to file an amended return. Here are the five most common investment (or investment account) related tax mistakes I have seen throughout the years. 

Duplicating, Forgetting, or Using the Wrong 1099s 

As a whole, I think this is probably one of the more common mistakes I see. I have seen this a couple of times within the last year with clients who use tax preparation software such as TurboTax to prepare their returns. In the program, there is an investment income section that allows you to connect to a custodian such as TD Ameritrade or Schwab. When you connect to your custodian in this section of the program, it brings over ALL your 1099s. This includes 1099-INT (interest), 1099-DIV (dividends), 1099-B (capital gains/losses), and even 1099-R (retirement income). What gets a little confusing is that there is a similar prompt in the retirement income section. Connecting to your custodian again in the retirement income section can result in duplicate entries for retirement income. 

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Multiple Accounts

I have also seen clients that have forgotten to report income from a 10990-DIV. Usually, these individuals own stock in an Employer Stock Ownership Plan (ESOP). They may also have an account where their company grants them shares of company stock. Technically these are two separate plans with two separate accounts. Each one will get its own 1099-DIV or even 1099-B.  

Out-of-Date Tax Reports

Finally, sometimes clients simply use the wrong 1099. I can completely understand this one. Custodians have until April 2nd, 2020, to correct errors on 1099 tax forms. For this reason, I encourage clients to wait until at least March to do their tax returns. I have found that this provides enough for the custodians to classify all the dividend income correctly and to make any other necessary corrections. 

Forgetting to Report Qualified Charitable Distributions (QCDs)

I have had more than one client get caught up by this investment tax mistake. For those of you over the age of 70 ½, you can make contributions to a qualified charity from your IRA. When tax time comes around, you will not report these distributions as taxable income. Better yet, when you reach the age of 72, they can count toward your Required Minimum Distribution. Here is the thing to remember, custodians will report a QCD as a normal distribution by your custodian. Typically box 2b “Taxable amount not determined” will be checked. It is up to you to make sure that the amount of your QCDs makes it on to your return. It is a good idea to keep either receipts or canceled checks from each transaction.  

Forgetting to Carry Over Investment Losses  

Sometimes you get over your head when it comes to preparing your taxes. Maybe you have started a new business and decided that you don’t have the time anymore or maybe the expertise. So you go to see a new CPA to prepare your return. For whatever reason, you don’t bring a copy of last year’s return. No big deal, right? Except if the prior year’s return had several hundred thousand dollars in capital loss carry over.  This is probably one of the single most painful investment tax mistake I have seen a client make.

I have also seen this scenario play out with clients as they migrate to the newest version of tax preparation software. Maybe the client got a new computer, and the program can’t find any existing copies of tax returns. What happens next? The program starts an entirely new profile for the client. And unless the client has a copy of the prior year’s return, this information is not going to make it onto the return. Oops. Fortunately, with more and more software moving online this is becoming less of a problem. 

Not Reporting Nondeductible IRA Contributions 

What’s more painful than having to pay income taxes? Having to pay income taxes on the same money twice. If you make nondeductible contributions to an IRA, the IRS allows you to keep track of the after-tax dollars you have put into your account. You can track this cost basis on Form 8606. When it comes time to take this money out of your IRA, it will not be taxed. Well, unless you forgot to report it on Form 8606.  

I have seen IRA contributions made early in the year cause issues for CPAs. While custodians do report contributions to retirement accounts, they do not generate the Form 5498 until after the tax filing deadline. If you contribute to your retirement account, you need to tell your CPA before they file your taxes. Your CPA will need to make sure that you report the nondeductible contribution. With the Tax Cut and Jobs Act of 2017 giving the green light to back-door Roth IRA Conversions, it is crucial to make sure to report ALL your prior nondeductible IRA contributions correctly. 

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Reporting Capital Gains Incorrectly

I have to admit; this is one of the things I hate the most. And it has been that way since 2011. Starting January 1st, 2011, all custodians are required to report the adjusted basis and whether any realized gain or loss is short or long-term. These are known as covered securities. Custodians will send this information to clients on Form 1099-B. When it actually come to doing your taxes, you will report this information on Form 8949. This part is straightforward, and I am thankful that I no longer have to research a stock’s cost basis. Do you know how much trouble it is to go to the local university library to research daily stock prices from more than 30 years ago?

Non-covered vs. Covered Securities

My biggest problem is with the non-covered securities-those securities purchased before 2011. Even though custodians are not required to report this information, some custodians insist on including what they have on the Form 1099-B. They include the data, even if it is wrong. Sometimes, custodians will leave the cost basis blank because they don’t have the info. Hopefully, you can understand why it’s essential you to try to figure out what you originally paid for investments. You or your CPA is going to be the person responsible for filling in the cost basis box. Otherwise, the entire amount may be treated as taxable gain.   


There is a lot to remember when it comes to doing your taxes. Something a simple as forgetting a form can cause major headaches down the road. If you are using a CPA or an accountant, make sure that it is a coordinated effort with your financial planner. Most CPAs welcome a quick 5 to 10-minute phone call to fill them in on everything done throughout the year. And most CPAs will provide a draft for you to approve. Talk to your financial planner and see if they would be willing to review it. Some planners have done a tax projection earlier in the year or have a prior year’s return they can compare to the draft. An extra set of eyes and a few minutes spent in review before filing a return are preferable to a letter a year later from the IRS saying that there is a problem. 

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Hedgefield Wealth Management is a registered investment adviser.  Hedgefield Wealth Management does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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