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One of my stocks did something odd. We have been issued new 1099s for dividends of that stock in 2009 and 2010. What they have done is they have reclassified some portion of the dividends as "return of capital", and advised us to refile our returns since our dividends are now much less (and so we should get some of our tax money back). Never heard of such a thing, but apparently it's legit.

Anyway, I need to open my Turbo Tax and revise the 1099 inputs, and then refile. Am I correct that the monies I get back from this only affect taxable income this year (2011)? Or do I have to move the new 2009 numbers into the appropriate 2010 lines too? My AGI is going to change, and my refund (or amount paid) will also change, and certainly any refunds are taxable the following year. But I'm assuming that since I would be receiving these funds this year that this is when they are taxed. Yes?

1poorguy (not looking forward to this, but it's a few hundred bucks so I'm gonna do it)
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I need to open my Turbo Tax and revise the 1099 inputs, and then refile.

I'm not nit picking, just trying to get you on track. So, let's use the right words as a starting point. What you must do is amend your 2009 and 2010 returns (assuming you've filed 2010 already). You do this on Form 1040X.

TT can prepare the 1040X for you in a process that is either a breeze or an exercise in torture, depending on whether you know what you're doing. I haven't used TT since the 1040X changed, so I can't help. Just make sure you go through TT's help resources and figure out step by step what it is you do to produce the correct document. And make sure you have a backup of your original before you start.

Am I correct that the monies I get back from this only affect taxable income this year (2011)? Or do I have to move the new 2009 numbers into the appropriate 2010 lines too? My AGI is going to change, and my refund (or amount paid) will also change, and certainly any refunds are taxable the following year. But I'm assuming that since I would be receiving these funds this year that this is when they are taxed. Yes?

No. Well, I'll give you a maybe on a couple of points, but that's possible only because I didn't understand some of it.

Each year stands by itself for a cash-basis taxpayer, so any taxable income you get in 2011 from these filings is taxable in 2011, even if it's from 2009. The Federal is easy. Any refund of tax isn't taxable. Any interest paid by Uncle Sugar is taxable in the year received. If you have a state income tax, this isn't the type of interest paid by the US that's exempt.

The treatment of any state refund of tax is more complicated. It's potentially taxable if you itemized your Federal deductions for the year in question. (In this analysis you look at each year separately.) Pub 525 explains the analysis. If there is a taxable refund of state tax it goes on line 10 of your 2011 1040.

Phil
Rule Your Retirement Home Fool
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Also, bear in mind that cash treated as "return of capital" is not taxable to you when received (as dividends are) because it's treated as though you are recovering a portion of your original investment in the shares. Return of capital distributions, therefore, require you to reduce your tax basis in the investment by the return of capital amount. If you have already sold the investment and reported the related gain or loss on your 2009 or 2010 return, you will also have to amend the amount of gain or loss you reported, increasing gain or reducing loss by the amount of the return of capital distribution.
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Thanks Phil and loopholes.

Yes, I knew about the reduction in basis. I will have to review my sales.

Yes, I knew it was amending the returns. Sloppy terminology on my part.

From a mechanical standpoint, can I amend both returns with TT2010, or do I have to load up TT2009 to amend that one (i.e. will 2010 read the 2009 tax file and allow me to produce the 1040X for it?). I got a new computer last fall, so 2009 is not loaded (or updated).

I did receive new 1099s, and the only difference is that box 3 has the return of assets value in it, and the dividend is reduced by that amount. Seems like that would be a fairly trivial amendment to make. The bigger problem will be the basis reduction because I did sell a portion of the stock, but NOT all of it. Not even most of it, actually.

1poorguy
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From a mechanical standpoint, can I amend both returns with TT2010

Sorry, no. The software is year specific.

Phil
Rule Your Retirement Home Fool
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OK. Hopefully after I install 2009 it will still do all the updates (i.e. they are available at Intuit). I figure I should do 2009 first since it might(?) affect 2010 too.

1poorguy
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2009 updated correctly, and even downloaded my "free state" forms too. I just finished updating the dividends (easy), and lucked out that the only stock sale was a same-day exercise of options which did not generate dividends, so I don't need to worry about effects on the basis.

I still have to finish the rest of the amending instructions (give reason for amending, do state), and then it's on to 2010.

On a side note, I gotta wonder why MCHP did this. Maybe the executive staff decided it would benefit them (since I'm sure their dividends are enormous)? It's very odd (to me).
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On a side note, I gotta wonder why MCHP did this. Maybe the executive staff decided it would benefit them (since I'm sure their dividends are enormous)? It's very odd (to me).


Hopefully this link to another board works. It explains why the dividends were reclassified.
http://boards.fool.com/dividends-reclassified-29106188.aspx

Due to advice from their auditors and tax advisors in January they have reclassified portions of both 2009 and 2010. This was required because they paid out more than their US taxable earnings in those years. The excess is a return of capital. Not taxable to the recipient but reduces the cost basis of the shares.
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One last question.

I just printed the 1040X form, and it includes the 1040 long form after it. It has updated the refund amount, but I don't see that it made allowance for the original refund amount. I know it saw the difference, because in the process of doing this it showed the difference. But the return that will be filed shows the total refund I would have been due had the dividend reclassication occurred before my original filing.

Is the IRS going to send me a check for the full amount based on that form? Or is their system smart enough to subtract the original refund (from 2 years ago) and only send the difference.

I assume I must also file the complete long form with the 1040X?

Yeah...this is my first time amending...I don't want any trouble because I got a double-refund.

TIA,
1poorguy
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I just printed the 1040X form, and it includes the 1040 long form after it.

Maybe Intuit has gone into the paper business. DO NOT send that 1040 to the IRS. Mark it prominently "as amended" and keep it with your records. All you send to the IRS in this particular case is the 1040X and, if there is one, Schedule B. The 1040X should show the correct amount of additional refund you'll get. If it doesn't, you've done something wrong.

Phil
Rule Your Retirement Home Fool
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From a mechanical standpoint, can I amend both returns with TT2010

Sorry, no. The software is year specific.


That's not exactly correct. You can prepare both 1040Xs with TT2010, but the procedure isn't simple. TT2010 cannot read the 2009 tax file, so you would have to manually enter the "as originally filed" numbers on Form 1040X using the forms view. Then you could follow TT's instructios for preparing the amended return.

It is far easier to prepare each 1040X using the appropriate year's software, since that program can read the original tax file and prepopulate the 1040X.

Since you will be preparing state amended returns as well, make sure you read TT's instructions before you do anything. IIRC, you have to open both the federal and state amended forms before you begin to complete the federal 1040X.

Ira
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The 1040X should show the correct amount of additional refund you'll get. If it doesn't, you've done something wrong.

Hmmmm....I may have to go in and delete the whole thing, and do it again. I kept my original tax file, so I could do that.

In 2009, I got a refund. After this dividend reclassification I'm due more. On the 1040X line 15 is zero, and lines 10 and 18 are equal. Lines 19-22 are blank. The added refund should be on line 20.

1pg
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I may have to go in and delete the whole thing, and do it again.

You probably will. As I implied in my original response and Ira flat-out said in his recent remark, the order in which you do things is vital to getting the amended return correct. 10B should be the additional amount you're owed (as a negative number). The same number (positive)should be on line 20.

Phil
Rule Your Retirement Home Fool
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Hmmmm....I may have to go in and delete the whole thing, and do it again. I kept my original tax file, so I could do that.

When you do the amended return - on form 1040X you have to click the box stating you are doing an amended return. Then enter in the changes and they will flow through to the 1040X.

Dusty
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All you send to the IRS in this particular case is the 1040X and, if there is one, Schedule B. The 1040X should show the correct amount of additional refund you'll get. If it doesn't, you've done something wrong.

I re-did it, and it worked this time. The numbers make sense.

So I only need to send the 1040X and schedule B (although T-Tax printed the whole bloody thing)? Same for the state, I assume (140X). No need for additional W2 or the 1099s that started this mess?

Thanks again for all the guidance. It was extremely helpful.

1poorguy
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So I only need to send the 1040X and schedule B (although T-Tax printed the whole bloody thing)? Same for the state, I assume (140X). No need for additional W2 or the 1099s that started this mess?

WHAT additional W-2? I though we were just talking about a revised 1099-DIV, which doesn't have to be sent with the amended return any more than the original 1099-DIV needed to go with the original 1040.

I don't know what your state wants. Check their instructions.

Phil
Rule Your Retirement Home Fool
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Oops. I can see how you misread that. I wasn't sufficiently clear.

I still think in terms before e-filing. In the old days you sent a copy of the W2 in with your return. They gave you several copies so you could do feds, and a couple of states, and still have one for yourself. So when I said "additional" I meant another copy of the original.

No, my W2 did not change. Just wanted to know if I needed to send a copy with the 1040X anyway.

Didn't think I'd have to send the 1099, but thought I'd be certain.

Thanks again! I have sched B printed, and will be mailing the thing today.

Regarding the state, I'm checking instructions now. T-Tax does mention the W2, but nothing about sched B or the 140 long form. I'm sure AZ Dept of Revenue has something on their site.

1poorguy
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