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General Tax Filing Questions

Why did I receive a letter from the IRS requesting additional tax for a previous tax year?

A common reason the IRS sends a taxpayer a letter requesting additional tax is due to a failure to correctly complete and/or file an income tax return for that tax year. The IRS generally requires proceeds from sales, redemptions, exchanges and principal returns, to be reported by brokerage firms on Form 1099-B. Some individuals may not be required to file a tax return because their income falls under the standard deduction and personal exemption amounts. However, inclusion of sale and redemption proceeds from Form 1099-B may be required in the calculation to determine if a return is necessary. Individuals receiving Form 1099-B generally must file a tax return even if it is for informational purposes only and no tax is due.

What is alternative minimum tax (AMT), and who has to pay it?

The alternative minimum tax (AMT) rules attempt to ensure at least a minimum amount of federal income tax is paid by taxpayers who have substantial economic income, but through exclusions, deductions or credits, pay little regular income tax. When under the AMT rules, the tentative minimum tax calculated for the year is in excess of the regular income tax, that excess amount generally must be paid in addition to the regular income tax.

The AMT is generally calculated by first determining the taxpayer’s alternative minimum taxable income (AMTI). This requires that many items of income and expense be recalculated under separate AMT rules. Once the AMTI is calculated, taxpayers may be entitled to subtract from AMTI an exemption amount based on filing status before determining the amount of any AMT liability. IRS Form 6251 may be used by taxpayers to determine AMT liability, if any.

Can I deduct commissions I paid when I bought or sold a security?

Commissions are generally not tax deductible as an itemized deduction. Instead, commissions are generally added to the purchase price and subtracted from the sale price to determine the gain or loss on disposition of the security. The Edward Jones confirmation reflects the total purchase cost, including commissions. Form 1099-B reflects the net proceeds received after the commission has been subtracted. For additional information, see IRS Publication 551 and refer to the Basis of Assets under the Stocks and Bonds subsection under Cost Basis.

Do I have to pay tax on my Social Security benefits?

Social Security benefits can be taxable at any age. The amount of Social Security subject to tax is determined by calculating “provisional income.”

Provisional income is the sum of one-half of Social Security benefits, plus, in general tax-free interest and dividends and modified adjusted gross income. Modified adjusted gross income is generally the adjusted gross income amount listed on Form 1040, line 37, plus any amounts listed on lines 33-35 (student loan interest, tuition and fees, and domestic production activities). Adjusted gross income includes traditional IRA, pension and annuity distributions but does NOT include Roth IRA distributions.

The following table illustrates what level of provisional income will cause the taxation of Social Security benefits, and at what percentage rate.

Single Return
If Provisional Income is: Amount of Social Security Benefits Subject to Taxation
$0-$25,000
$0
$25,001-$34,000 50% of the amount of provisional income over $25,000 (capped at 50% of total benefits
$34,001 or more
$4,500 + 85% of the amount of provisional income over $34,000 (capped at 85% of total benefits)  

Joint Return

If Provisional Income is: Amount of Social Security Benefits Subject to Taxation
$0-$32,000 $0
$32,001 - $44,000
50% of the amount of provisional income over $32,000 (capped at 50% of total benefits)
$44,000 or more    
$6,000 + 85% of the amount of provisional income over $44,000 (capped at 85% of total benefits)

*If a taxpayer is married filing separately and lived with his or her spouse at any time during the year, the provisional income limitation is $0, and 85% of Social Security benefits are subject to tax.

Because tax-exempt interest income is included in provisional income, it can impact the amount of tax an individual pays on his or her Social Security benefits. However, tax-exempt interest will typically have LESS impact than other types of interest income, because yields on tax-exempt bonds are usually lower than yields on taxable bonds. Plus, the taxation of Social Security benefits is only PART of an individual's total tax picture. Tax-exempt interest income can minimize federal income taxes because it is not included in taxable income. Tax-exempt interest is reported on Form 1099-INT.

More questions?

For tax questions, consult your tax professional. For investment-related questions, please contact your local financial advisor.

Important Information

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.

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