5 Tax Reminders For Traders
For traders, January represents the start of a new trading year. The slate is wiped clean and new trading plans are put into place. January is also the start of the tax season. Since the IRS didn’t get wiped out with the polar vortex, we all have to file our taxes this year. Here are 5 reminders to help you have a successful start to your tax season.
Estimated Tax Payments
Estimated tax is the method profitable traders should use to pay tax on their trading gains since it is not subject to withholding. If a trader does not pay enough through withholding or estimated tax payments, they can be charged a penalty. Most traders can avoid this penalty if they owe less than $1,000 in tax or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
The due dates for the estimated tax payments are April 15, June 15, September 15, and January 15 (for the prior year). A qualified tax professional can help you determine if you should be making estimated tax payments.
Mark to Market Election
You should consider whether or not to make the mark to market election for 2014. This election will change the taxation of your trades from capital gains and losses to ordinary income and losses, enabling you to deduct up to 100% of your trading losses against other income on your tax return. It also frees you from the wash sale rules. If you trade stocks, ETFs, or options, you should strongly consider talking to a qualified expert to help you determine if the mark to market election makes sense for your trading business. Keep in mind that the election needs to be made with your 2013 tax filing by April 15 if you want to get the switch done for 2014.
Net Investment Income Tax (NIIT)
The net investment income tax is a new tax that can potentially hit traders. The NIIT is a 3.8% additional tax on your net investment income and is reported on Form 8960. The tax will affect those traders who report adjusted gross incomes above the thresholds of $250,000 for married filing joint and $200,000 for single filers. The tax is based on the lesser of your net investment income or the amount your adjusted gross income exceeds the thresholds. Since this tax is new this year, you should take the time to familiarize yourself with Form 8960.
Reconcile Your 1099s
“Trust but verify” is a motto for auditors but it should be your motto when it comes to your 1099s. With the changes to the cost basis reporting over the last few years, many 1099s that are issued have errors on them. You should take the time to reconcile your 1099s with your trade confirmations to verify that the cost basis is correctly being reported. Any errors need to be pointed out to your broker so a corrected 1099 can be timely issued.
Traders with a financial interest in or signature authority over a foreign financial account (bank account, brokerage account, mutual fund, trust) are required to file an annual Report of Foreign Bank and Financial Accounts (FBAR). Starting this year, this form needs to be filed electronically through a website maintained by the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN).
A FBAR is required only if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. The report for 2013 is due by June 30th of this year and can be filed by you or your accountant. Since it is a new process this year, you should register and file this form early to avoid any penalties or fines.
If you have a topic you’d like me to address in a future article, please email me at info@ShrinkMyTaxes.com for consideration.
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