“Our financial advisor provides us with reports showing how our investments are performing. We compare that report’s numbers with our account statements and some numbers match and some don’t. And the returns he shows us never match our 1099s for our income taxes.
Would you please explain?”
Sure. In the most simple of terms, 1099s report currently taxable returns (interest, dividends, capital gains, etc.) to the IRS while your advisor reports show total returns whether they are currently taxable – or not.
Within your portfolio there may well be gains that are not currently taxable – like inside your IRAs or inside an annuity. These do not get reported on your 1099s, but they are shown on your portfolio report.
Additionally, some ‘returns’ are on paper (stocks or mutual funds that have risen in price, but have not yet been sold) and are not reported on your 1099 until they are realized (fancy IRS term for sold).
And, of course – under the right circumstances – some investments are not taxed. Municipal bonds and Roth IRAs are two that come to mind as typically untaxed.
1099s serve their purpose for income tax calculation, but they are not very useful when trying to understand rates of investment return.
If you have questions or comments, please send them to Gene@AskMtM.com