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Our Head of Tax: 6 Tax Filing Hurdles When Investing

Taxes can be confusing, even for the most savvy investors. Enter Eric Bronnenkant, our Head of Tax, with six things to look out for when filing your taxes while investing.

Articles by Eric Bronnenkant

By Eric Bronnenkant
Head of Tax, Betterment
Published: December 17, 2018 | Updated: January 15, 2020

Whether you’ve been investing for years or not, holding money in an investment account can make your filing process a bit more complicated. I’m here to help guide you through that process with a few tips.

1. Haven’t taken a withdrawal from your taxable account? Still expect some taxable income.

Even if you haven’t withdrawn funds from your account, dividends you’ve earned and capital gains from sales in your account may still be taxable. Sales that don’t result in withdrawals can come from rebalancing that helps keep your portfolio on track, as well as any allocation changes you might have made. The dividend and investment sales will be reported to you on a Form 1099-B/DIV. Interest on your Cash Reserve account will be reflected on a Form 1099-INT. Learn more »

2. If you only have IRA investments, your taxes may be simpler than you think.

One of the key benefits of investing in an IRA is that all the income inside the account is tax-deferred. As long as you leave your funds in the IRA, you do not report any of the dividends or investment sales. If your only investments are within an IRA or 401(k), you aren’t typically required to report investment sales on Schedule D/Form 8949 (which you might experience as buying tax software that includes investments), so that may make your filing process more straightforward. Learn more »

If you do take an IRA distribution (make a withdrawal), you should expect to receive a Form 1099-R from us. An IRA distribution may or may not be taxable, but it is always reportable.

3. A globally diversified portfolio is good strategy. Know how it can affect your tax filing.

Diversification is one of the key tenets of Betterment’s portfolio advice. International investments help decrease the risk of a portfolio heavily invested in U.S. stocks and bonds. Because of this, you should know that these foreign investments add a few steps when you’re filing your taxes. You’ll need to calculate the foreign tax credit to mitigate the double taxation between the US and foreign countries. Learn more »

4. Tax-smart investing starts with government bonds. Look out for reporting that income.

To be as tax-smart as possible, you’ll want to take advantage of every tax benefit available to you. One benefit built into Betterment’s portfolios is income from government bonds, which is exempt from state and local income taxes due to federal law. It is common for investors to overlook this tax benefit and subject all of their taxable interest to state and local income taxes. Be more tax-smart by being sure to report income from government bonds on your state tax returns. Learn more »

In addition, municipal bond income is generally exempt from federal income tax. The rules at the state level are a little more tricky. If your resident state has an income tax, it will tax all out-of-state muni income. Knowing what portion of your income falls into the in-state versus out-of-state is important to paying the appropriate amount of tax. Learn more »

5. 2019’s market was volatile, which means Tax Loss Harvesting+ was hard at work.

Stock and bond markets are inherently volatile. While you hope that they appreciate in value over the long term, it is expected that there may be substantial fluctuations in the short term. Betterment’s Tax Loss Harvesting+ helps to take advantage of volatility by “capturing losses,”—selling investments at opportune times and buying similar replacement investments that do not violate certain IRS rules. These captured losses can then be used to help offset any gains you’ve recognized or against other income in the tax year up to $3,000. If there are any additional losses, they may be carried forward until used in a future year. Learn more »

6. We saw new tax legislation starting in 2018. This changed brackets, deductions, and credits.

Tax reform that was passed in late 2017 paved the way for substantial changes starting in 2018. The top ordinary income tax bracket decreased from 39.6% to 37%, creating a substantial tax cut for many higher-income individuals. The state and local tax deduction is now capped at $10,000 which increased tax for many individuals living in NY, NJ, and CA. The child tax credit doubled to $2,000 with more favorable income limits cutting taxes for many families. The intersection of these events has drastically shifted the tax landscape and opens a new frontier for tax planning opportunities. Learn more »

Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

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