Suprise! Taxes from Investments

Whether we like surprises or not, we all know in life there are good surprises, and some not-so-good surprises.

Two of the greatest surprises in my life were the phone calls telling me I had a baby boy waiting for me. Both my boys were adopted and they were both what they call drop-ins, which means the mom didn’t have an adoption plan before giving birth. So I got a call that there was a baby, and I needed to pick up my new son the next day. It was like finding out you are pregnant in the baby is born the same day! Those were great surprises!

However, we also know that sometimes in life we get surprises that aren’t so great. The loss of a loved one, an unexpected bill, an unfavorable medical diagnosis…

…A surprise tax bill…

When it comes to the tax season, some of us are caught by a surprise by an unexpected tax and that doesn’t leave those good surprise feelings.

The 1099R for IRA’s

This may come as a surprise, it is nothing to be alarmed about, but if we don’t understand it then it can definitely cause some not-so-good emotions.

A 1099R is generated when you have a rollover or a distribution from your retirement plan, while it will always show the amount moved or distributed, it is not always taxable.

For example, if you roll money from your 401k to an IRA or another retirement plan,  it is not a taxable event.

If you look closely at those 1099s, you’ll see a code that says not taxable, meaning it’s a non-taxable distribution. They still send you this 1099 showing that it went from one place to the other for reporting purposes.

This is a surprise that could put you a little bit on edge until you realize that it’s not a taxable event, so just be aware that all rollovers or distributions will generate this but look at the code to see what is taxable.

Hidden Capital Gains Tax

There are some other tax surprises that can come from investments that really do cost you, especially flow-through capital gains tax or what we call the hidden capital gains tax.

When you have money in pooled accounts such as mutual funds and ETFs that are not in an IRA, but rather a brokerage be that an individual or joint account, you may receive unexpected capital gains bills.

In some cases, like this last year, you might have a loss in that account, yet you still end up owing taxes.


This hidden capital gains tax happens because other people sold the fund, which means the fund had to liquidate stock and this has to be done according to the fund prospectus. This means there could be capital gains on the positions they sell, and those capital gains taxes are then spread out among everyone who still owns the fund at the end of the year.

When you sell a fund, you will receive either a capital gain or loss based on how much you bought the fund for and the value when you sold the fund. But the tax on any of the individual holdings that the fund had to sell for those redemptions is transferred to anyone still holding the fund.

This is not a very fun surprise, especially when you’re down in accounts and end up still paying tax for gains you didn’t even realize. (we talk about this in more detail in our Tax Efficient Investing video)

The good news is that the hidden capital gains unwanted surprise can be avoided with proper planning.

Our team is very conscious about tax-efficient investments so you’re not surprised by tax bills. When it comes to investing, if you don’t take taxes into effect, the return printed on your statement may not be your real return.

If you end up paying 10% or 15% in capital gains taxes, that affects your true net earnings.

It’s really important for brokerage accounts to be managed in a tax-efficient way. We talk about this in more detail in Tax Efficient Investing part 2.

If you are surprised this year by hidden capital gains taxes, give us a call so we can talk about what you can do now to reduce your tax burden.

We serve clients in Mineral Point WI, Dodgeville WI, Platteville WI, Lancaster WI, Fennimore WI, Boscobel WI, Richland Center WI, Muscoda WI, Spring Green WI, Mazomanie WI, Sauk City WI, Middleton WI, Madison WI, Fitchburg WI, Verona WI, Mount Horeb WI, Barneveld WI, New Glarus WI, Monroe WI, Belleville WI, Oregon WI, Stoughton WI, Darlington WI, Cuba City WI, Hazel Green WI, Belmont WI, Dubuque IA, Freeport IL

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