A Comprehensive Guide to Your Composite 1099 Tax Statement

Transcription

1 A Comprehensive Guide to Your 2016 Composite 1099 Tax Statement

2 Table of Contents A Note from Hilliard Lyons... 1 Tax Information Reporting and Our Obligation to Clients... 2 What s New This Year and Important Dates to Remember... 4 Information to Be Aware of When Preparing Your Tax Return... 7 Your Composite 1099 Tax Statement Original Issue Discount (OID) Proceeds from Broker and Barter Exchange Transactions Dividends and Distributions Interest Income Tax Terms and Rules You May Need to Know Glossary Return to Table of Contents

3 A Note from Hilliard Lyons At Hilliard Lyons, providing excellent client service is our highest priority. We work diligently to enhance and refine the support we provide you as you fulfill your tax return filing obligations. This year-end 2016 tax guide is a reference document provided to accompany your Hilliard Lyons Composite 1099 Tax Statement. This guide explains in detail the content of your Composite Statement, which includes 1099 and other tax information reporting documents as well as supplemental information. The Guide also reviews tax rules and concepts incorporated into 1099 reporting. This is especially important, as the tax information we must furnish you is, at times, only the starting point for your calculations rather than the final numbers. Sometimes, tax rules require treating certain transactions differently from what you might expect (wash sales, amortization, writing options, etc.). That is why we sometimes refer to Section 4, Tax Terms and Rules You May Need to Know, below to help you understand how your transactions are treated under the Internal Revenue Code. Understanding these non-intuitive tax rules can help you not only prepare this year s tax return but also consider your investment strategy in a new light. Taken together, this Guide and your Composite 1099 Tax Statement can support and facilitate the successful filing of your tax returns. Remember that you can download your data straight into TurboTax, making it simpler for you or your tax preparer to incorporate your financial transactions into your tax return. As always, we are grateful for the opportunity to be of service. We appreciate your trust in Hilliard Lyons. Hilliard Lyons does not provide tax advice. This material is presented for informational purposes only. Consult your tax advisor concerning any issues that may affect your tax situation. 3 Return to Table of Contents

4 Tax Information Reporting and Our Obligation to Clients Federal tax law requires financial services firms to report certain tax information to both their customers and the Internal Revenue Service. At Hilliard Lyons, we must provide you with Tax Information Statements for interest, dividends, proceeds of sale, and some other financial transactions (such as retirement distributions). Tax regulations also require that we provide this same information to the IRS on Tax Information Returns. Although the IRS issues individual forms for reporting purposes (1099-INT, 1099-B, etc.), the rules permit us to combine certain forms into a Composite Substitute Statement, provided the information presented conforms with IRS Publication Our Composite Tax Statement includes reporting on payments consisting of the proceeds of brokerage and barter transactions, dividends, interest, original issue discount (OID), patronage dividends, and royalties. The Composite 1099 Tax Statement Your Composite 1099 Tax Statement includes transactions subject to reporting on: Form 1099-B Form 1099-DIV (except for certain dividends) Form 1099-INT (except for certain interest) Form 1099-MISC (only for royalties or substitute payments in lieu of dividends and interest) Form 1099-OID Form 1099-PATR Form 1099-S (only for royalties) Your Composite Tax Statement also includes information to help in your tax return preparation. Such information can include basis for non-covered lots, explanatory remarks on permissible basis adjustments for covered lots, and descriptions of the type of transaction (merger, buy to close, redemption, etc.). We also provide schedules that include: Reconciliations, Fees, Expenses and Expenditures Detail of Miscellaneous Income Detail of Tax-Exempt Interest Fees & Expenses Schedule of Management Fees Exempt Accounts and Non-Reportable Transactions Some accounts are exempt from IRS Form 1099 reporting and backup withholding requirements. These generally include accounts for C corporations, qualified retirement plan accounts (QRPs), individual retirement accounts (IRAs), certain WHFITs, charitable organizations, foreign accounts, and most federal, state, and local government accounts. You can see a fuller list of exemption criteria in the Instructions to IRS Form W-9 (Request for Taxpayer Identification Number and Certification). If your account is exempt from IRS Form 1099 reporting and you receive a Tax Information Statement, please contact your Financial Consultant. This may be because your account has been set up for delivery of non- 4 Return to Table of Contents

5 reportable statements. This is a service where information is provided to the account holder similar to a 1099 statement but no IRS reporting occurs. Some retirement account information reporting occurs through Form 5498 (IRA Contributions) and Form 1099-R (distributions from pensions, IRAs, etc.). These are not part of our Composite Tax Statements. We issue these forms only in connection with contributions to and distributions from qualified pension, IRA, and similar plans. De Minimis Exemption for 1099 Reporting In general, all payments of interest and dividends to US citizens are subject to reporting on the form 1099 series. Such payments include interest (1099-INT), original interest discount (1099-OID), dividends (1099-DIV), substitute dividend payments (1099-MISC), and patronage payments (1099-PATR). There is a de minimis reporting exception for amounts less than $10 on all of these income items. Proceeds of sale are subject to reporting on Form 1099-B along with the holder s basis in the security sold. There is no de minimis exemption from 1099-B reporting of proceeds of sales. Tax laws have changed the de minimis threshold level for corrected 1099 forms, and this is discussed below in the section What s New This Year and Important Dates to Remember. Account Transfers Understanding your Composite Tax Statement also requires an understanding of how we handle account and security transfers. We can provide year-end tax information only for sales we have effected on your behalf. If you transferred your account to Hilliard earlier this year, you should receive a 1099 statement from your prior broker for transactions and income earned in the account at the prior broker. When your account transferred in, we received your security positions, and in the case of covered securities subject to cost basis reporting, we should have also received the basis in each individual tax lot. Our obligation is to report that basis when you later sell those securities through us. If your broker failed to provide basis for covered securities, we will have attempted to obtain that information from the broker. If we did not get it, then we can treat those securities as non-covered, and basis reporting is not required. However, in such cases, we recommend reviewing your original purchase to capture and preserve your basis for future tax filing purposes. If you transferred any open short positions, we must issue a 1099-B at the time of closing, reporting both the cost and original proceeds you received when you opened the transaction in your account before transfer. 5 Return to Table of Contents

6 What s New This Year and Important Dates to Remember Tax year 2016 brings with it several tax reporting changes and the last significant phase-in of cost basis reporting. Under the cost basis reporting regulations Complex Debt instruments became covered securities as of January 1, Complex debt includes variable-rate debt instruments, inflation-indexed debt, contingent payment debt instruments, options on debt with payments denominated in, or determined by reference to, a currency other than the U.S. dollar, and options issued as part of investment units. Any purchases of these securities you made in 2016 are being tracked for basis reporting. We have highlighted some of the important aspects of these complex debt instruments and their treatment under the basis reporting regulations in the section Tax Terms and Rules You May Need to Know further below. The changes made by the IRS to tax reporting forms includes adding a FATCA check box to Forms 1099-B and 1099-R to identify whether the reportable payment is being made by a foreign financial institution under the FATCA regulations. This is similar to last year s check box that was added to Forms DIV, -OID, and -INT. Box 12 was added to Form 1099-INT to display Bond Premium on Treasury Obligations. This addition causes a change to the use of Box 11 as well. Previously, Box 11 was for all bond premium on taxable bonds (covered lots). Now Box 11 must include the bond premium only on taxable bonds that are not treasury obligations, while Box 12 displays premium on Treasury obligations. Box 10 was added on Form 1099-OID to display Bond Premium related to qualified stated interest payments if a broker chooses to report such payments and offsetting premium on a Form 1099-OID. But, since we have been reporting these amounts for an OID bond on Form 1099-INT, as permitted by the regulations, we will continue to do so. This means of clearly distinguishing payments of qualified stated interest and associated bond premium amortization from the accrual of original issue discount and associated acquisition premium facilitates your view of tax reporting documentation and supports tax preparation. An additional check box has been added to Box 2 on Form 1099-B for situations in which some of a taxpayer s gain or loss may be ordinary rather than capital. We can report short-term, long-term, or ordinary income by checking one of the boxes. But we can check up to two boxes in Box 2, reporting a combination of either Short-Term and Ordinary, or Long-Term and Ordinary. This new approach to reporting income duration and character is designed to better inform taxpayers when transactions in contingent payment debt instruments or debt denominated in foreign currency is being reported. A further change on the 1099-B impacts the reporting of Wash Sales, Accrued Market Discount and Collectibles. For the last two years a single box (1f) has been used to report disallowed wash sale losses and market discount recognized at sale or maturity. An additional box (1g) displayed the qualifying codes for those items and as well as a code if the proceeds in Box 1d were from the sale of collectibles. The 2016 version of Form 1099-B separates these amounts into distinct boxes and eliminates the box devoted to the codes. Box 1f is now used for reporting accrued market discount, box 1g is for reporting the amount of wash sale loss disallowed, and the collectibles indicator has been moved to box 12. The IRS has revised the de minimis dollar thresholds brokers can apply when issuing a corrected Form As you know most Forms 1099 have a $10 de minimis threshold for reporting purposes. Until now, such minimums also applied to a corrected Form Form 1099-B, on the other hand, has never had a 6 Return to Table of Contents

7 minimum threshold. All securities transactions subject to Form 1099-B reporting, regardless of dollar amount, had to be reported. This applied to initial statements and corrected ones. As of January 1, 2107, there will be new thresholds in place for corrected Forms 1099, which will include Form 1099-B. If one or more dollar amounts are incorrect on a 1099 statement we have furnished to you, no correction of the dollar amount will be required, if: The difference between the dollar amount reported on the furnished payee statement and the correct amount is no more than $100; and The difference between the dollar amount reported for tax withheld on the furnished payee statement and the correct amount is no more than $25. This provision will help taxpayers avoid having to amend their tax returns for minor adjustments. But you can request that you continue to receive all corrected Forms 1099, in which case such corrected forms will also be furnished to the IRS. From the IRS point of view, these changes are part of a much broader program to enhance and accelerate reporting and reduce Refund Fraud. Also included in this fraud prevention program is a new restriction that delays payment of refunds or credits before February 15 to a taxpayer who claimed the Earned Income Tax Credit or Additional Child Tax Credit on the return. If such credits are not claimed, there is no delay in refund processing. Important Dates We will mail the following single tax forms on or before January 31, 2017: Form 1099-INT Form 1099-Q Form 1099-OID Form 1099-MISC (except payments reported in boxes 8 or 14) Form 1099-DIV Form 1099-C Form 1099-R On or before February 15, 2017, we will be mailing single Form 1099-Bs, Form 1099-MISC reporting payments in box 8 or 14, and the Composite 1099 Tax Statements. When you get these statements will depend upon what you hold in your account. Most accounts with mutual funds, unit investment trusts (UITs), real estate investment trusts, and other securities subject to income reclassification will be mailed by February 15, But accounts pending final reclassifications will be mailed after February 15 and before March 17, We will get an IRS extension to file for these accounts. Delaying delivery of statements with late reclassifications sounds like a bad thing but it means you may avoid having to amend your tax return to reflect changes to income and basis in securities. We work closely with industry experts in securing reclassification information as soon as it is available to expedite any delayed statements. We will be mailing our 1042-S Non-resident Alien tax statements on or before March 15, Before May 31, 2017, we will mail Form 5498, IRA Contribution Information. 7 Return to Table of Contents

8 Revised (Corrected) Tax Information Statements If we get corrected or updated information, we will report it to you and to the IRS, if required, on a revised Tax Information Statement. Corrected transactions will show a C in the Notes column of the revised Tax Information Statement. Tax regulations require that we correct a 1099 statement if given revised information within three years after issuing the original Additionally, a broker that transfers an account must furnish corrected information for a transferred tax lot up to 18 months after the original transfer. This could also lead to the issuance of a corrected 1099 statement. 8 Return to Table of Contents

9 Information to Be Aware of When Preparing Your Tax Return Before preparing your tax return, please note the following important information: This guide is to help you prepare your federal income tax return and is for use by individual U.S. taxpayers (who file IRS Form 1040 and are investors for tax purposes and not traders or dealers in securities, for whom special tax rules may apply). You should review the information in this section before you begin preparing your tax return. Being aware of these topics will help you address the fundamentals properly. Your tax professional can provide detailed advice as to specific federal, foreign, state, and local tax reporting requirements. Payer The payer for all transactions on your Tax Information Statement is J.J.B. Hilliard, W.L. Lyons, LLC (Taxpayer Identification Number ). This name and TIN should be listed wherever the payer s name is requested on an IRS form with respect to amounts reported on your Tax Information Statement. Taxpayer Identification Number Please check your name and Taxpayer Identification Number (or truncated number) displayed on your Tax Information Statement. If it is either missing or incorrect, you should promptly complete an IRS Form W-9 (Request for Taxpayer Identification Number and Certification), sign it, and get it to your Financial Consultant. If your Tax Information Statement shows more than one name, ensure that the statement s TIN belongs to the individual whose name is listed first. If not, please contact your Financial Consultant. To avoid backup withholding, it is important to ensure that your name and Taxpayer Identification Number are correct. If the information is not correct, or does not match the records of the IRS or Social Security Administration, then, upon notice from the IRS, pursuant to its B-Notice Program, we may be required to start backup withholding. Nominee Recipients If your TIN or Employer Identification Number (EIN) is shown on your Tax Information Statement, and the statement includes amounts that belong to another person, you are considered a nominee recipient. You must file IRS Form 1099 for each of the other owners, showing the income allocable to each. File the applicable IRS Form 1099 (Copy A) along with IRS Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) with the IRS Center in your area. You should be listed as the payer on IRS Form 1099 and as the filer on IRS Form You must furnish copy B of IRS Form 1099 to the other owner(s). Note that spouses need not file a nominee report to show amounts that the other spouse owns. To order official IRS information returns, visit 9 Return to Table of Contents

10 IRS Publications You can get IRS publications from your local IRS office, by calling the IRS Forms Distribution Center at (800) TAX-FORM, or visiting the IRS website at These IRS publications provide useful tax information related to reporting securities transactions: Pub 550 Investment Income and Expense; Pub 590A Contributions to Individual Retirement Arrangements; Pub 590B Distributions from Individual Retirement Arrangements; Pub 938 Real Estate Mortgage Investment Conduits (REMICs) Reporting Information; (and Other Collateralized Debt Obligations (CDOs); and Pub 1212 Guide to Original Issue Discount (OID) Instruments. Separate Accounts You will get a separate Tax Information Statement for each brokerage account you maintain with us. Whether you have a second account with us or an account at another brokerage firm, note that some reporting processes may require the netting or matching of transactions and positions between multiple accounts. For example, purchases and sales of the same security (including in retirement accounts) can lead to wash sales, and options and short positions can require holding periods to be adjusted. (See Tax Terms and Rules You May Need to Know below.) Please consult with your tax advisor for other situations that may require you to consider multiple accounts. Timing Differences There are timing differences between your Composite 1099 Tax Statement and Brokerage Account Statement. Dividends and interest declared and made payable by mutual funds and REITs in October, November, or December are reported on this year s Tax Information Statement, even when the dividends were actually paid in January. Similarly, dividends and interest paid on WHFITs and WHMTs in October, November, or December are reported on this year s Tax Information Statement, even when the dividends and interest are actually paid in January or February. The dividends are referred to as spillover dividends and will not be reported again on the following year s Tax Information Statement. There may also be a timing difference when a short sale transaction is closed for a year-end profit. Your Composite 1099 Tax Statement will not reflect the closing transaction until the later year, but you must report and recognize the income in your current year s tax filing. (See Tax Terms and Rules You May Need to Know below.) Margin Accounts Substitute Payments / Tax-Exempt Bonds If you have a margin account with a debit balance, securities in the account can be loaned to a broker. If you had shares loaned out over a dividend record date, you may receive a substitute payment instead of a dividend payment. Substitute payments are taxed at ordinary income tax rates and are reported to you on Form 1099-MISC. Remember that you cannot deduct the interest expense on a loan taken out to buy a tax-exempt bond. Borrowed funds used for and directly traceable to the purchase of a tax-exempt instrument are not a deductible investment expense. You should keep careful records and make certain your borrowing for investment purposes does not open the door to possible IRS interpretation that such borrowing can be 10 Return to Table of Contents

11 allocated to a tax-exempt instrument rather than a taxable one when you are deducting investment interest. Federal Income Tax Withheld (Backup Withholding) We are required by law to withhold 28% of federal income tax from all reportable dividends, interest, and gross proceeds paid to certain U.S. persons (including trusts and partnerships) who fail to furnish a valid TIN or appropriate certification (IRS Form W-9). This is called backup withholding. If you are exempt from backup withholding because you are an exempt recipient (such as a QRP or charity), please furnish your Financial Consultant with an executed IRS Form W-9, including the exemption. If you are exempt from backup withholding because you are a foreign person, please furnish a withholding certificate, such as IRS Form W-8BEN. We report federal income tax withheld separately in the 1099-B, 1099-DIV, 1099-INT, and 1099-OID sections of your statement. You should combine these amounts and report them on IRS Form 1040, line 64. Form 8949 and Schedule D Form 8949 is used to report sales and exchanges of capital assets. It allows you and the IRS to reconcile amounts reported to you and the IRS on Form 1099-B with the amounts reported on your Form 1040, Schedule D. This is done by placing information into various short-term and long-term categories on the Form 8949 and then transferring totals to Schedule D. Our Composite 1099 Tax Statement indicates what information should be placed on the Form 8949 and under which categories. This is presented on the Form 1099-B portions of the Composite Statement. Note that the reporting of ordinary income derived from contingent payment debt instruments is now accounted for by using the IRS worksheet, Worksheet for Contingent Payment Debt Instrument Adjustment in Column on page 10 of the 2016 Instructions for Form Generally, when a gain is the result of the worksheet, it is reported as interest income on the Form 1040; if a loss results, generally it is reported as an ordinary loss on the tax return. TurboTax You can download your Hilliard Lyons tax information to your TurboTax software. You will need to know your account number and the document ID. Please see the TurboTax import instructions at for more detailed information. 11 Return to Table of Contents

12 Your Composite 1099 Tax Statement Your Composite 1099 Tax Statement contains information we report to the IRS and additional information that may be useful to you. Some categories of transactions may not pertain to your account. Summary displays are provided, some presenting transactions that we do not report to the IRS, but which you may find helpful in preparing your tax returns. We give examples of these summaries below. The first page of your Tax Statement contains account and payer required information in the top section. Then the Summary Information sections begin (see below). In the center of the page, the following sections are presented and serve as substitute Form 1099 statements. This is possible because the information in these statements can be presented in the aggregate and need not be presented on a transactional or position basis. This information is reported to the IRS as it appears below. Dividends and Distributions DIV Miscellaneous Income MISC Regulated Futures Contracts B The lower portion of the page shows a Summary of Proceeds, Gains & Losses, Adjustments and Withholding that summarizes all Form 1099-B transactions (other than those treated for tax purposes as regulated futures). Note that Form 8949 information is highlighted here; you can use it a check when reconciling your Form 8949 details to added totals. We do not report this summary to the IRS. 12 Return to Table of Contents

13 The second page of your Tax Statement presents your substitute Form 1099-INT, which we report to the IRS as presented here. Your Tax Statement also includes four information summaries on this page that we do not report to the IRS. One of these is the Original Issue Discount (Form 1099-OID) summary. Similar to Form 1099-B, Form 1099-OID is not an aggregate presentation but an individual tax position/lot presentation. Following this page, the substitute Form 1099-OID is presented for specific securities. The other three summaries on this page, which are not reported to the IRS, are presented to support your tax return preparation, and their content is self-explanatory. Note that on the Form 1099-INT above, new Box 12 - Bond Premium on Treasury Obligations, now appears. Also note that in the OID Summary no qualified stated interest nor related premium appears as that information continues to be reported on the 1099-INT. 13 Return to Table of Contents

14 Original Issue Discount (OID) To better understand the presentation of Form 1099-OID, we will first take a closer look at the OID summary. This document is not filed with the IRS, because the Form 1099-OID must reflect only one debt instrument and at times the reporting may even be done on the tax lot level. OID is a form of interest. It is the difference between a debt instrument s stated redemption price at maturity and its issue price. A debt instrument, such as a bond or note, generally has an OID when the instrument is issued for a price less than its stated redemption price at maturity. If you owned a taxable debt obligation issued with OID, you may be required to include a portion of the OID in your gross income for each year you hold the obligation, even if you did not receive any cash payments. In complying with the requirement to report the OID income on a per-security or lot basis, we use the Tax Information Statement Form 1099-OID (see below). Separate reporting of each debt instrument s OID is also required on your tax return. It is important that you report these amounts on your tax return just as they appear on your Tax Information Statement. The IRS may attempt to match these items to your tax return. The OID Summary above shows $12, of total Non-Treasury OID in this account. According to the Forms 1099-OID below on the Tax Information Statement, this derives from totaling the Box 1 amounts from 2 different instruments. The issuance of six Forms 1099-OID (individual line entries) is due to the difference in tax lot acquisition dates. The corresponding covered lot acquisition premium of $1, is presented under the Box 6 category. The non-covered acquisition premium also appears but is not included in the OID Summary and is not furnished to the IRS. The Box 8 Treasury OID amount of $4, is the product of 2 issues, which have generated a total of three Forms 1099-OID. Note treasury income may be non-taxable by states. 14 Return to Table of Contents

15 Original Issue Discount Form 1099-OID Detail Income earned on an OID bond is calculated separately for each accrual period. Although we report amounts to the IRS annually, we report income to you for each accrual period. The date each accrual period begins is displayed in the detail section of your Tax Information Statement. OID (column 1) Amounts in this column reflect the OID on each obligation for the part of the year in which it was owned. Early Withdrawal Penalty (column 3) Shows interest or principal forfeited if you withdrew before maturity. See instructions to Form 1040 for guidance on where this amount may be deducted. Market Discount (column 5) Shows the discount accretion for the year if the debt instrument was purchased at a market discount and you chose to recognize this interest income currently. (See Tax Terms and Rules You May Need to Know below.) Acquisition Premium (column 6) Shows the amount of acquisition premium amortization for the year, generally considered a reduction of OID reported to you. See the instructions for Form 1040, Schedule B for where this amount may be deducted. 15 Return to Table of Contents

16 Investment Expenses (column 9) This represents your share of investment expenses of a single-class REMIC. Your share of UIT, WHFIT, and WHMT expenses are also reported on this line. If you file IRS Form 1040, you may be able to deduct this amount as Miscellaneous Itemized Deductions (subject to the 2% limit (threshold)) on IRS Form 1040, Schedule A. Because the amounts of OID we report on your Tax Information Statement may not be the amount on which you should pay tax, you should calculate your OID adjustment. See IRS Publication 1212, Guide to Original Issue Discount, for details. Report OID (1099-OID Summary First Line) on IRS Form 1040, (Schedule B, Part 1 Interest) as shown below. Report Acquisition Premium as an adjustment to OID. 16 Return to Table of Contents

17 Proceeds from Broker and Barter Exchange Transactions Below, we provide a sample Summary of Form 1099-B information on the first page of a Tax Statement that can be used in reconciling totals of information when filling out Form 8949 for Schedule D purposes. Note that the second column of information has alphabetic indicators that align the category totals of Form 1099-B transactions to Form This table matches 1099-B transactions with Form 8949: Form 1099-B Section Short-Term transactions for which cost basis is reported to the IRS Short-Term transactions for which basis is not reported to the IRS Short-Term transactions for which no Form 1099-B is received Long-Term transactions for which cost basis is reported to the IRS Long-Term transactions for which cost basis is not reported to the IRS Long-Term transactions for which no Form 1099-B is received Undetermined Term basis not reported to the IRS Undetermined Term 1099-B not received Corresponding Form 8949 Part and Box A Basis reported to the IRS B Basis not reported to the IRS C Form 1099-B not received D Basis reported to the IRS E Basis not reported to the IRS F Form 1099-B not received B or E Basis not reported to the IRS C or F Form 1099-B not received The individual Forms 1099-B are provided in listings in this Tax Statement grouped by the same categories above. Long-term and short-term transactions are segregated both on the Summary and the individual 1099-Bs. Sales of those securities covered by basis reporting regulations are separated from noncovered securities transactions. This 1099-B format simplifies your process of recording or transcribing each transaction from the 1099-B to Form Return to Table of Contents

18 The next table matches boxes from Form 1099-B, which report information for covered securities transactions, and the corresponding columns on IRS Form Note that although the Form 1099-B now designates a separate box for wash sales and market discount, the Form 8949 continues to report those amounts using column (f) for a code and column (g) for the dollar amount. Form 1099-B Box Item 1a Description of property Item 1b Date acquired Item 1c Date sold or disposed Item 1d Proceeds Item 1e Cost or other basis Item 1f Accrued market discount, if any Item 1g Wash sale loss disallowed, if any Corresponding Form 8949 Column (a) Description of Property (b) Date acquired (c) Date sold or disposed of (d) Proceeds (sales price) (e) Cost or other basis (f) Codes from instructions (g) Amount of adjustment The following contains six Forms 1099-B for short-term covered transactions. Note that one of the trans- actions for Guggenheim Equity is made up of three separate tax lots with the column (1b) Date Acquired displaying the word VARIOUS on the 1099-B transaction. The Form 1099-B boxes are indicated in each column heading and the Part and Box for Form 8949 is indicated in the three lines of description provided for Short Term Transactions for Covered Tax Lots. If there was a need to indicate Ordinary income as part of this transaction, the word Ordinary would appear in the Additional Information column. This presentation would be equivalent to checking the Short-term and Ordinary boxes on a form. 18 Return to Table of Contents

19 See the information provided in the Tax Terms and Rules You May Need to Know section below for details on the following descriptions of Form 1099-B s columns and headings. 1. Description of Property (1a) Name and/or CUSIP of security sold. 2. Quantity (1a) The number of shares displayed under the quantity column is considered a part of the description of property included in 1a. If fractional shares are included, the fractional amount will be shown. 3. Short-Term Transactions for Covered Lots (2 & 5) This caption addresses the information requirement in boxes 2 and 5 on the Form 1099-B. It indicates all transactions appearing in this section are covered and short-term. 4. Proceeds (1d) & Reported Gross / Net (6) This is the amount of proceeds received from the sale with an indication if an option premium was netted in the sale. 5. Date acquired (1b) The word VARIOUS will display in this column if the securities sold were acquired on a variety of dates. (See Guggenheim transaction above.) For covered short sales, the date shown is the acquisition date of the security delivered to close the short sale. 6. Cost or other basis (1e) The cost or other basis for disposition transactions is shown in this column. For additional information on cost basis, see IRS Form 8949, Schedule D (Form 1040) Instructions, IRS Pub. 550 (Investment Income and Expenses), and IRS Pub. 551 (Basis of Assets). 7. Accrued Market Discount (1f) & Wash Sale Loss Disallowed (1g) For transactions that resulted in a wash sale, the nondeductible amount of the loss is displayed with code (W) alongside. For securities with recognition of market discount the amount of market discount would be displayed with a (D) alongside. For transactions with both wash sale and market discount only the wash sale information will be displayed. 8. Gain or loss (7) The amount of gain or loss on the transaction is shown here but not reported to the IRS (Z). However, if the loss is not allowed as a result of a reportable change in control or structure it will be indicated here and reported to the IRS (X). The following table presents Long Term Transactions for Covered Tax Lots. Note that other than the description for box 2, which is now Long Term, all columns and boxes 3 (Basis Reported to IRS) and 5 (Covered Lots) are the same as for Short Term Transactions. 19 Return to Table of Contents

20 The following table presents Long Term Transactions for Non-covered Tax Lots. Note that box 2 is not mentioned because duration is not reportable for non-covered securities, and the title indicates box 5 is checked as a non-covered security. The possibility of indicating that this long-term transaction also contains some Ordinary loss can be accomplished by indicating so in the Additional Information column. Report each transaction separately on IRS Form 8949 and Form 1040, Schedule D, as either short term or long term, depending on the holding period. Short-term transactions should be itemized in Part I of Form 8949 and long-term transactions should be itemized in Part II. The sample statement below shows how this information is reported on your Tax Information Statement, and the sample tax form below it shows how you should report this information on your tax return. Note that Form 8949 has not been changed to accommodate the reporting of Ordinary loss from a Contingent Payment Debt Instrument. Its instructions include a worksheet with guidance on what to do once the Ordinary CPDI gain or loss amount is calculated. There is no mention of treatment of currency gains or losses on non-us currency denominated bonds which are also Ordinary. We report the entire transaction as a capital gain or loss but will check the Ordinary box as some of the gain or loss may be currency conversion. You should consult with your tax advisor as to whether a foreign exchange gain or loss makes up part of the gain or loss we are reporting. 20 Return to Table of Contents

21 You would then take the totals at the bottom of IRS Form 8949, which could also include line item amounts from other 1099-B forms, to complete Line 1 of Form 1040, Schedule D. 21 Return to Table of Contents

22 Dividends and Distributions The Dividends and Distributions Substitute 1099-DIV portion of your Tax Statement presents dividend types with the level of detail the IRS requires. Dividends and Distributions 1099-DIV Total Ordinary Dividends (1a) Ordinary dividends that include any net short-term capital gains from a mutual fund are fully taxable. Report total ordinary dividends on IRS Form 1040, line 9a, or IRS Form 1040A. Also report it on IRS Form 1040, Schedule B (Interest and Ordinary Dividends), line 5, if required. See the instructions for IRS Form 1040, Schedule B, to determine whether you must complete Schedule B to report your dividends. Exempt-interest dividends from a mutual fund or other regulated investment company (RIC) are reported on Form 1099-DIV, Line 10. They are not reported on Form 1099-INT, Interest Income. Qualified Dividends (1b) The portion of your dividends that may be eligible for taxation at capital gains rates appears as Qualified Dividends on line 1b. You should report the eligible amount on IRS Form 1040, line 9b. If you have qualified dividends you must figure your tax by completing the Qualified Dividends and Capital Gains Tax Worksheet on IRS Form 1040 or 1040A instructions, or the Schedule D Tax Work- sheet in the Schedule D instructions, whichever applies. Exceptions: Some dividends reported as Qualified Dividends on line 1b may not be Qualified Dividends depending on your circumstances, including those described below. Dividends on stock or mutual fund shares that you owned for less than 61 days in the 121-day period surrounding the ex-dividend date are not qualified dividends. The 121-day period begins 60 days before the ex-dividend date. When counting number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. Your holding period need not be continuous. For dividends on preferred stock, when the dividend is attributed to periods totaling more than 366 days, the stock must be held for at least 91 days within the 181 days surrounding the exdividend date. Again, your holding period need not be continuous. 22 Return to Table of Contents

23 If you are obligated to make payments under a short sale, dividends on the stock you sold short (or substantially similar stock) are not considered qualified dividends. Substitute payments are not qualified dividends. Substitute payments are payments you receive when your stock is on loan on the stock s ex-dividend date. Your shares could be loaned if you borrow to buy stock on margin. Substitute payments are separately reported to you on IRS Form 1099-MISC. Foreign Dividends: Foreign dividends may be considered qualified dividends when paid by a foreign corporation that is either: (1) incorporated in a U.S. possession; (2) eligible for the benefits of a comprehensive income tax treaty with the United States and that the Treasury Department has determined is satisfactory for this purpose; or (3) readily tradable on an established securities market in the United States (such as the New York Stock Exchange or the NASDAQ stock market). But dividends paid by passive foreign investment companies are not considered qualified dividends. Money Market and Bond Funds: Dividends paid on money market and bond funds are generally nonqualified dividends. As such, these dividends are generally reported only in line 1a of Form 1099-DIV. For guidance on determining whether your dividends qualify for taxation at the Long-Term Capital Gains rate, see IRS Publication 550 or the instructions to IRS Form Total Capital Gain Distributions (2a) Total capital gain distributions (long-term) from a mutual fund or REIT are included in this section of your Tax Statement. Report total capital gain distributions on Form 1040, Schedule D, line 13, regardless of how long you held your investment. If your capital gain distributions contain additional classifications, your Tax Information Statement will include separate Capital Gain Distributions lines 2b, 2c and 2d. Unrecaptured Section 1250 Gain (2b), Section 1202 Gain (2c), Collectibles (28%) Gain (2d) If your Tax Information Statement contains amounts on any of these lines, see the Instructions for IRS Form 1040, Schedule D (Capital Gains and Losses) for information on how to report this income. Non-dividend Distributions (3) Certain payments represent non-dividend distributions because they are a return of capital. You must reduce your cost (or other basis) by the amount of the non-dividend distribution for the purposes of calculating the gain or loss when the security is sold. If your security is a covered security Hilliard will adjust the basis in our cost basis system for you. Once you have received an amount equal to your cost (or other basis) for the security, further distributions are taxable as a capital gain. Please review your distributions on non-covered securities carefully to determine whether any represent a return of capital. Federal Income Tax Withheld (4) Report federal income tax withheld (backup withholding) as a payment on IRS Form 1040, line 64. Federal income tax withheld is 28% of the dividend distribution (including short-term capital gains, long-term capital gains and redemptions). Investment Expenses (5) Your share of investment expenses is reported on line 5. You may be able to deduct these expenses (subject to 2% limit) on the other expenses line on Form 1040, Schedule A, line Return to Table of Contents

24 Foreign Tax Paid (6) Your Tax Statement includes foreign tax paid (withheld) from foreign-source dividends credited to your account. Cash and Noncash Liquidation Distributions (8 and 9) Generally, liquidation distributions are treated as amounts received from the sale or exchange of a capital asset and should be reported on IRS Form 8949 and Form 1040, Schedule D. Dividend Reinvestment Plans Your dividends may have been reinvested pursuant to a dividend reinvestment plan. Reinvested dividends are reported in this section of your Tax Information Statement as if a cash dividend was credited to your account. State Tax-Exempt Income Tax-exempt income is reported on Form 1099-INT as Tax-Exempt Interest (8), and as Specified Private Activity Bond Interest (9), if applicable. Line 10 reports the CUSIP number(s), if any, of the tax-exempt bond(s) for which tax-exempt interest is reported on line 8. Please refer to the report of source percentages, later in your package, for your tax exempt income. IRS Form 2439 If you own shares in a mutual fund that paid tax on undistributed long-term capital gains, we will issue IRS Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains) to you at the end of March. This information is provided to us after the close of the fund s tax year and will be sent to you in a separate mailing shortly after the information is made available by the issuer. 24 Return to Table of Contents

25 The Tax Statement s Detail for Dividends and Distributions breaks down dividends and distributions by payment, then totals them. The detail provides the security description, CUSIP or symbol, state (if relevant), date of payment, amount, type, and notes. Report Total Ordinary Dividends (1099-DIV, item 1a) on IRS Form 1040, Schedule B, line 5 as shown below. Total Qualified Dividends are entered on the IRS Form 1040, line 9b (see further below). 25 Return to Table of Contents

26 Dividends and Distributions 1099-DIV Transfer the total of all ordinary dividends from IRS Form 1040, Schedule B, line 5, to IRS Form 1040, line 9a, as shown below. Note the Qualified Dividends are placed on Line 9b. Report Qualified Dividends on IRS Form 1040, line 9b, as shown above. The amount of qualified dividends you report on IRS Form 1040, line 9b, may be less than the amount of qualified dividends reported on your Tax Information Statement. Some dividends that we report as qualified dividends may not be based on your individual circumstances. If you have qualified dividends you should use the Qualified Dividends and Capital Gain Tax Worksheet in the IRS Instructions to Form 1040, or the Schedule D Tax Worksheet in the Instructions to Schedule D, whichever applies, to calculate your tax. The Instructions to IRS Form 1040 and Schedule D tell you which Tax Worksheet to complete to calculate your tax. 26 Return to Table of Contents

27 Interest Income The amounts reported in this section of your Tax Statement reflect interest income credited to your account. The summary section reflects four totals for interest income: Interest Income, Interest on U.S. Savings Bonds and Treasury Obligations, Tax-Exempt Interest, and Specified Private Activity Bond Interest. We report these totals separately to the IRS, so you should report each total separately on your tax return. Interest Income (1) Interest income reported on this line was paid by corporations (U.S. and foreign) and U.S. government agencies, and may include interest on your credit balances. Total interest income reported on this line is also reported in the summary section of your Tax Statement as Interest Income. You should report this total as an item on IRS Form 1040, Schedule B, line 1. Interest on U.S. Savings Bonds and Treasury Obligations (3) Interest Income on this line was paid on U.S. Treasury notes, bonds, and bills. This interest income is not included in Interest Income (line 1), Tax- Exempt Interest (line 8), or Specified Private Activity Bond Interest (line 9). Total Interest on U.S. Savings Bonds and Treasury Obligations (line 3) is also reported in the summary section of your Tax Information Statement. You should report total interest on U.S. savings bonds and Treasury obligations as an item on IRS Form 1040, Schedule B, line 1 also. Investment Expenses (5) The amount reported on this line represents your allocable share of investment expenses and may be attributed to direct investments such as UITs, WHFITs and WHMTs. Foreign Tax Paid (7) This amount represents taxes paid to foreign governments on interest from foreign sourced assets. You may be able to claim these taxes as a credit or as an itemized deduction on your federal income tax return. Tax-Exempt Interest (8) Interest income reported on this line represents interest paid on bonds issued by U.S. states, the District of Columbia, a U.S. possession, an Indian tribal government or a political subdivision. Total interest income reported on this line is also reported in the detail section of your 27 Return to Table of Contents

28 Tax Information Statement as Detail for Tax-Exempt Interest. Generally, individuals should report this total on IRS Form 1040, line 8b. Specified Private Activity Bond Interest (AMT) (9) Interest income reported in this column was paid from specified private activity bonds. This interest may be considered in your alternative minimum tax (AMT) calculation, and is included in the Tax-Exempt Interest (line 8). You may be required to report this total on IRS Form 6251, Alternative Minimum Tax Individuals. Market Discount (10) If purchased at a market discount and the taxpayer has elected to recognize market discount income currently this box captures the annual reportable amount. Bond Premium Amounts (11, 12, 13) These boxes capture specific types of bond premium that can offset interest income and reduce basis. Tax-exempt bond premium is a reduction in basis only. The supporting Detail for Interest Income shows payments, indicating amount and other details. 28 Return to Table of Contents

29 For reporting purposes, the IRS permits reporting interest net of premium amortization on the interest line or gross with the premium displayed in boxes 11 through 13. Hilliard will show your interest in gross amounts with the corresponding premium reflected on the appropriate premium line. Note that the reporting of premium amortization is required only for covered securities. 29 Return to Table of Contents

30 Interest Income 1099-INT Other Statement Forms The Composite 1099 Tax Statement also includes reporting information for Regulated Futures Contracts and REMIC and WHFIT Statements. There are information schedules that present mutual fund and UIT Supplemental Tax Detail, Tax-Exempt Interest Detail, and other miscellaneous schedules. If you receive any of these and need explanation beyond what appears on the Tax Statement, you should consult your tax preparer. 30 Return to Table of Contents

31 Tax Terms and Rules You May Need to Know This final section of your Tax Guide is meant to clarify some of the more complex tax treatments of securities on your Composite 1099 Tax Statement. We also furnish a Glossary below, which focuses on federal Cost Basis regulations and terms from some of the other tax regulations that are incorporated into basis tax information reporting (in particular, those addressing wash sales, inheritances, and gifts). Section 1234 Options The sale of a Section 1234 option (puts and calls on stocks) is reported on a Form 1099-B. But the manner of reporting depends upon which side of the option you are on. If you buy a put or call, then the cost to purchase the option is your cost basis and is reported on the Form 1099-B, Box 1e Cost or other basis. But if you sell a put or a call (write the option), the amount you pay to close out the position (the money paid to buy back the call) is treated as negative proceeds. When we report a purchase and then sale of an option to you, it will have Proceeds in Box 1d and Cost or other basis in Box 1e. When we report your closing of a written option (you buy the option to close) we will report the net amount of your proceeds from the original sale and the cost to close it netted in Box 1d Proceeds. If the option expires, we will report to you only proceeds with no associated cost. If you buy the option to close and pay more than your original proceeds from the sale, we will report a netted, negative proceeds amount to you in Box 1d. When you exercise a covered option (bought on or after 1/1/2014) or you get assigned on a covered option, we must fold in the premium you received or paid on the option into the basis of the underlying stock or proceeds of sale from the underlying shares. When the transaction is reported, Box 6 will be checked to indicate Net proceeds. Section 1256 Options A Section 1256 option is also known as a non-equity option. Our cost basis system can identify such options for proper tax reporting treatment. In general, a Section 1256 option must be listed on an exchange and must not be on a single stock. For example, an option on a bond would be a Section 1256 option, but an option on IBM stock would not. If the option is on an index of stocks, it may be a Section 1256 option if it is a cash-settled option on a broad-based index of securities. Our cost basis system will figure that out. Section 1256 options are reported differently from Section 1234 options. A Section 1256 option is reported like a Regulated Futures Contract is. These options are marked to market over year end, and they can be netted together on a single Form 1099-B for reporting purposes. There is no tracking of duration, because any gain or loss is split 64/40 Long-term/Short-term. This does present a unique situation when a Section 1256 option is exercised (ex. an option to buy a bond). Because of the 60/40 concept, the underlying premium related to the option is never folded into the security involved in the exercise. Instead, we must report the transaction in two segments. The option is treated as if it expired and a Form 1099-B is issued for it. Note the gain or loss will be 60/40. The underlying security is purchased or sold according to the option price but not with the premium folded in. When that transaction is closed, a 1099-B will be issued solely related to the bond s proceeds and cost, with duration being determined by the holding period of the bond. 31 Return to Table of Contents