A Comprehensive Guide To Your Composite Tax Statement - HilltopSecurities

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A Comprehensive Guide to YourComposite Tax Statement.Hilltop Securities does not provide tax advice.This material is presented for informational purposes only.You should consult your tax advisor on all issues and questions concerning your tax situation

CONTENTSHilltop’s Obligation to Report to You . 1What’s New? . 1About the Composite 1099 Tax Statement We Prepare for You . 3Non-resident Alien (NRA) Reporting . 3Puerto Rico Informative Statements . 4Exempt Accounts and Non-Reportable Transactions . 5Retirement Accounts . 5Revised (Corrected) Tax Information Statements . 5Account Transfers and Their Statement Impacts . 6Important Dates . 6Important Information to Know When Preparing Your Tax Return . 7Payer . 7Taxpayer Identification Number . 7IRS Publications. 7Separate Accounts . 8Timing Differences . 8Margin Accounts - Substitute Payments / Tax-Exempt Bonds . 8Federal Income Tax Withheld (Backup Withholding) . 8Form 8949 and Schedule D . 8TurboTax and H&R Block . 9Your Composite 1099 Tax Statement . 9The First and Second Pages . 9Original Issue Discount (Form 1099-OID) . 11Proceeds from Broker and Barter Exchange Transactions (Form 1099-B) . 14Dividends and Distributions (Form 1099-DIV) . 18Detail for Dividends and Distributions. 20Interest Income (Form 1099-INT) . 21Detail of Interest Income . 22Miscellaneous Income (Form 1099-MISC) . 24Section 1256 and Other Financial Contracts . 24Other Statement Forms . 25Tax Information - Terms and Rules. 25Changing Ownership of Securities . 26Covered Securities . 26Debt Instruments . 26Options . 27Qualified Dividends. 28Short Sales . 28Wash Sales . 29Important Wash Sale Terms . 30i

Hilltop’s Obligation to Report to YouFederal tax law requires financial institutions to report certain tax information to their customers andthe Internal Revenue Service (IRS). In accordance with these regulations, Hilltop provides you with TaxInformation Statements for interest, dividends, proceeds of sale, and certain other financialtransactions, including retirement distributions. As noted, this information is also provided to the IRS.They rely on it when processing tax returns for the purpose of matching what taxpayers report on theirreturns with what financial institutions have reported to the IRS.The IRS provides a series of statements to be used by financial institutions for tax reporting. Thesestatements are designed to be sent individually (1099-INT, 1099-B, 1099-DIV, etc.). However, theregulations permit financial firms to combine certain of these forms into a Composite Substitute TaxStatement, provided the information presented conforms to IRS-specified requirements in IRSPublication 1179. Our Composite Substitute Tax Statement includes reporting on payments consisting ofthe proceeds of brokerage and barter transactions, dividends, substitute payments in lieu of dividendsand interest, interest, original issue discount, patronage dividends, and royalties. This Tax Guide wasdesigned to take you through your Hilltop Composite Statement and to assist you in using theinformation it provides. Our Tax Guide also addresses other statements which some of our customersreceive, including the Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, thePuerto Rico 480.6 series of information statements, and retirement statements Forms 1099-R and 5498.We suggest you review the section “Tax Information - Terms and Rules” at the end of this guide, prior toutilizing the tax information contained in your Composite Tax Statement for tax return preparation.What’s New?This past year has been challenging for all of us. Recognizing this, the IRS took steps to address thedifficulties taxpayers would have in filing their 2019 tax returns, funding their IRAs and fulfilling manyother tax regulatory obligations. As a result, many filing deadlines were extended, the date for paymentof income taxes due was moved from April 15th to July 15th, and requirements for retirement plandeposits and withdrawals were modified. In fact, the IRS took so many actions at varying times, it almostbecame a point of confusion as to what were the latest IRS changes affecting taxpayers. But this is 2021,and whether or not the IRS takes new relief actions targeted to 2020 tax filings, we at Hilltop willcontinue to provide the best possible client tax reporting experience for our account holders by keepingto a “business as usual” objective as best we can under the circumstances. In that regard, let’s take alook at what’s been happening and what is new for 2020 tax reporting.This year sees the introduction of new Form 1099-NEC and the resultant modifications to Form 1099MISC. The 1099-NEC replaces the 1099-MISC for reporting nonemployee compensation. The 1099-NEC isnot a part of the Composite Statement and as such will be delivered to you separately by February 1st.Along with changing reportable tax information statements to reflect these and other IRS changes, wemay also have revised our nonreportable statements, supporting schedules and our Tax Ledger andInvestor Tax Summary statements as appropriate.Last year we updated you on Section 11011 of the Tax Cuts and Jobs Act (the “Act”) which created a new“Deduction for Qualified Business Income of Pass-thru Entities” which applies to various forms of passthru income. We noted this new 20% deduction for “qualified REIT dividends,” known as Section 199A1

dividends, created the need to modify Form 1099-DIV by adding a new Box 5 to the form. At that timethe IRS had not confirmed whether this deduction could be passed through, from Regulated InvestmentCompanies (RICs) holding REIT investments, to their shareholders. We can now confirm, thatsubsequent to issuing our 2019 Tax Guide, the IRS did extend this pass-thru benefit to RICs holding REITpositions.In late December, 2019, the Setting Every Community Up for Retirement Enhancement Act (the “SECUREAct) was signed into law. Many provisions became effective as of January 1, 2020. One such provisionchanged the timeframe for applying Required Minimum Distributions (“RMDs”) to plan participantwithdrawals. The age for taking Required Minimum Distributions (RMDs) was raised from 70 ½ to 72. So,any individual who had not reached age 70 ½ by year-end 2019 is not subject to the RMD requirementsuntil the year that individual attains age 72. Given this gap, there were no individuals newly subject toRMDs in 2020. Among other SECURE Act provisions, there is no longer an age restriction for makingcontributions to regular IRAs. As long as an individual continues to work, he or she will be eligible tocontribute into a traditional IRA. There is now also the ability to make a penalty-free withdrawal of up to 5,000 from a retirement account in the case of the birth or adoption of a child.On March 18, 2020, the IRS issued Notice 2020-17 postponing the due date for certain Federal incometax filings from April 15, 2020 until July 15, 2020. The IRS then issued Notice 2020-18 which restated andexpanded the prior relief, but specifically required Hilltop and other paying agents to deliver taxinformation returns to the IRS in accordance with regular deadlines. Most tax statements were deliveredto our account holders prior to the impact of the pandemic. Other relief offered by the IRS was aimed atretirement accounts. In recognition of the possibility that a retirement account had experienced asignificant valuation drop when the COVIP-19 pandemic struck, but that the RMD withdrawal amountrequirements were tied to prior year-end valuation, the IRS suspended the requirement to take theRMD in calendar year 2020, and also established guidelines for replacing money already withdrawn in2020.In last year’s Tax Guide we told you about proposed regulations under Internal Revenue Code Section1446(f) - Special Rules for Withholding on Dispositions of Partnership Interests and the possibility ofwithholding being put into place in 2020. Those regulations have been finalized and are set to go intoeffect as of January 1, 2022, rather than 2020. They will impose Non-resident Alien withholding onproceeds from sales of Master Limited Partnership securities and withholding on certain returns ofcapital as well. Withholding on proceeds is new for NRA accounts and presents programming andlogistical complexities, thus the January 1, 2022 implementation date. We will have much more tocommunicate about this in next year’s Tax Guide.Finally, we note that the treatment of bond premium in call situations has become a topic of interest asrates have declined and many bonds have recently been called prior to maturity. These calls havecreated “excess bond premium” for many account holders. For a further explanation of such situationsand their impact on taxpayers see the Interest Income (Form 1099-INT) section below.2

About the Composite 1099 Tax Statement We Prepare for YouIRS regulations permit us to roll up several of your tax statements into one consolidated form – TheComposite 1099 Tax Statement (the “Statement”). The Statement is a permitted substitute for officialIRS forms and also includes supplemental information. Among the forms that may be included on theComposite Statement that Hilltop provides are: Form 1099-BForm 1099-DIV (except for certain dividends)Form 1099-INT (except for certain interest)Form 1099-MISC (for royalty and substitute payments in lieu of dividends and interest only)Form 1099-OIDThe supplemental information provided in your Composite Tax Statement is designed to facilitate yourtax return preparation. We provide schedules that include: Non-Reported Income, Fees, Expenses and ExpendituresDetail of Miscellaneous IncomeDetail of Tax-Exempt InterestFees & Payments ReceivedSchedule of Management Fees (not currently deductible for tax purposes)Regulated Futures and Section 1256 Contract transaction detailsMutual FundOn sales of non-covered securities reported on Form 1099-B, we may include basis if it is available in ourrecords. We are not required to, and do not report such information to the IRS. We also provideexplanatory remarks on basis adjustments for covered lots and descriptions of transaction types (buy toclose, redemptions, etc.).Each individual statement is subject to a de minimis reporting threshold except for Form 1099-B. Deminimis transactions will not be reported to you, however you still have the obligation to include suchamounts in your tax filings. Included in the de minimis threshold reporting exception are payments ofinterest (1099-INT), original interest discount (1099-OID), dividends (1099-DIV), and substitute dividendpayments (1099-MISC). This de minimis reporting exception applies to amounts less than 10. Form1099-B does not have a de minimis threshold. All transactions subject to reporting on the Form 1099-Bmust be reported regardless of amount. These threshold amounts are not applicable to statementcorrections (see Revised (Corrected) Tax Information Statements below).Non-resident Alien (NRA) ReportingFor our account holders who are not US residents and receive Form 1042-S rather than a Form 1099Composite Statement, we would like to draw your attention to a few important matters to considerwhen you review the tax statement(s) we send to you. We are not permitted to include multiple incomecodes on a single Form 1042-S statement. We are required to report a single income type per form,rather than providing you with one Form 1042-S covering several categories of income. As a result, you3

may receive several Forms 1042-S with each representing a different category of income (interest,dividends, etc.).If you are claiming a reduced treaty rate or an exemption from tax it is mandatory that you provideHilltop with your Foreign Taxpayer Identification Number (FTIN) and we place it on the Form 1042-S. Asa means of protecting your personal identification information, Hilltop is truncating NRA accountholders’ FTINs. We will only display the last 4 digits with all other numbers represented by an X. Thereare exceptions to this mandatory FTIN disclosure requirement for individuals living in the British VirginIslands, the Cayman Islands, Bermuda and Australia. This list may increase or decrease over time.Remember, should you believe that you are entitled to a refund of money withheld as part of the Nonresident Alien Withholding Tax, you should obtain a Form 1040-NR or 1120-F and file a return makingsuch a claim.As a reminder of the NRA withholding changes that were initiated in 2018, please note that the rate ofwithholding on a publicly traded partnership distribution of income effectively connected to a U.S. tradeor business is 21% for corporate partners and 37% for all other partners. As noted in our What’s Newsection, beginning in 2022 there will be a new withholding regime put into place for publicly tradedpartnerships and we will alert you to the details in future correspondences.Finally, we want to remind you that the “Limitation on Benefit” code in Box 13j is no longer used forindividuals. Therefore, NRA accounts for individuals at Hilltop will not have any entry in box 13J. Allentity accounts will continue to have their Limitation on Benefit code reflected in box 13J.Puerto Rico Informative StatementsIf you are a Puerto Rican resident or purchase securities issued in Puerto Rico you may be subject toPuerto Rico tax information reporting. Generally, Puerto Rico forms report the same types of income asthe 1099 series required by the IRS. However, the organization of the forms differs in several ways. First,the forms are not organized by the type of income. Rather, the guiding principles are residency and taxwithholding. Second, withholding tax is shown separately for each type of income instead of as anaggregate amount on each form. It should be noted that a US citizen account holder can receive a Form1099 for a specific transaction (i.e. 1099-INT or 1099-DIV) and a Form 480.6C reflecting Puerto Ricowithholding, if the source of the income is Puerto Rican. Additionally, a Puerto Rican resident mayreceive a Form 1099-B and a Form 480.6A for the same Puerto Rico-sourced investment proceeds. Thereare four Puerto Rican information forms that Hilltop may issue. They are:480.6A - Form 480.6A is intended for residents of Puerto Rico. It covers gross proceeds andinvestment income that is not subject to withholding.480.6B - Form 480.6B is intended for residents of Puerto Rico. It covers investment income that hasbeen subjected to Puerto Rico source withholding.480.6C - Form 480.6C is intended for non-residents of Puerto Rico. It covers investment income thathas been subject to Puerto Rico source withholding.480.6D - Form 480.6D is intended for residents of Puerto Rico. It covers exempt income and incomesubject to the Puerto Rico Alternate Basic Tax (ABT).4

Rather than use the official forms issued by Puerto Rico’s Hacienda (Federal Reserve), Hilltop hascreated its own form for each of these 480.6 forms. The Hilltop forms have been approved by PuertoRico’s Hacienda for delivery to our customers.Puerto Rico requires disclosure of cost basis of a security sold and reported as proceeds on form 480.6A.Brokers must include, along with that form, detail that includes the cost of sales related to the grossproceeds reported to the payee. To satisfy this requirement, Hilltop provides a supplemental statementto our customers, but this is not given to the government. We believe we are only required to providecost basis on covered securities, so to meet this requirement, Hilltop has developed a gain/loss pagewith the basis information, which is delivered as an addendum to Form 480.6A.Exempt Accounts and Non-Reportable TransactionsWe are not required to report information for certain accounts which are exempt from most IRS Form1099 income, adjustments and proceeds reporting and backup withholding requirements. Among theaccount types this exemption extends to are “C” corporations, individual retirement accounts (IRAs),charitable organizations, foreign accounts, certain WHFITs, and most federal, state, and localgovernment accounts. If you maintain such an exempt account with us and receive a tax statementreflecting income, adjustments or proceeds information but do not understand why, please contact yourFinancial Advisor here at Hilltop. This may be because your account has been set up for delivery of nonreportable statements. Under this service, we provide the account holder with information similar inform to an individual form 1099 or a composite statement. However, we do not report this informationto the IRS.Retirement AccountsRetirement account information reporting occurs through Form 5498 (IRA contributions) and Form1099-R (distributions from pensions, IRAs, etc.). IRS regulations do not permit us to include these formsin a composite statement. You will receive these statements separately in accordance with the“Important Dates” timeline below. Form 1099-R reports on monies distributed from a retirementaccount. It does not report on transactions (other than distributions) or income earned in the account.Form 5498 reports contributions made into a retirement account and information related to valuationsof assets in the account.Revised (Corrected) Tax Information StatementsIf we receive corrected or updated information, we will report it to you and to the IRS, if required, on arevised Tax Information Statement. Corrected transactions will show a “C” in the ‘Notes’ column of therevised Tax Information Statement.Generally, we are required to correct a Form 1099 statement within three years after issuing the originalform. Additionally, a broker that transfers an account must furnish corrected information for atransferred tax lot up to 18 months after the original transfer. This could also lead to a corrected 1099statement being sent to you. Corrections are usually the result of income reallocation transactions,corporate action adjustments and revisions resulting from changes to wash sale transactions. (See “TaxInformation - Terms and Rules” below.)5

In recent years, amendments to the tax reporting laws established thresholds for correction reporting.These correction thresholds only require corrected reporting if the error amount exceeds 100 for an individual amount on a form or the correction is for a withholding amount greater than 25.Currently, we process all dollar amount corrections through March 15th of the year subsequent to thetax reporting statement year. Thereafter, if we discover a need to correct a statement, we will apply thethreshold amount of greater than 100 to generate the correction as this is considered the “materialamount” threshold for our company. Likewise, we apply the 25 threshold for withholding amounts.Account Transfers and Their Statement ImpactsUnderstanding your Composite Tax Statement requires an understanding of how account and securitytransfers are processed. Our year-end tax information reporting is limited to sales we have effected onyour behalf. If your account was transferred to Hilltop this year, you will receive 1099 statements fortransactions executed and income earned in your previous account from your former broker. Whenyour account transferred in, your open security positions were transferred to us. In the case of coveredsecurities, we should have also received the basis for individual tax lots. If your broker failed to providebasis for covered securities and did not respond adequately to our notification of such failure, we treatthose securities as non-covered, and basis reporting is not required. If you transferred an open shortposition, and subsequently closed it through Hilltop, we will issue a 1099-B, reporting both the cost andoriginal proceeds you received when you opened the transaction in your prior account before thetransfer.Important DatesWe will mail the following single tax forms on or before February 1, 2021. However, of the formshighlighted immediately below, if they are eligible to be part of a Composite Tax Statement, they neednot be mailed individually by February 1st. Form 1099-INTForm 1099-OIDForm 1099-DIVForm 1099-RForm 1099-SAForm 1099-Q1099-MISC (if you are reporting payments in only box 8 or 10) must be furnished by February 15,2022Form 1099-NECForm 1099-CForm 5498 (Fair Market Value assessment)On or before February 16, 2021, we will be mailing single Form 1099-Bs and the Composite 1099 TaxStatements. When you get one of these statements will depend on the holdings in your account. Mostaccounts with mutual funds, unit investment trusts, real estate investment trusts, and other securitiessubject to income reclassification will be mailed by February 16, 2021, but accounts pending final6

reclassifications will be mailed after February 16 and before March 18, 2021. We will obtain an IRSauthorized extension to delay mailing these accounts. By awaiting the delivery of statements with latereclassifications to file your tax return, you may avoid having to amend your tax return to reflect thesechanges, which typically impact income and basis of securities. Hilltop works closely with industryexperts to obtain reclassification information as soon as it is available to expedite the delivery of anydelayed statements.We will be mailing our 1042-S Non-resident Alien tax statements on or before March 15, 2021. On orbefore May 31, 2021, we will mail Form 5498, IRA Contribution Information.Important Information to Know When Preparing Your Tax ReturnBefore preparing your tax return, you should familiarize yourself with the following importantinformation. Familiarity with some or all these topics will help you understand the fundamentals of theinformation being reported to you in your tax statement(s) and how to use it when preparing your taxreturn. Your tax professional can provide further information regarding specific reporting and/or returnpreparation requirements. Note that further information helpful to your tax return preparation isfurnished in the Tax Information – Terms and Rules section below.PayerThe “payer” for all transactions on your Tax Information Statement is Hilltop Securities (TaxpayerIdentification Number 75-1382137). This name and TIN are listed wherever the payer’s name isrequested on an IRS form with respect to amounts reported on your tax statement.Taxpayer Identification NumberPlease use this opportunity to verify that your name and Taxpayer Identification Number (or truncatednumber) as displayed on your Tax Information Statement are correct. If there is an error, please providean executed IRS Form W-9 (Request for Taxpayer Identification Number and Certification) to your HilltopFinancial Advisor. If more than one name is shown, please ensure that the TIN on the Composite TaxStatement belongs to the individual whose name is listed first. Again, please contact your FinancialAdvisor if there is an issue here. Backup withholding may be instituted if your name and/or TaxpayerIdentification Number are incorrect. If they are incorrect there is a process we must follow which mayultimately result in 24% backup withholding on certain transactions including interest, dividends andproceeds of sale.IRS PublicationsYou 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 www.irs.gov. The following IRS publications provideuseful tax information related to reporting securities transactions: Pub 550 – Investment Income and ExpensePub 590 – Individual Retirement Accounts (590-A Contributions 590-B Distributions)Pub 938 – Real Estate Mortgage Investment Conduits (REMICs) Reporting Information; (andOther Collateralized Debt Obligations (CDOs)Pub 1212 – Guide to Original Issue Discount (OID) InstrumentsPub 515 – Withholding of Tax on Non-resident Aliens7

Separate AccountsWe are required to deliver a separate tax statement for each of your accounts maintained with us.However, the fact that securities holdings are held in different accounts does not change therequirements for applying tax regulations. Whether you have a second account with us or an account atanother brokerage firm, tax regulations may require netting or matching transactions and positionsacross accounts (i.e. wash sales). Purchasing options and short positions can require holding periodadjustments to other stock positions. We recommend that you consult with your tax advisor in theseand other situations when multiple accounts are involved.Timing DifferencesYou may encounter timing differences between your Composite Tax Statement and your HilltopBrokerage Account Statement. Dividends and interest declared and made payable by mutual funds andREITs in October, November, or December of 2020 should be reported on this year’s Tax CompositeStatement, despite their being paid in January of 2021. This is similar for dividends and interest paid onWHFITs and WHMTs, which may be declared in 2020 but actually paid in January or February 2021.These dividend types are referred to as “spillover dividends.” There may also be a timing differencewhen reporting the closing of profitable short sales. If the transaction occurs over year-end, yourComposite Tax Statement will not reflect the closing transaction until the subsequent year, but you mustreport and recognize the income in your current year’s tax filing. Again, we recommend consulting yourtax advisor.Margin Accounts - Substitute Payments / Tax-Exempt BondsIf securities you own are held in a margin account you must keep the following in mind. If the securitiesare lent out by Hilltop and a dividend is paid on them, you may receive a substitute payment instead of adividend payment. Substitute payments are reported on Form 1099-MISC, not Form 1099-DIV, and theyare

TurboTax and H&R Block . and retirement statements Forms 1099-R and 5498. . (1099-OID), dividends (1099-DIV), and substitute dividend payments (1099-MISC). This de minimis reporting exception applies to amounts less than 10. Form 1099-B does not have a de minimis threshold. All transactions subject to reporting on the Form 1099-B

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