Understanding Your National Financial 2014 Tax Reporting Statement

Each year, we send tax statements to the National Financial Services LLC (National Financial) brokerage account customers our records indicate are subject to Internal Revenue Service (IRS) Form 1099 reporting. This guide can help you understand your tax statement, which provides information that you will need when you complete your federal and state income tax returns.

National Financial’s 2014 tax reporting statement consists of two parts:

• Tax Reporting Statement This form is made up of the information we report to the IRS on Forms 1099-DIV, 1099-INT, 1099-MISC, 1099-B, and 1099-OID. The titles, line and column headings, and box numbers used on this consolidated statement correspond to those on each of the stand-alone IRS forms.
• Supplemental Information This form features additional information (not reported to the IRS) that you may find helpful in preparing your income tax returns.

The screenshots from a statement, presented below, are for illustrative purposes only. Certain categories of transactions may not pertain to your account as your individual statement is generated based on your account activity. For instance, your statement will only include a Form 1099-B and/or a Form 1099-OID if you had any applicable 2014 transactions.

Tax Reporting

Statement Supplemental

Information Additional

Tax Reporting Statement

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1099-DIV Dividends and Distributions

Lists all taxable dividends, long-term capital gain distributions, nondividend distributions, and certain investment expenses, foreign tax paid, and tax-exempt interest dividends and private activity bond interest dividends (mainly from mutual funds or other regulated investment companies). The 1099-DIV information may include dividends and/or distributions from the mutual fund you use as your core money market fund. When computing any Alternative Minimum Tax (AMT) liability (see the IRS Instructions for Form 6251, Alternative Minimum TaxIndividuals (PDF) ), the IRS requires you to include any private activity bond interest dividends in this calculation. Dividends and capital gain distributions reported on Form 1099-DIV must be reported on your federal income tax return regardless of whether they were paid in cash or reinvested.

We report all dividends in U.S. dollars (USD). If the dividends that you received were paid in a currency other than USD, we convert the foreign currency dividends into USD and report the USD equivalent on Form 1099-DIV.

The dividend amounts that we report may be higher than the amounts that you actually received. For example, if foreign tax was paid, the amount that you may be able to claim as a deduction or credit is reported on Line 6 on Form 1099-DIV and that amount is also included in the dividend amount reported in Line 1a and, if applicable, Line 1b. For this reason, the total dividends reported on the form may be higher than the amount that you actually received.

IRS reporting requirements governing widely held fixed investment trusts (WHFITs) are another situation where National Financial may report a dividend amount higher than the amount you may have received. If you owned certain unit investment trusts or HOLDRS trusts, National Financial reports investment expenses on Line 5. We also include those expenses in the dividends reported in Line 1a, because we are required to report gross trust dividends including expenses. Because we are reporting gross dividends, the total dividends reported on the form may be higher than the amount that you actually received. The same situation may occur for tax-exempt interest dividends, reported in line 10. These expenses are not included in line 5. Instead, they are listed in the Supplemental Tax-Exempt Investment Expense section, which you may find near the end of your statement if there are appropriate expenses to report. Investment expenses may be deductible, subject to applicable limitations. For more information, see IRS Publication 550, Investment Income and Expenses (PDF). or consult your tax advisor.

1099-INT Interest Income

Lists all interest you earned on government and corporate debt obligations and shortterm certificates of deposit, as well as interest earned from cash in your account.

As part of the 2014 Cost Basis Legislation (CBL) changes, there are two new fields on the Form 1099-INT: Line 10, Market Discount, and Line 11, Bond Premium. For debt issued at par, market discount is the difference between the instrument’s stated redemption price and the purchase price. There is a taxpayer election that allows you to choose whether you want to recognize the discount at disposition (sale or redemption), or alternatively to calculate accretion daily. The default setting is to recognize the discount at disposition. If you elect to calculate accretion daily, the market discount would appear on Form 1099-INT in line 10. Bond Premium is the amount paid above a debt instrument’s par value. There is a taxpayer election that allows you to choose whether you want to amortize the premium for corporate bonds. The default setting is to amortize, for which the amortized amount would appear on Form 1099-INT, line 11.

Line 8 reports tax-exempt interest from individual securities, but not from mutual funds or other regulated investment companies. We report those tax-exempt interest dividends on Form 1099-DIV, as described above. In addition to your federal tax return, you may also be required to report this information on your state income tax return.

Line 9 reports any applicable specified private activity bond interest. Specified private activity bond interest must be taken into account in computing the federal Alternative Minimum Tax (AMT). The tax-exempt interest reported on Line 8 includes this specified private activity bond interest, if any. For more information, see the IRS Instructions for Form 6251, Alternative Minimum TaxIndividuals . In addition to federal reporting, National Financial may be required to report all or a portion of your total exempt income to California, Connecticut, Minnesota, or New York state tax authorities.

Line 12 shows CUSIP numbers for tax-exempt securities on which tax-exempt interest was paid to you during the calendar year and reported on Line 8. In cases in which we are reporting tax-exempt interest from more than one CUSIP, the line is marked various.

Due to IRS reporting requirements governing widely held fixed investment trusts (WHFITs), for certain unit investment trusts or mortgage-backed securities distributing taxable interest, National Financial reports your prorated share of investment expenses in Line 5. Those expenses are also included in the interest reported in Line 1, because we are required to report your share of any unit investment trust or mortgage-backed security gross interest before expenses were subtracted. For this reason, the interest reported on the form may be higher than the amount that you actually received. In the same manner, we also include your prorated share of tax-exempt interest investment expenses in the amount reported in tax-exempt interest on Line 8. We provide details on those expenses in the Tax-Exempt Interest Investment Expenses section (shown if applicable) near the end of the supplemental section of your tax statement. Investment expenses may be deductible, subject to applicable limitations. For more information, see IRS Publication 550, Investment Income and Expenses (PDF). or consult your tax advisor.

We report all interest in U.S. dollars (USD). If the interest that you received was paid in a currency other than USD, we convert the foreign currency interest into USD and report the USD equivalent on Form 1099-INT.

Details of 1099-MISC Transaction

Lists other reportable income, such as royalty payments from grantor trusts, other income, and substitute payments made in lieu of dividends. Royalty payments are generally reported on your federal income tax return, Form 1040, Schedule E.

Other Income includes credit adjustments for substitute payments in lieu of qualified dividends, or certain credits, adjustments, or other income. Following IRS regulations, National Financial reports Other Income if you received other miscellaneous income totaling at least $600 during the tax year. We determine your total other income by adding together the other miscellaneous income amounts in all your accounts (under the same Taxpayer ID) for which National Financial Services LLC (NFS) is the payer. Beginning with 2013 we reported Line 3, Other Income, on this consolidated Tax Reporting Statement. See the FAQ in this guide, I did not receive a separate Form 1099-MISC, reporting Other Income, (Line 3). Where is it?

Substitute payments in lieu of dividends are generally reported on the Other Income line of your federal income tax return, Form 1040, and should be taxed at federal ordinary income tax rates.

Due to IRS reporting requirements governing widely held fixed investment trusts, if you owned certain royalty or HOLDRS trusts, National Financial reports various expenses, as well as adjustments that affect the estimated cost basis of your shares, in the applicable supplemental sections of your tax statement. We also include your prorated share of those expenses in the royalties (Line 2) reported in the 1099-MISC, because we are required to report your royalties before expenses were subtracted. For this reason, National Financial may report a higher amount of royalties than the amount that you actually received. Investment expenses may be deductible, subject to applicable limitations. In addition, by March 16, if you owned a royalty trust, National Financial may post online additional information relayed to us by the royalty trust. For more information, see IRS Publication 550, Investment Income and Expenses (PDF). or consult your tax advisor.

Summary of Proceeds from Broker and Barter Exchange Transactions

Lists gross proceeds less commissions from sales. Beginning January 1, 2014, gross proceeds will also be adjusted for option premiums from option contracts purchased and subsequently closed after that date.