Covering ETF Tax Forms and Tax-Free Alternatives For Investors (PRB, SHM, TFI, MUB, PZA)

Ron Rowland: April is here, which means warmer weather for most of us. Unfortunately, it also brings income tax time.

This year you get an extra day to procrastinate since April 15 falls on Sunday. A small consolation, but I’ll take it.

As an ETF investor you have some advantages in the tax department, but you aren’t completely off the hook.

Today I’ll give you some links to helpful information, update you on a type of tax-friendly ETF, and shed some light on those mysterious “K-1″ forms you may be dreading.

Stay Informed

April 15 is almost here!
April 15 is almost here!

Let’s start with some references that may come in handy as you gather your paperwork:

Form 1099

In most cases, your brokerage firm will tell you about taxable gains (or losses) and dividend payments in your ETFs on a form 1099. If you have a professional prepare your return (always a good idea), just hand over the information your broker sends. The preparer should be able to take it from there.

If you do it on your own, remember that the numbers on your 1099 aren’t treated any differently because they come from ETFs. If you’re used to reporting income from stocks or mutual funds, you’ll find the ETF process pretty familiar — and possibly easier.

What Is This “K-1″ Business?

Some ETFs and ETNs have to send you a different form called “Schedule K-1.” This is particularly the case for products based on futures contracts, commodities, currencies, or other alternative strategies.

Schedule K-1 makes some folks mad.
Schedule K-1 makes some folks mad.

 I’ve talked to investors who regard “K-1″ almost like a form of profanity. Something about them just makes people angry. I’m no fan, either, but they’re part of the landscape.

I try to look at the bright side. The same ETFs and ETNs that generate K-1 paperwork give me the chance to invest in ways that were once all but impossible. If I have a chance, at least, to make money in these strategies, I’ll deal with the hassle.

Muni Bonds: What’s the Appeal?

If you find yourself paying too much investment related taxes, then you may want to consider a municipal bond ETF. In January 2011, I told you about Two Muni ETFs to Avoid — and One That’s Surprisingly Safe!

Municipal bonds are issued by state and local governments. A big part of their appeal is that the interest they pay isn’t subject to federal income tax.

Now “tax-free” isn’t necessarily better. They tend to have lower yields than taxable bonds of similar quality. If you are in a low tax bracket, you may be better off going for a higher yield and paying tax on it.

Home of the muni bond.
Home of the muni bond.

In the Money and Markets column linked above, I was skeptical of PowerShares Insured National Muni Bond (NYSEARCA:PZA). I went so far as to call it “fool’s gold.” My main concern: The “insured” aspect was (and still is) dependent on some shaky bond insurance companies.

That’s still a concern. However, PZA has sailed right through a pretty scary period for the muni bond market. And the weakest bond insurers are now out of the picture. PZA may be worth another look.

If tax-free income is one of your investment goals, here are some other leading municipal bond ETFs to consider:

  • iShares S&P National Municipal Bond (NYSEARCA:MUB) is the largest ETF in this group. It’s very liquid and holds a diversified portfolio.
  • SPDR Barclays Municipal Bond (NYSEARCA:TFI) covers mostly the same ground as MUB and is a worthy alternative.
  • SPDR Barclays Short Term Municipal Bond (NYSEARCA:SHM) is the second-largest muni ETF. SHM has shown results similar to the Market Vectors Pre-Refunded Municipal ETF (NYSEARCA:PRB) that I mentioned in the same article with PZA.

Again, before you buy any kind of municipal bond fund, remember the tax benefit is valuable only to the extent you would otherwise pay taxes on that income. If your tax burden is minimal for other reasons, then a muni ETF can actually work against your bottom line.

Likewise, owning a muni ETF within an IRA or other retirement account is usually pointless. Why? Because you’re getting preferable tax treatment anyway!

ETFs can’t eliminate all your tax hassles, but they can definitely help. Remember to consult a professional any time you aren’t sure what the IRS wants. That’s what I always do.

Best wishes,

Written By Ron Rowland From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss  along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson. To avoid conflicts of interest, Weiss Research and its  staff  do not hold positions in companies recommended inMaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not  guaranteed. Performance returns cited are derived from our best  estimates but must be considered hypothetical in as much as we do not  track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene  Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam  Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle  Zausnig.

This investment news is brought to you by Money and MarketsMoney and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss  Research analysts offering the latest investing news and financial  insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view  archives or subscribe, visit



Leave a Reply

Your email address will not be published. Required fields are marked *