If you’re a traditional employee, every year you receive a W-2 form from your employer that records your earnings for the year and the amount of taxes withheld from those earnings. IRS 1099 forms are complements to the W-2 form for non-traditional employee relationships. They are generally designed to record sources of income that have not been subjected to withholding – in other words, sources where an employer has not already paid the corresponding taxes.
If you are self-employed, you know the IRS form 1099-MISC that reports payments made to you over the course of the year. However, there are many different types of 1099 forms – and not all of them increase your tax bill.
SSA-1099 – Your Social Security benefits are recorded here. No more than 85% of your benefits can be subject to taxes, and that’s only if your “combined income” as defined by the IRS reaches certain thresholds. Many Social Security recipients don’t pay any tax on their benefits at all.
1099-R – This form covers distributions from retirement accounts such as IRAs and 401(k)s. Most are funded with pre-tax money and are therefore fully taxable, including the earnings. Roth IRA contributions are made with post-tax dollars and are not taxable, although earnings may be.
1099-INT – Interest income that you receive (think savings or checking accounts) is recorded here. This income is fully taxable.
1099-DIV – Income from dividends and investment distributions from non-retirement accounts go here. This income is also taxable, although they may be taxed under the lower capital gains tax rate.
1099-Q – This form covers distributions from educational savings accounts (529 or Coverdell accounts). If you used the distribution for qualified educational expenses, the distribution is tax-free. If not, tax will be due on the earnings component of the distribution.
1099-G – The 1099-G covers government payments to individuals such as unemployment benefits, including benefits at all levels (federal, state, and local). Most government payments are taxable, but not all.
1099-C – Cancelled debt, such as forgiveness of mortgage debt, is considered a taxable benefit – just as if the creditor had paid you the amount of money to turn around and pay them back. 1099-C forms record this debt.
1099-LTC – 1099-LTC records benefits applied toward long-term care expenses. Assuming benefits are used for qualified LTC expenses, the benefits are tax-free – unless the policy pays a pre-set amount regardless of expenses. In that case, some portion of the benefit may be taxable.
1099-B – This form records the income from the sale of brokered assets such as stocks – but to determine the taxable profit or loss, you subtract the basis (in general, what you paid for the asset). If the result is a net loss for the year, your tax bill would be reduced.
1099-S – Income from real estate transactions are captured here. As with the 1099-B above, you will have to subtract the basis of your home to determine taxable profit or loss. You may also be able to exclude up to $250,000 in gains (twice that for couples filing jointly) under certain circumstances. A separate form (1099-A) captures foreclosures – and yes, you may have a taxable capital gain even in foreclosure.
These are the some of the most common forms, but check the comprehensive list to see if more obscure forms apply to you.
Make sure that you understand how many 1099 forms you should expect to receive for the tax year, and follow-up with any entities that give an incorrect total (or fail to send a form at all). A mismatch between your records and IRS records could lead to an audit and headaches that go beyond an increase in your tax bill.
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